By on July 31, 2017

used cars used car lot

Earlier this year, auto lenders assured us that the stagnating car market and an unprecedented number of off-lease vehicles flooding into used vehicle lots would coalesce into the perfect storm of unprofitability. However, despite stoking the flames of terror at the beginning of the year, automotive lenders are doing just fine.

We’re sure you’re all very pleased to read car financiers are still doing so well and have likely collectively exhaled a sigh of relief. But there’s more good news. Some of these companies aren’t just surviving, they’re thriving. Several have even reported record high profits, even though used car prices continue to fall. It may be time to pop the champagne corks, pour out the bubbly, and hoist our glasses for the financial institutions we all love so dearly.

Since the previously assumed doom for lenders was focused around the impending glut of pre-owned vehicles, there was no way used auto prices wouldn’t fall. However, thanks to the high default and repossession rate of lessees over the last few years, banks have tightened up their standards and essentially forced a bunch of people into the used vehicle market. This has kept demand higher than expected and kept the value of pre-owned automobiles from falling quite as far as anticipated.

According to Bloomberg, more people with bad credit and less money was exactly what this situation needed. Ally Financial, formerly GMAC, reported record earnings for the second quarter while Ford Motor Credit Company claimed its highest pretax profitability since 2011.

Ford CFO Bob Shanks said lease residuals were flatter in the second quarter than anyone had expected. “I think that’s a victory,” Shanks said on a July 26th earnings call. “That’s been one of the biggest headwinds of the business now for quite a number of quarters, but as it has been written about by many of you and others in the media, we are seeing less of a downward draft on auction values than what we had expected.”

For larger banks, like Wells Fargo, pulling out of auto lending has given financial institutions that make it their primary business more room to breathe. Capital One Financial Corp., which specializes in loans almost exclusively, said it didn’t miss the competition while its auto originations grew 14 percent from a year ago to roughly $7.5 billion. However, it did express some mild concerns over continued falling auction prices and “an increasingly indebted consumer.”

In fact, all of that debt has actually hurt subprime auto lenders and kept them from enjoying the same recovery rates as the more varied banking institutions.

The party is unlikely to last forever, though. Ed Groshans, a bank analyst at Height Securities LLC, said heavy declines in used car values will probably resume in the next quarter. “I’ve been surprised at how well the pricing has held up through the first of the year, because none of the trends changed,” he said. “Something has to give as we go forward.”

Auto lenders seem to be in agreement. For the most part, they all seem to see the summer’s profitability as an unpredictable anomaly.

“From a macro perspective, the consumer is still in good shape,” Jeffrey Brown, Ally’s chief executive officer, told Bloomberg. “Confidence is high, debt loads are manageable, employment is still strong right now.” However, he’s maintaining a 7 percent depreciation forecast for 2017, and expects another 6 to 7 percent cumulative drop for 2018 and 2019.

[Image: Steve Snodgrass/Flickr (CC BY 2.0)]

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48 Comments on “Used Car Prices Are Falling, but Don’t Worry – Lenders Are Still Raking in the Dough...”


  • avatar
    28-Cars-Later

    BANKS are still making the dough. Stop using their newspeak.

    ““I’ve been surprised at how well the pricing has held up through the first of the year, because none of the trends changed,””

    Well all of you have colluded to keep prices high because all of you had too much in your current inventory as wholesale started to correct. Kinda like when oil falls $5 but you don’t see any change in gas pricing for about a week. Funny that.

    Wake me when wholesale is down 30% where it should be, and don’t try to catch the falling knife.

    • 0 avatar
      Adam Tonge

      Value is really dependent on model right now. Residuals fall off a cliff on sedans and compact cars. Where I work, refinancing a 2014 or newer compact sedan is impossible because we don’t go much over 100% Loan-To-Value. Wells Fargo and Capital One do. I’m not approving anything with a 135% LTV.

      On the other hand, we can do refis on full sized trucks all day. Even ones that were just purchased. Values are pretty much always good.

      I do find it interesting that 70% of our auto loans are used vehicles. People lease new vehicles now. Or they get a really good rate from captive finance companies that will roll in GAP, extended warranties, undercoating, etc, etc.

      • 0 avatar
        28-Cars-Later

        I agree with all of this, but valuation has always been dependent on make/model. You couldn’t touch an Expy or Navi in late 06 for much less than 5-6K off sticker up to clean 30Kish. By 2008, these things were radioactive and by mid/late 09 those who bought made a killing.

