Auto market turbulence: Trends, risks, and the path forward

[00:00] Bill Moniz: Can’t drive your house to work, so you need your car. Nowadays, everybody works from home, so you don’t need your car either. So what happens is they’re letting go. Their cell phone bill is more important than their car typically these days.

[00:17] Narrator: Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[00:40] Vince Passione: Welcome everyone to 22 minutes in Lending. I’m your host, Vince Passione, and I’m excited to welcome Bill Moniz as our guest today. Bill has spent over 25 years in the auto industry. He started his career at Citizens Bank and went on to hold senior-level positions at both Belmont Savings Bank and SunTrust. Today Bill is the CEO of Cinch Auto Finance also known at Credit Union Loan Source. Since taking the helm at Cinch in 2016, Bill and his team have driven remarkable growth. Bill, welcome and thanks for joining us today.

[01:06] Bill Moniz: Thank you for having me.

[01:08] Vince Passione: Awesome. Well listen, congrats on the success. And we’re going to talk about it a little bit further, Bill, but I want to dig in a little bit about Credit Union Loan Source and Cinch and the history, and maybe you distinguish between the two of them? That would be helpful.

[01:22] Bill Moniz: Sure. So Credit Union Loan Source was developed to help the founding credit unions in Georgia in 2004. It started doing business about 2005, early 2005, rolled out to other credit unions within Georgia. I think they peaked out at about 12 to 14 and then rolled back after the recession to about eight when I joined in 2016. So from there we worked with Illinois to expand our credit union box per se, who we’re selling to, and the rest is history from there. I mean we started adding states regularly and through the COVID and the acceleration of liquidity, credit unions had needs for alternative assets and investments and that’s where we came in.

[2:19] Bill Moniz: So we started growing pretty significantly in that range. Now with Cinch, as we expanded through our dealer network, we did get a lot of, well, we do not need another credit union. We have plenty of credit unions to participate, and we’re a finance company. We’re a CUSO finance company that is able to provide the same type of services as a Bank of America credit union finance company and what have you. I mean, the difference that we have is we’re prime only, so most finance companies fall in subprime world. We’re prime only 640 plus FICO, and we wanted to make sure that when we’re going to a dealership to expand, they understand that we’re a finance company and we have a program to offer.

[03:08] Vince Passione: I was preparing for the podcast, and I was looking at some of the Cox data that’s out there. So here’s some stats. So new cars, which was very interested to see this new market day supply, which is new to me since my days at Dealertrack, but if you’re familiar with it’s how long the vehicle stay inventory, and I’m saying that’s now at 74 days, and that’s up 43% year over year, which was fascinating to me.

[03:34] Bill Moniz: But if you rewind to pre-COVID, that’s typical number mean. Maybe it’s more in the mid-60s, but it’s not significantly higher.

[03:45] Vince Passione: So the impact on new car pricing right now, it looks like average listing price of new car is about $47,000. And is that up down or about the same, Bill?

[03:54] Bill Moniz: That’s up about 14,000 from pre-COVID. So at least for our books we were running about 33 for a new car, and we’re in the industry average right now.

[04:10] Vince Passione: And on the used car side, I was looking at the available inventory that’s out there on Manheim says, “About 2.26 million units that are out there,” which they’re saying, “Is up about 3% from a year ago.” That seem about right?

[04:21] Bill Moniz: Yeah, I mean it’s probably a little light and again, it’s based on the leasing market not being able to fulfill vehicles back into the inventories. I think leasing has come back. I mean it’s running close to where it was, so I think after probably ’26, ’27 we’ll start seeing the used market come back in that side.

[04:46] Vince Passione: So Manheim’s Index says, “That used car prices are starting to stabilize.” The average listing price I was able to find was about 25,670, which seems to be down from last year. Is that what you’re seeing as well?

[04:49] Bill Moniz: Yeah, we’re seeing the same thing, and we’re starting to see not so much accelerated on our end, not so much accelerated depreciation, but more back to the normal one, one and a half percent a month.

[05:13] Vince Passione: So what impact does it have on LTV and obviously for the dealer, right? He’s got the front end of the back end. What are you seeing happening there because I mean the dealer is making money to sell the car, but they’re making money on aftermarket products. Doesn’t matter if it’s new or used.

[05:28] Bill Moniz: Correct.

[05:35] Vince Passione: Especially on the used side, how are those values and the value of the vehicle changing, affecting the LTV and affecting that component of underwriting?

[05:42] Bill Moniz: Like I said before, “We’re primed to prime shop.” So what we’ve saw over the last three years, we typically run about 8% on the positive for trade equity during mid ’22 to mid ’23 or so. That was cut in half to about 4%, but we never really ran in the negative as far as equity here. Now industry-wide absolutely, I mean not only were prices inflated, sometimes vehicles were demanding a upcharge market adjustment. So those type of vehicles, I don’t see them coming back unless if there was a significant cash put down on that. You’ll see some negative equity probably for a couple years still to come.

