By Ray Birch
STAMFORD, Conn.—Lenders should be watching for the “ICE cliff,” because it’s approaching and it could have a significant negative impact on auto loan portfolios, especially those with longer terms.
The ICE (internal combustion engine) cliff is the point at which the value of gas-powered cars begins to drop due to the growing acceptance and consumer demand for electric vehicles (EVs), explained Wei Fan, SVP and head of passenger vehicle, RVI analytical services at RVI Group, who shared words of caution for credit union lenders.
“Here at RVI, we have been talking about the ICE cliff for some time,” said Fan. RVI offers residual value insurance.
Down-Shifting Values
The ICE cliff, according to Fan, could represent a big downward shift in value for gas-powered cars coming onto the used market. He emphasized that projecting just how significant the price drops could be is hard to predict, as is when that tipping point will arrive.
“We know that determining residual value on electric vehicles today is challenging,” said Fan, who added the opposite will eventually occur—when EV residual values are much more predictable than their ICE counterparts. “We've been asking our clients to think about this challenge now, to think this through. What risks do you have in your portfolio if this market changes? At what point do you have too many ICE vehicles in your portfolios?”
Fan said the main risk will come from low resale values following repossessions, along with the risk from consumers who are already upside-down on their auto loans—the growing negative equity issue—who walk away from their obligation and turn in their keys to the credit union.
What the Data Show
Data show electric vehicle registrations in the U.S. more than doubled in the first half of 2021 from a year earlier to account for a still slim 2.5% of total new-vehicle registrations. According to Experian, 214,111 new EVs were registered nationwide through June, up from 98,351 in the first half of 2020. EVs represented about 1.5% of all new-vehicle registrations in the U.S. at the same time last year.
But those numbers are expected to grow quickly. A record number of almost 100 pure battery electric vehicle models are set to debut by the end of 2024, Fan noted, adding that President Biden has set a target of having 40%-50% of cars and trucks sold by 2030 be electric vehicles.
In addition, the federal infrastructure bill includes billions of dollars for installment of electric vehicle charging stations across the country.
“On the battery side, CATL (a Chinese battery manufacturer) announced commercialization of the sodium battery, and Chinese automaker NIO is building an extensive network of battery swap stations. Tesla, too, announced it is opening its charging stations to other electric vehicles,” he said.
As CUToday.info reported, California’s announced it will ban sales of new gas-powered vehicles by 2035.
Fan called out credit unions because they are known for making longer-term loans, many out to 96 months. Moreover, CUs are also known for making longer-term leases, going out to five years, Fan said.
Period of Volatile Pricing
David McKay, VP of business development and sales, passenger vehicle at RVI Group, said what lenders must understand is the country is in the middle of a volatile automobile pricing period. He emphasized how long prices will be unstable will depend on the how long the microchip shortage continues, as well as the problems with the supply chain.
“To predict where prices will be in five or six years, that is very hard,” said McKay. “That leads to a great deal of risk that lenders must accept today.”
McKay agreed most lenders are in good shape now if they are repossessing vehicles, as the wholesale lanes are returning record prices due to the high demand for used autos.
But McKay pointed out the rash of automobile repossessions forecast to occur when the pandemic struck has never materialized, but he believes that day is likely coming.
“The prices of cars are as volatile as they ever have been,” stated McKay. “What will happen when credit unions start repossessing a lot of vehicles? This could happen in the next few years.”
The Big Question
Fan said that while it is difficult to predict when the microchip supply shortage will end, he does expect prices will eventually normalize.
“But this will likely be a new normal,” stressed Fan.
Fan explained that vehicle prices following the Great Recession were inflated because there were not as many cars on the market.
“They eventually came down, and we will see that again,” Fan said. “But, again, the question is what will be the new normal?”