Auto Credit Express Blog
January 30, 2008
Is AmeriCredit’s bad news bad news for sub prime?
Here at Auto Credit Express, we were just as surprised as Wall Street by AmeriCredit’s announcement that they lost $19 million in the last quarter. Does this mean that the entire automotive sub prime market is in trouble?
Look at the business model
When you take a close look at AmeriCredit’s losses, it is a result of an increase in funds to cover increased current and future loan losses as well as increased insurance costs that reflect the increased risks in the bond market.
What has to be taken into consideration is how AmeriCredit’s business model works. While other sub prime lenders generally have a central office (or possibly an east and west coast office) where all loans are handled, AmeriCredit has a large number of regional offices. Even to an outsider, it would seem that this would account for an increase in overhead versus the traditional model.
Another consideration would also have to be timing. With the economy as a whole slowing down, a gradual build-up of reserves throughout the year would’ve prevented a sudden shifting of resources in the last quarter that resulted in a single, large loss.
The sub prime car market vs. the subprime housing market
While the losses at AmeriCredit are worrisome, they are miniscule compared to the housing market. Their more than 2 month delinquency rate was up from 2.6% at the end of 2006 to 3% at the end of 2007 while charge-offs went from 5.8% to 6.9%.
AmeriCredit plans on concentrating its resources with large dealers and dealer groups in the major metropolitan areas - a sound strategy that will enable them to eliminate many of their regional offices.
The Bottom Line
While AmeriCredit’s problems may be bad news for the short term, it should also serve as a wake up call for your special finance department. Other sub prime lenders will no doubt be following their lead in looking at the performance of their dealers. When the going gets tough, banks scrutinize the look to book ratios of all their dealers even more closely. By developing relationships with the loan officers at all your sub prime sources and knowing their programs and well as how they buy, you can avoid sending an application that doesn’t fit their parameters. Keeping your look to book ratios low will help you avoid getting dropped by the banks. In the end, it will be a win-win situation for both you and the bank.