        Refi a truck, as in refinance? What sorcery is this?

        • 0 avatar
          Adam Tonge

          A lot of people refinance new vehicles before their first payment. Ford products especially (at least in the Detroit area). Ford offers a bunch of cash to finance with Ford Credit. But the rate isn’t incentivized, so it is terrible. However, Ford Credit has no prepayment penalties. So a new truck buyer often goes to their local bank or credit union and get a better rate.

          We probably do 10-12 of these sorts of deals a month.

          • 0 avatar
            28-Cars-Later

            Ah ok, yes I have heard of this. I was imagining Joe Bob rolls in with his MY11 F-150 and wants to refi (or take out a second loan).

          • 0 avatar
            Adam Tonge

            We don’t do second position on a car. However, I could pay off the loan on the 2011 and give him cash out if the value was there.

          • 0 avatar
            28-Cars-Later

            Ok, makes sense. While I have you, were you a basketball player at one point (hence the “bball”)?

          • 0 avatar
            Adam Tonge

            A very good one by high school standards. One with no knees and revoked scholarship offers by college standards.

          • 0 avatar

            I diid. I incorrectly thought that my credit score would get a good rate at the dealer. Not so, so I signed on the line but went to my car insurance company who was only too happy to re-fi me at a very low rate.

            Does the dealer still get that kickback if they write the note and it is paid before the first payment ?

          • 0 avatar
            Adam Tonge

            Many captive finance companies claw back the fee they pay the dealer if the loan is paid off/refinanced in the first 90 days. It’s different with a bunch of lenders. We do some indirect. However, we don’t pull back the nominal fee we pay to the dealers if a loan gets refi’d. We don’t do indirect auto loans though. So refis happen way less. We do indirect for boats, RVs, snowmobiles, etc.

      • 0 avatar
        jalop1991

        “Or they get a really good rate from captive finance companies that will roll in GAP”

        What does GAP stand for?

        I know that GAAP stands for Generally Accepted Accounting Principles. But GAP?

        Oh, wait–it doesn’t stand for anything. It’s just gap insurance–you know, insurance to cover the gap between what the car’s worth and what you owe.

        It’s gap insurance, not GAP insurance.

        Not everything is an acronym.

        • 0 avatar
          Adam Tonge

          My fault for making it one.

          It’s a habit since all the documents I see at work have gap insurance listed as GAP Insurance.

          • 0 avatar
            rocketrodeo

            It may be a backronym: Greatly Augmented Profit, or Gross Additional Profit, perhaps.

          • 0 avatar
            Adam Tonge

            Ha.

            Where I work, gap is $350. I tell my branches to offer it if it fits the situation. Someone buying a 2015 F150, putting $5000 down, with a 48 month loan doesn’t need it. Someone buying a 2017 Elantra on a 72 month loan with $0 down may.

            We also have them check with their insurance company to see if they offer it. Some do for free (mine does). But if they do need gap insurance, we are usually way cheaper than dealerships.

      • 0 avatar
        DeadWeight

        Difference between vehicles and many (most?) other commodities is that vehicles depreciate at a relatively rapid clip whether being driven or stored (IOW, whether by use or age).

        One can store Brent or WTI oil, aluminum, copper, nickel, and other non’perishable goods/commodities, and the prices will rise or fall in often wild swings, over time and dependent on geopolitical and supply/demand factors, whereas vehicles have a continual depreciation curve downward, whether being stored as new, stored as used, being in-service, etc.

        Vehicles are the very definition, with very few (make/model -‘collectors/exotics) exceptions, of wasting assets.

    • 0 avatar
      I_like_stuff

      “Kinda like when oil falls $5 but you don’t see any change in gas pricing for about a week. Funny that.”

      Put the tinfoil hat down slowly….and read this. This has been explained 1000 times and yet people like you still think there’s a grand conspiracy out there.

      https://www.cnbc.com/2014/12/04/gas-and-oil-prices-why-havent-gasoline-prices-fallen-faster.html

      • 0 avatar
        FreedMike

        The “refiners buy the oil at X dollars per barrel so when it’s X minus 5%, they don’t drop their refined price” explanation makes perfect sense.

        But we all know why gas prices spike immediately when there’s an increase in oil prices…greed is good, baby.

  • avatar
    PrincipalDan

    So what does this mean for the huge groundswell of lease returns that will soon start coming in?

    • 0 avatar
      28-Cars-Later

      Will be interesting to see. My guess is wholesale will decline at rate X and they (dealers and banks) will collude to control the retail descent depending on how steep rate X is at the time.

