By Ray Birch
SAN ANTONIO—Automobile repossessions are not just rising as delinquencies creep higher, a bigger concern is that “skips”—where borrowers stop paying and drive off with the vehicle—are happening within credit unions at an almost record rate, SWBC says.
“What we're seeing is almost a perfect storm,” said Michael Dippo, SVP of lender-placed auto at SWBC’s Financial Institution Group. “The last couple years we've seen car prices hit new highs, both used and new. Monthly payments are at all-time highs on new loan originations. Last I heard 20% of new loans had monthly payments of $1,000 or more, which is almost unheard of.”
Dippo said borrowers are feeling the pinch of inflation and overall rising rates, which have been nudging up delinquencies. Given that backdrop, credit unions should be concerned over the balances members are carrying, he added.
“You now have higher balance loans that are going into delinquency,” Dippo explained. “Vehicles are just so costly--vehicle prices are becoming unaffordable for many consumers.”
The latest data shows the average amount financed on a new vehicle is almost $50,000. more than $47,000.
Need to Act Early
“All this makes it imperative that credit unions identify problems early, address them, and when the car needs to be repossessed they need to move quickly,” he said.
But credit unions must be more vigilant that ever, continued Dippo, because more borrowers are not paying and skipping off with the car.
“Skips are people who are not communicating with their financial institution. They're not returning phone calls. They may not even work at the place of employment listed on their credit app,” he explained. “They have these high-priced vehicles and they are running away with them.”
Dippo said SWBC has not seen skips at this level among credit unions in recent years, noting that those running off tend to be those with more expensive vehicles.
“It seems that some borrowers now are just getting over their heads with vehicle payments, they can’t afford them and they don’t want to part with their car,” he said.
Michael Dippo
Dippo added that some, but not the majority, of the skips appear to be premeditated.
‘Significant Amount Per Loss’
“That can be seen when the borrower skips out after the first payment, or maybe makes no payment at all,” Dippo said. “These are borrowers who clearly had no intention of ever paying.”
But, again, the data suggests these borrowers simply cannot afford the high payment anymore, Dippo told CUToday.info.
“With financial institutions financing vehicles for 84 and 96 months—and I never thought I'd see that—people are skipping out on those vehicles in the $60,000-$70,000 range. The average new loan balance is $50,000, so it's a significant amount per loss.”
Dippo said SWBC, which provides insurance coverage for credit unions to protect their interest in the collateral being financed, is seeing record loss claims for high-priced skips.
“In the last 12 months, the frequency of skips has increased 25% to 30%,” Dippo said. “While the severity, the amount that we pay, has increased over 100%.”
Staffing Issues
What’s making things even more difficult for credit unions is repossession agents are short staffed.
“Just like anyone, these small businesses are having trouble keeping and hiring enough staff,” Dippo said.
Dippo pointed out that with skips, a skip-tracer must first be used to find the buyer who has skipped town, before a repo company can step in.
“The key to success is the financial institution reporting the skip to us within the first 60 or 90 days of the delinquency cycle,” Dippo said. “Our chances of success are going to increase the sooner we get them in the delinquency cycle. While our find rate used to be 70% or higher, during the last 12 months it’s been 50%.”
Plates Are Full
Dippo also reminded that repossession agents are shorthanded at the same time their plates are fuller than ever and, as a result, they are not retrieving cars as quickly.
“The find rates have dropped dramatically, which accounts for why our paid skip losses have doubled in the last 12 months,” he said. “I've talked to other providers and they're seeing the same thing—their skip frequency and severity are increasing over the last 12 months.”
For the most part, Dippo said skips are increasing due to high vehicle prices and either the tightening economy or some life event, such as a job loss or a medical bill, making the car unaffordable for the borrower.
“Also, in many states auto insurance has gone up as much as 20%. So, all of this is just piling on to the consumer and they're having a hard time making ends meet,” Dippo said.
Bracing for Loan Losses
As CUToday.info recently reported, banks are bracing for a rise in loan losses, bolstering reserves.
Dippo said he would not be surprised credit unions are doing the same thing, including tightening lending standards. He warned credit unions not to go the other way with their credit decisions right now.
“Net interest margins are being squeezed, and I know some credit unions began to buy a little deeper, maybe dropping a credit tier,” he said. “Right now, you can't afford to do that because the credit risk will outrun the interest rate risk. Be diligent, stick to the basics, and you’ll get through this.”