The repo man is getting busy

By Karen Aho

For the repo man, business is always good. But lately, it's been better than good.

As the subprime-mortgage collapse blares in the background, "recovery service agents" have been cleaning up the wreckage of another subprime-lending mess: that of the auto industry, which in its own competitive bid for buyers has been extending longer, costlier loans to people unable to keep up with their payments.

The number of auto loans past due by at least two months reached a 10-year high in January, according to Fitch Ratings. Three-quarters of prime and subprime auto asset-backed securities fell more than 60 days behind on payments, a 44% increase over one year earlier.

Nationwide, 12.4% of consumers have at least one late auto payment on file, according to consumer credit agency Experian. One in three auto-loan borrowers have payments greater than $500 a month, and 12% have been late at least once.

In a survey for the National Automotive Finance Association, BenchMark Consulting International said monthly repossessions by subprime lenders increased 15% from 2005 to 2006.

1.5 million repossessions last year

Manheim Consulting, which analyzes the used-car market, estimated a 10% increase in the total number of repossessed vehicles –- both new and used -- to 1.51 million in 2007. Auctions held by Manheim and Adesa, a vehicle remarketing company, resell most of the vehicles repossessed in the United States.

Tom Kontos, executive vice president of analytical services for Adesa, says auction houses saw about a 15% increase in repossessed autos from January 2006 to January 2007.

"Faced with a decision of whether to pay a home mortgage or make a car payment, oftentimes the decision is to default on the car," Kontos said. "So that's what we think is happening that's contributing to this surge of repos."

Tom Webb, Manheim's chief economist, expects the steady rise of auto repossessions in the last two years to continue through 2008, due to a sagging economy and loose lending standards in place before autumn 2007.

"The auto lenders have already started to tighten up," Webb said, and he expects to see lower default rates by 2009.

"The shorthand is that for years we've lived beyond our means, reflected in record debt levels, and now comes the paying phase," said Christian Weller, a senior fellow at the Center for American Progress, a progressive think tank in Washington, D.C. "Car loans have expanded as fast as mortgages, and in terms of the categories of what people borrow for, it is the second-largest."

Repossession agents in areas hit by foreclosures say they've been picking up vehicles both from people struggling to keep their homes and from those now left without work: construction workers, pavers, landscapers and real-estate agents.

"It is actually stunning the number of cars we're taking from people who are supporting the local real-estate market," said J. Patrick Altes, the president of Falcon International, a recovery agency with offices throughout Florida. "It's almost the type of thing where we see it and you wonder if anyone else sees it. . . . It's like they turned off the spigot."

Cracks are showing everywhere:

• Buyers continued to take out longer and longer loans, an indication they are borrowing more than they can afford. The percentage of prime auto loans with maturity lengths greater than 60 months increased from 12% in 2002 to 41% in 2007, Manheim reported. Among subprime borrowers, that rate grew from 33% of borrowers in 2002 to 67% in 2007. "They're basically trying to buy as much vehicle as they can within a monthly payment," Webb said. "By extending it, it allows them to buy more vehicle."

• In 2007, younger vehicles -- those under six years -- made up a larger share of subprime repossessions than in years past, Manheim said, indicating that people are falling behind earlier in the cycle.

• For the first time in several years, prime lenders increased the number of loans extended to risky consumers. Those with FICO scores below 600 moved from 4% to 8% for used vehicles and 2% to 6% for new vehicles, BenchMark reported. "They're moving downscale, and they're also lending money to the higher-risk players," Cunningham said.
• Subprime lenders also reached down the credit scale, with 54% of deals made to buyers considered a high or superhigh risk, those with FICO scores under 549, up from 34% in 2005. "All of these are kind of pointing to higher delinquencies and higher charge-offs," Cunningham said.

Continued: A unique form of collection

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