Category: Economy

Breaking Out of the Groundhog Day Cycle

Post author By efgmarketing
Post date June 27, 2018

Contributing Author:
Mark Rappaport
President
Simplicity Division
EFG Companies

I’m sure you’ve seen the 1993 movie Groundhog Day starring Bill Murray. His weatherman character disparages his assignment to cover the annual groundhog event, only to wake up the next day…and the next day…realizing he is inexplicably reliving the same day over and over again. Filled with cynicism, Murray fails to “flip the script” on his predicament and must suffer the monotony.

A lender client shared a similar sentiment with me concerning the recent rise in defaults, bemoaning how auto loan volume, defaults, and delinquencies all follow the cycle of economic ups and downs. The economy tanks and auto loan volume goes down while defaults and delinquencies go up. The economy is on the upswing and auto loan volume goes up while defaults and delinquencies decrease. It’s the same old story every year.

With a plateau in vehicle sales and elevated auto loan defaults, everyone is wondering if after ten years of an expanding economy, we are on the tipping point to a down economy. But, let’s take a look at the numbers.

The Great Recession was tipped by mortgage defaults, not auto loans. However, the behavior has some similar undertones. Subprime borrowers are suddenly missing payments within a few months of the vehicle purchase. This reflects the early signs of the subprime mortgage crisis in late 2006 and early 2007.

Tags Goldman Sachs, JPMorgan Chase & Co., Mortgage Crisis

Economy

Reading the Tea Leaves on Interest Rates

Post author By efgmarketing
Post date June 6, 2018

Contributing Author:
Brien Joyce
Vice President
EFG Companies

The topic of interest rates is a popular one among lenders, sparked by the quarterly Federal Reserve meetings, and debated by those with contradictory opinions. As a case in point, let’s review the recent comments made by Moody’s Analytics during the Auto Finance News Performance and Compliance Summit. According to Michael Vagan, assistant director and lead auto economist at Moody’s Analytics, “The Federal Reserve waits too long to raise interest rates. They [the Federal Reserve] wait to make sure the economy is strong and inflation is growing – then they increase interest rates. But, what inevitably happens is they wait too long so then they have to act quicker and more aggressively to cool the economy down.”

In March, the Fed raised interest rates a quarter of a point to between 1.5% and 1.75%, and have signaled rates will be hiked two more times before the end of 2018. However, Moody’s believes interest rates will pick up steam much faster, predicting interest rates will be above 3.1% by 2019. The truth is likely somewhere in the middle. Regardless of what eventually comes to pass, forecasting interest rate hikes impacts auto lenders and consumers in the near term.

It’s time to plan

Unless your crystal ball has some magical powers, there is little you can do to actually affect rates. However, you can and should plan for interest rate changes. Develop a series of scenarios and build strategies to respond to each one. While it might seem counterproductive, the time spent on this exercise can mean the difference between a nimble response and being caught flat footed.

Communicate with consumers

Consumers often respond negatively to interest rate hikes. They perceive that their money will not go as far, and they curtail or delay major purchases. It’s important for auto lenders to clearly communicate with consumers about the true effects of various interest rates over the life of a loan.

Business Growth Economy

Risk versus Reward in 2018

Post author By efgmarketing
Post date January 17, 2018

Contributing Author:
Mark Rappaport
President
Simplicity Division
EFG Companies

While the hastily signed Congressional Tax Reform Bill had many phoning their accountants at the end of 2017, the real questions are quickly emerging in 2018 as tax season looms. A strong stock market close in 2017 has been tempered with a predicted return of inflation, thanks to the Federal Reserve signaling interest rate hikes. How will lenders weigh the risk versus reward for the automotive credit market in 2018?

No doubt there are some bright spots on the horizon for the automotive market. Talk has abounded at this week’s Detroit Auto Show around advanced technology and improved models. Consumers signaled in December that demand is still high for the right type of vehicle – i.e., light trucks and SUVs. However, OEM incentives also reached record highs in 2017. And, while the volume of lease returns spiked, used car inventory continued to tighten in certain parts of the country struck by natural disasters.

Many economists and investment firms are remaining cautious for the beginning of 2018. Credit Suisse Group AG issued an interesting comment, stating, “After a year of strong investment returns on risk assets, we enter 2018, a year likely to see sustained economic growth and good, albeit more limited returns. We believe the next generation, or Millennials, will emerge even more strongly as a major driving force in key realms of life.”