      • 0 avatar
        Adam Tonge

        I agree.

        It really depends on how brands handle it. There are a lot of franchised dealer only auctions now. The captive finance company, manufacturer, and dealer all work together to make that retail price high.

        • 0 avatar
          28-Cars-Later

          In my time, every auction worth going to was always dealer only.

          I’d love to see Fedgov remember there are actually anti-trust laws on the books. I wonder how Jeff’s blog would respond to a suit against Amazon?

          • 0 avatar
            Scoutdude

            Hmm, antitrust laws? Fact is that those auctions are wholesale only auctions with a dealer license required to attend because those auctions have a wholesale license, not a retail license.

            You can’t exactly walk into a beer distributor and pick up a pallet or case of your favorite brew, again because they are licensed wholesalers.

            Which is why when Costco started you pretty much had to have a business license to get a membership to get around the state regulations that prevented the wholesaling of products to the general public. To this day in may state thanks to state laws that dictate a minimum mark up when you walk by the tobacco cage at a Costco they have 2 price columns, retail and re-sale.

          • 0 avatar
            28-Cars-Later

            I’m referring to Amazon, which screams anti-trust. However I’m sure there are statutes somewhere against collusion between multiple parties to fix prices, which is exactly what is happening nationwide. Where are you Justice Department? So quick to jail the potheads, but not the swamp creatures, and nor investigate big business.

      • 0 avatar
        Scoutdude

        Why would the banks collude with the dealerships to keep prices high? The banks that are in the leasing game might attempt to collude with each other to keep wholesale prices high because once it is sold it is no longer their problem or concern. Dealers of course would be interested in colluding to keep retail prices high even as wholesale prices drop to increase their profit margins.

        However all of that is unlikely. What we might see is a bit of a standoff at the wholesale level with the banks setting the reserve above market and an ensuing stand off of who can last longer. Will the dealer who is hurting for inventory crack before the banks have no place left to stock pile the cars and no money to lend because all of their capital is sitting in the back 40 somewhere loosing value by the day while incurring the expense of storage.

        The normal thing for a captive finance arm to do is to offer it to the grounding dealer at market value, then when that doesn’t work drop it a bit because they know as soon as they take possession it is their problem and they will incur transportation and other fees and back charges.

        The next step would be a online franchised dealer auction to give it another try at avoiding possession of the vehicle.

        If they don’t unload it there it will go to an auction yard in a special franchised dealer only auction.

        When it doesn’t sell there they may rerun it through those channels another time or two or send them right to the auctions open to any dealer.

        Once it is to that level now they are also competing with those dealers who are trying to sell the late model trade that doesn’t fit on their lot.

        • 0 avatar
          28-Cars-Later

          Simply because the banks own the leases/loans and they’d be underwater on the true valuations which are falling. Same for dealers with older inventory bought/traded too high. Everyone including the auctions have an interest in stable prices, even if they are too high for market conditions. Same goes for real estate which finally seems to be falling a little after being blown up like a balloon for five years.

          The gasoline comparison is apt, the wholesale and retail prices won’t come down until old inventory is sold at the higher price so no one is in the red. They will control the decline by manipulation of supply, financing, availability, etc.

          I have been saying for several years wholesale is 30% above what it actually should be on average, and Morgan Stanley seems to agree with me:

          http://www.marketwatch.com/story/how-much-morgan-stanley-thinks-used-car-prices-will-crater-in-one-chart-2017-04-03

          Can you imagine if wholesale had a very sudden 10% correction in say a six week period? Whole shops would be ruined.

          Burn baby, burn.

          • 0 avatar
            Scoutdude

            It isn’t like this didn’t happen when gas prices went to $4/gal. All those dealers holding SUVs had to write them all down to move them out. Yes they got to increase the prices on the fuel efficient cars in inventory but it was still a huge net loss for many.

            Chrysler especially got burned as the vast majority of their cars were gas guzzlers at the time. The local auction yard was overfilled with V8 Grand Cherokees, Durangos, Chargers and 300s that dealers weren’t buying at any price. $5-$6k would buy them all day long and that was for the nice ones according to my friend that was in the business at the time.

  • avatar
    87 Morgan

    The ground swell of lease returns will affect the imports far more than the domestics. GM cars have not leased well for the last 10 years, Pontiac was the lease special. ALG does not care for the GM product, so the residuals are lower. Zee Germans never met a lease program they did not love though and their are a lot BMW’s fixing to come back to the dealership for drop off. BMW financial does a great job of keeping their customer in a BMW though.

