By Ray Birch
CARMEL, Ind.—Credit unions are being advised to move more quickly when it comes to auto repossessions, as the number of vehicles being repo’d is up and the trend isn’t going to improve anytime soon, according to Allied Solutions.
The company is recommending CUs hit the gas on repo’s for additional reasons as well, including rising costs and falling used car values.
“We deal with a lot of the largest finance companies in the country, so, we've been able to monitor repossession volumes for years,” said Allied Solutions Director Scott Myers. “From 2015 to 2019, repossessions went through the roof, and a lot of that was due to the increase in subprime lending during those years. It was basically an open market. Anybody could get a car who wanted to get a car. We generally saw this for about four consecutive years, up until the first quarter of 2020.”
Myers said the companies with which Allied works saw a 20% to 30% increase in repossessions in that four-year period, noting these lenders deal heavily in the subprime space. Among Allied’s solutions, the company offers repossession and remarketing services.
“Then, COVID happened, and repossessions fell off a cliff,” Myers recalled. “There were barely any repossessions for first 90 days after the moratoriums went into place in March of 2020. We went from handling about 70,000 repossessions a month to less than 20,000, overnight.”
And that is where repossessions generally stood, throughout the health crisis, Myers explained.
“It was almost 12 consecutive months of just absolute flatness. Default rates were at historic lows,” he said. “They were under 10,000 a month at some points. Even in 2021 into 2022 they were still at 50% to 60% of their pre-COVID numbers.”
The Trend Shifts
Scott Myers
But that trend shifted in the middle of last year, Myers said.
“We have now seen more than seven consecutive months of repossession growth,” Myers said in February.
Myers attributed what has happened with repossessions to the “COVID economy.” He pointed to stimulus money that “artificially” inflated people’s incomes.
“When that stimulus money went away you started to see the default rates tick up a little bit,” he told CUToday.info, adding that the rate of repossessions today is still not approaching pre-COVID levels.
Two Factors at Play
There are other factors, too, that are sending the tow trucks out in larger numbers today.
“The economy is getting a little bit worse. Inflation is clearly an issue,” Myers noted. “Budgets are getting strained. These rising repossessions, I believe, are one the clear signs of the problems of economic inflation.”
Myers added that during the health crisis many people were not driving to work, reducing vehicle expenses, such as gas.
“What’s happening as a result of a confluence of several different things,” he said.
Not a Good View Through Windshield
Myers said the outlook for repossessions in the near and extended term is not good for lenders.
“We expect this trend to continue increasing the rest of the year,” Myers forecast. “But I don’t think at any point we will see huge spikes in repossessions. I think it's just going to be a steady return to probably the rates that we saw pre-COVID.”
But Myers said his opinion comes with a caveat and could change if all of the forecasts for a recession prove to be true and the slowdown becomes larger than the modest economic pullback that has been forecast by many.
Another Factor at Work
Then there is another factor at play--the record levels for new car prices and used car values, with the average new car price approaching $50,000. Lenders have responded by stretching terms out as long as 96 months—which is driving up negative equity.
“These cars, especially used cars, are not going to be worth all that money a year from now,” said Myers.
All of that is coming together to raise yet another challenge for lenders who take back cars—getting them sold fast.
“There is a push now to get the cars and sell them now, while you're going to get the most value,” said Myers. “Lenders who are taking back cars want to sell them fast. The cycle times from arrival at auction to sale, or from repossession to sale--there really aren’t any wasted days in there.”
Declines in the Fast Lane
Myers noted, too, lenders know that as more cars are repossessed and back to market, it will only hasten the decline in used values. As CUToday.info has extensively reported, used vehicle deprecation rates are beginning to return to more normal levels.
But a growing concern, Myers said, is the increasing average insurance recovery amount. He said those numbers have been rising dramatically due to insurance company staffing shortages, supply chain issues for vehicle parts when a repossessed car is damaged and high prices of used cars—a lot due to total-loss tickets rising with inflated car prices.
Myers said the average average insurance recovery used to be around $3,000 on average, which reflects the price the insurance carrier would pay Allied on a claim less the deductible. Now that figure is $4,700.
“We've seen this massive increase in the average recovery on a vehicle, but that is completely due to the changes in the auto market,” he said.
A ‘Big Game of Chicken’
All of this makes it even more important for lenders to take back the car as quickly as possible and then sell it at a wholesale auction.
“Lenders are seeing at auction what these cars are going for, and it's like a big game of chicken. They're just waiting for those prices to start falling,” Myers said. “They're trying to sell the cars as quickly as possible once they get to auction.”
But getting the car back into the credit union’s hands is taking longer.
“There were quite a few repossession outfits that went out of business during COVID and have not come back,” Myers explained, adding the percentage of vehicles lenders are getting back that are out for repossession is falling. “A lot of their business went away during COVID.
The Advice
“My advice for credit unions this year, if you do have to repo the car, sell it as quickly as possible, because especially this year, if you leave it at the auction for any period of time—if the borrower is giving you the runaround saying, ‘I’m going to pay, I’m going to pay’—and that goes on for 30 to 45 days… You're losing value on that car at auction every day it sits there,” concluded Myers.