Article written by:
Aaron Gerten, CPA
Analysts have warned that depressing values of automobiles could lead to losses for financial institutions. The decreasing value of automobiles is related to the amount of production from automakers and an increasing amount of vehicles coming off leases in 2018. According to J.D. Power, more than 3 million vehicles will hit the used-car market in 2017. This is 33% more than last year. Even more are expected to hit the market in 2018. Per Ally Bank, the depreciation forecast for 2017 was 7%, and they expect another 6-7% cumulative drop in both 2018 and 2019. GM’s CFO Chuck Stevens says declines in values are “more back-end loaded into the second half of the year.”
The decreasing value of automobiles can lead to higher losses as lenders receive lower values for collateral that was obtained from loans in default. With lower value of vehicles, some lenders have resorted to financing negative equity and stretching out loan terms to make monthly payments less strenuous for borrowers. Analysts warn that stretching out loan terms on loans with over 100% loan-to-value ratios coupled with the increasingly indebted consumer are reasons for caution. Lenders tend to recover 56% of losses; however, recently that percentage has dropped to 51%.
Please contact your GBQ representative for any consulting services or allowance for loan loss reserve analysis for your institution.