    The sedan market is already and will continue to get crushed. The residuals that were used 3 years ago are too high regardless of make/model and they will make for some great buys at the auction and a fantastic value for those out there in need a new/used car in the coming months. I still see a lot of sleds out being driven, a shift to retailing more used vs new, while not great for the OEM, the dealers will be fine.

    • 0 avatar
      DeadWeight

      Cadillac, Chevrolet and Buick are more reliant on leases as a % of their “sales,” and by a historically massive marker, as a percentage of their “booked” sales.

  • avatar
    eggsalad

    Interesting parallel to homes, at least here in Vegas. Banks own tens of thousands of homes, but won’t put them on the market because doing so would make inventory rise and prices plummet. Houses sit empty and rot.

    There are likewise tons of lease returns, and it appears that banks are working to keep those prices high as well.

    I’m sitting back, waiting of an off-lease Nissan Leaf to plummet to $6k.

    • 0 avatar
      Adam Tonge

      There are $6000 Leafs out there. Lease returns are under $10,000 in some cases.

    • 0 avatar
      Scoutdude

      The banks aren’t sitting on those homes just to keep prices high. In many areas the market could absorb a ton of inventory w/o impacting prices, especially in the lower price ranges.

      In fact most of those repos that come back on the market only serve to drive the median price up, not down. Large numbers of them won’t qualify for financing as they sit. That puts the majority of buyers out of the running.

      The investors that buy them then fix them up often with high end finishes and top prices since that is what is selling.

      The reason that the high end of the market is dominate right now is the lack of re-sale inventory. The new houses that are being built are high end homes. The buyers who are moving up are increasingly purchasing their new home before prepping and listing their current one. Meanwhile at the lower end we have a stand off going on. There are many people who now have the equity to be able to sell but with the lack of inventory they aren’t willing to put their home on the market for fear of being unable to find a replacement in a timely manner.

  • avatar
    bikegoesbaa

    Can’t be true. Bark told me so.

  • avatar
    I_like_stuff

    If you don’t want evil banks to make money off car loans, don’t get a loan. It’s quite simple.

  • avatar
    silentsod

    “Debt loads are manageable” is a great way to say people are able to make that minimum monthly payment and continue to lack financial security.

  • avatar
    deanst

    Ford currently losses over $10,000 when they reposses a vehicle – the big pain will come when the economy turns and more people are unable to make payments. It’s not the loss per vehicle, it’s the number of repossessed vehicles that will kill profitability.

  • avatar
    -Nate

    ” said heavy declines in used car values will probably resume in the next quarter.”

    O.K. then ;

    I guess I’ll slap two recap tires on the back end do a major tune up and HOT oil and filter change on every thing, change the coolant and hope the tranny lasts until Christmas when prices on vehicles drop precipitously .

    This was the Farmer’s/Blue Collar motto when I were a lad .

    Here in La La Land, (hope to Fruits, Nuts and Flakes), I use loan sharks off and on but you’d better believe I knew damn well I could make every payment ON TIME as a mechanic with anything broken, is worthless in any shop .

    One of my Equipment Operator buddies when I was still @ L.A.P.D. caught wind of this and had fits thinking I was going to get killed .

    Live in a rusty trailed as a Child and you typically figure out how to manage things of you’re stuck in a Crab Spirits (!MISS YOU!) tale until you’re dead .

    -Nate

  • avatar
    TW5

    The auto industry doesn’t have much to worry about for the time being. The average consumer lacks the sophistication to negotiate personal lines of credit or auto loans from banks. More importantly, the average consumer has too little cushion in their budget to quickly payback an auto loan or personal loan that may not have the best terms of credit.

    Therefore, the dealers are about the only show in town for most car buyers. The dealers can control supply and demand to a degree (through credit negotiations); therefore, the dealers can exert some control over residuals in the near term.

    However, dabbling in residual value manipulation is a risky strategy, and a lot of people are going to get burned badly in the long run, if they aren’t able to keep used vehicles moving. The program of coordinated buying will become an unintentional dumping of used cars in a giant fire sale.

    Businesses hate to take their medicine because they are all paid an meaningless short term metrics that ebb and flow during normal business cycles. Attempting to manipulate the market in the long run is a fool’s errand. If the auto manufacturers start lobbying for a new cash for clunkers, a used car apocalypse is surely waiting in the wings.

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