My oh my, this COVID-19 virus thing is not a good thing. It’s not good. It’s bad for business. It’s also been a bad thing for our personal lives. Hopefully, you and your family have fared well through this crisis. Now, what to do?
While I suspected that BHPH delinquency would go up from the norm, I also specifically remember that during our last economic crisis in the 2009 – 2012 period, which was brought on by the subprime mortgage industry, subprime auto loans performed much better than expected. Candidly, the subprime auto finance industry never lowered its underwriting standards to the level that the subprime mortgage finance industry did. However, the terrible thing that happened was that the state and federal regulators decided the term “subprime” was very bad, regardless of having any factual proof of auto loan deterioration.
Two memorable things happened – many BHPH dealerships lost their lines of credit with banks due to regulatory pressure on the banks, and BHPH sales activity picked up due to mainstream subprime auto finance companies raising their credit requirements as they were getting pressure from their line of credit providers.
On the first issue, BHPH dealerships with perfect performance records with their banks had their lines of credit suspended due to regulatory pressure from the bank regulators. On the second issue, consumers who needed to or wanted to upgrade their vehicle found that the used-car departments of franchise dealerships couldn’t get their previous customers financed due to the change in the credit requirements of their usual mainstream subprime finance companies.
In an unexpected turn of events, many of these “standard” subprime auto customers turned to the BHPH community to replace their vehicle – and found a willing dealer ready to help them. Many BHPH dealerships developed lasting relationships from those times. The most successful dealerships were the ones with the ability to take a 10-year-old trade-in on a 5-year-old replacement vehicle.
In the fall of 2012, Standard & Poors, one of the credit rating agencies for auto backed securitizations (ABS), published a paper praising the performance of the mainstream auto finance companies’ ABS pools of auto loans. There had been no rating downgrades of auto securitizations during the recession of that period. Quoting from “Is The U.S. Subprime Auto Loan ABS Market Headed For A Repeat Of The 1997-1998 Contraction? We Don’t Believe So,” published by Standard & Poors Rating Services, September 19, 2012:
“Despite the recent credit crisis, subprime auto ABS rating performance has been strong. We raised the ratings on many of these transactions and did not lower any ratings due to deteriorating collateral performance. The only downgrades resulted from downgrades on the related bond insurers.”
While the subprime mortgage industry was melting down, the subprime auto finance industry was performing! This result begged for an explanation. Certainly oversimplified, but the fact was that people could let their homes be foreclosed on because they could go rent a house or apartment. And, the incidence of mortgage foreclosure was so high that it wasn’t even too humiliating.
However, to continue to live and function in society, consumers in practically the entire United States, need to have transportation available – not just for recreation, but to continue their lives. Going to work, going to church, going to the grocery store, etc., all require transportation. Around 78% of the population of the United States lives in cities of fewer than 100,000 people – no subways, very little public transportation of any type. Hence, vehicles are required.
While the preceding is about the old crisis, it points out that subprime dealers’ finance contracts did not fail on a blanket basis. In fact, the successful BHPH dealers found new customers – it was just a matter of marketing. In this crisis, funds being made available by the CARES Act for businesses and consumers are being used to some extent for vehicle/transportation purposes.
The current crisis is probably going to present a similar opportunity. Already, mainstream subprime finance companies are talking about raising their credit standards, insisting on higher down payments, and tightening their loan-to-value requirements. To be able to take advantage of this opportunity, funding is vital, and this is where Agora Data, Inc comes into the current picture in a big way.
With Agora Data’s AgoraInsights product, so long as your dealership owns a portfolio of Retail Installment Credit Agreements (Finance Contracts), you have access to capital for the funding needs of your business. Funding can be used for any financial need – inventory, capital improvements (build or repair a building, paving, lighting, fencing), reducing lines of credit balances, opening a new location, paying vendors, taxes, etc. And, the funding is not in the form of a loan – you would just be exchanging one asset, some portion of your receivables, for another – CASH. The amazing thing is that our process is neither difficult nor lengthy.
AgoraInsights is our newest feature empowering BHPH dealers to have on their
desktop real time loan and portfolio valuations through our AgoraBookValue, the only Book Value for
loans and portfolios in the industry. AgoraInsights was designed to empower the BHPH dealer with AI-Infused
tools and features typically only available to the large institutional lenders and we provide it free
of charge to BHPH dealers. Access benchmarking, granular portfolio and loan data, and liquidity at the
click of your mouse.