Detroit is crowing that the auto industry is back, but so far, at least, it is a success story built as much on a revival in lending as on the development of desirable cars.
Sales of new cars rose 11 percent, to around 11.4 million, in 2010 and are off to an even stronger start this year, according to Autodata, an industry research service. Sales of used cars have been similarly robust.
After radically scaling back auto lending during the financial crisis, banks and the lending arms of the automakers have started to issue loans more aggressively. Borrowers of all types are now finding it much easier to obtain a loan compared with a few months ago.
Even car buyers with tarnished credit histories are getting financing, in some cases without making a down payment. More than 859,000 new cars were sold to consumers with a so-called subprime credit rating in 2010, a nearly 60 percent increase from the year before, according to CNW Marketing Research.
The revival of auto lending is emblematic of an increased appetite for risk in the American economy. Consumers, showing renewed confidence in the recovery, are opening their wallets again after putting off car purchases during the recession.
Banks, flush with deposits to lend out, have eased their standards for extending credit. And investors, who fled from the bond market during the throes of the crisis, are starting to snap up higher-risk debt as they seek higher yields.
Wall Street’s loan packaging business has once again become a crucial engine for supplying money to auto and credit card lenders — and it is happening much faster than most economists had predicted.
Nobody is suggesting an imminent return to the heady, reckless days of the housing boom, and any one of a number of factors — like the recent surge in oil and commodities prices — could set the recovery off track. But the gradual expansion of credit in virtually every area except real estate is an important sign that the American economy is returning to health.
The rebound in auto lending has been especially pronounced. Michael E. Maroone, the president of AutoNation, which has a coast-to-coast network of more than 200 dealerships, called it the single biggest factor spurring the sharp increase in car sales last year.
“We had people coming to our showrooms that wanted to buy, but we couldn’t get them financed,” Mr. Maroone said in an interview. “We are now getting them the financing.”
Kevin Lauterbach, 29, an operations manager from Coral Springs, Fla., said he was surprised that so many lenders were willing to give him a loan when he went shopping for a new car in December. Although he had worked hard to repair a mildly damaged credit score, several major lenders rejected his application for a new credit card a few months earlier. But five banks offered to help him finance a car, all with no money down.
Mr. Lauterbach eventually locked in a 4.75 percent rate on a $19,000 loan from City County Credit Union of Fort Lauderdale to cover the cost of a 2008 Jeep Liberty. The 72-month loan requires payments of $150 every two weeks.
“My credit wasn’t great, and what I had been hearing is that credit is tight right now,” he said. “But it wasn’t really as difficult as I was anticipating.”
For the auto industry, the surge in sales represents a remarkable reversal. Only two years ago, Detroit’s Big Three automakers were in such dire condition that they took more than $87 billion in federal aid; Chrysler and General Motors required Chapter 11 bankruptcy protection to turn themselves around, with the government’s help.
The Obama administration provided other forms of assistance as well. It engineered the rescues of the CIT Group, a major lender to auto dealerships and parts suppliers, and also bailed out the troubled auto finance companies Chrysler Financial and GMAC, now known as Ally Financial.
Just as crucial, economists say, was the administration’s effort to lure private investors back into what was once a $100 billion-a-year bond market for auto finance companies, according to Deutsche Bank Securities. That market had all but dried up by the end of 2008.
Returning to normal?
The federal program provided more than $11.7 billion in below-market financing to dozens of private investors — a group that included hedge funds like FrontPoint Partners, money managers like BlackRock and Pimco, and even a retirement fund operated by the City of Bristol, Conn. — to encourage them to resume buying bonds backed by auto loans. Although the amount of government financing was relatively small, it accomplished its goal: to revive the market for packaged consumer loans and get credit flowing again, especially to weaker borrowers.
That market stood at $36 billion in 2008, during the throes of the crisis, but by 2010 it had bounced back to almost $58 billion. Bankers and analysts project that could rise by as much as 15 percent in 2011.
“To me, it feels like it’s returning to normal,” said Ted Yarbrough, Citigroup’s head of global securitized products.
Several factors contributed to the quick recovery of auto lending. Both banks and auto lenders can reap large profits on new loans, since interest rates near zero have kept the cost of their funds extremely low. Auto lending was also largely unaffected by the Dodd-Frank Act and other regulations, which reduced the fees that banks could charge for services like credit cards and overdraft protection.
In addition, auto lenders, unlike home lenders, have long issued loans expecting that the vehicle will start to lose value as soon as it is driven off the lot. That helped them avoid the costly mistakes of mortgage lenders, who underwrote loans during the boom on the belief that prices would keep going up. In fact, auto loans fared better than almost any other loan category during the crisis.
There were other reasons, too. Car dealers, unlike mortgage brokers, tend to have closer relationships with their lenders, so that a dealership that passes along a lot of bad loans might quickly find it hard to secure loans for other customers.
Meanwhile, used cars began drawing higher prices, a result of sagging new vehicle sales over the last few years. That encouraged banks to take bigger risks since they would assume ownership of a more valuable car if a borrower defaulted.
As the economic recovery gathered steam, domestic auto lenders like GMAC and Chrysler Financial flooded back into the business in the fall. That lured traditional banks like Bank of America, Banco Santander, Capital One, JPMorgan Chase, TD Bank and Wells Fargo back in a bigger way, and helped prop up lending for used vehicles.
Dealers say the frenzied competition has made it possible for weaker borrowers — those denied credit even six months earlier — to finally obtain loans. AutoNation, for example, said that approvals for subprime customers reached 38 percent in the fourth quarter of 2010, compared with 18 percent a year earlier, amid only a modest increase in applications.
Over all, lending to subprime borrowers has risen to about 38 percent of the auto finance market, although it is still well below its precrisis highs when it made up nearly half of all loans, according to credit bureau data from Experian.
“The biggest improvement started in December,” said Rick Flick, who runs Ford and Chevrolet dealerships in the New Orleans area. “The banks are getting aggressive again. They are calling us and asking why aren’t we sending them more business.”
Still, lenders are typically demanding more stringent terms, including higher down payments compared with those required in the boom years. But, as Mr. Lauterbach’s experience suggests, even those are starting to ease.
Meanwhile, the automakers have come up with innovations to help. One program that is currently popular: down payment assistance.