[06:40] Vince Passione: Yeah, so that’s an interesting stat and even in the CFPB has touched on it, but I think the industry as a whole recognizes that that’s a number that seems to be running pretty high. And the last number I saw it said, “About 24% of new vehicles financed have negative equity in them.” The average consumer that has negative equity, that value is about $6,400, which is up significantly. I mean the last big, big number I saw was back in before ’22 is about $4,500. So how does that affect the consumer? How does it affect the credit quality?

[07:17] Bill Moniz: The rise in negative equity obviously mirrors the increase in cost of vehicle. I mean vehicles are, it’s not unheard of. I mean more payments are over $1,000 than not, which is extremely high being in this business for so long. So it’s somewhat shocking, but I think that the negative equity factor is an educated consumer. You typically see that more so on the prime, not always, but they’re looking at the term, right? If you’re stretching the term, you’re upside down. That’s just going to continue to move forward, right? So if we could cut back on some of these terms, now we go to 84 months, but as you go higher on term, you’re getting cut back on LTV.

[08:06] Vince Passione: No, no, I get it. It’s always troublesome, right, when you see someone carrying their old car into their new car, right? So now they’re paying off one and a half cars in that same loan, but you’re right, it’s unavoidable. Are you seeing gap insurance pick up in sales on the back end from the dealers because I would imagine that most of the lenders would be pretty interested in making sure that the consumer had purchased gap insurance if they’re carrying that much negative equity?

[08:34] Bill Moniz: Yeah, and yes, I mean we’ve seen a little bit of an uptick in gap, but it’s been pretty much the norm. Typical customer. If they’re finding that, and they know it up front that they’re trading negative equity, they’re obviously if they could qualify for the gap that is, be purchasing that. Yeah.

[08:58] Vince Passione: So credit quality, let’s touch on that. Delinquencies went up, and it’s interesting, they run about 8% of auto loan balances for the last 30 days. You and I were speaking back, I forget what conference we were at together, and I think it was August of 2022, it felt like that was the beginning where something went wrong, at least for the credit unions I service. And I’m curious if they were yours that all of a sudden there’s a batch of loans that started back in the summer of ’22, and when credit union’s market share went from 16 to 25%, this just didn’t look like they were performing well. So how much of that 8% that we’re seeing in delinquent loans is that vintage, and how much of that’s just, hey, the consumer’s under stress and it’s just happening?

[09:46] Bill Moniz: Yeah, there’s a couple pieces of that puzzle, right? So KBRA came out yesterday or this week with their delinquency on asset-backed securitizations, and prime was up 17 base points to 1.2 in July. So that 8% definitely is loaded with the 9%, 30 to 59 delinquencies in subprime. So we have that. Negative equity doesn’t help. Inflation is definitely driving the delinquency, but what they saw in their study against the securitization market for them, the highest 60-plus delinquencies since 2011.

[10:38] Bill Moniz: So that’s concerning. And inflation is you used to always adjourn the ’08 times. Somebody I used to work with was always like, “Well, you can’t drive your car, I mean your house to work, so you need your car.” Nowadays, everybody works from home, so you don’t need your car either. So what happens is they’re letting go. Their cell phone bill is more important than their car typically these days. So that’s what we’re seeing as just the world evolves, right? So it’s just different.

[11:12] Vince Passione: That’s a very interesting observation, Bill. I used to joke around and say, “We can hook your car, right, in 90 days,” but they can’t take your house away for a year. So it makes sense, and they need their vehicle, but you’re saying, “Hey, people are working from home.” So now with new priorities, pay your cell phone bill, right? And let them take the car. Wow.

[11:36] Bill Moniz: Being able to call into work, that’s just how it goes these days. Just like most, I guess Fintechs and CUSOs or whatever, and we have people working from home. It’s sometimes a factor of even hiring somebody these days, so…

[11:54] Vince Passione: Now, Bill, I remember when I started in the industry two decades ago in auto finance, it was get the consumer into a payment that’s $350 a month and everything is great. Now we’re trying to figure out how to wrap our heads around a thousand

[12:07] Bill Moniz: 600.

[12:07] Vince Passione: … dollars a month.

[12:08] Bill Moniz: Yeah, yeah, I mean it’s unbelievable. I mean that $28,000 vehicle, if your back end, it’s about $600 payment. It’s unbelievable.

[12:19] Kara VanWert: This is Kara VanWert, Chief Lending Officer at Veridian Credit Union. Since 2016 we’ve been working with LendKey and joined the member student lending CUSO to help provide student loan solutions to our members. As the current CUSO board chair, I’m proud of the CUSO LendKey partnership, as this has allowed Veridian to help over 12,000 of our credit union members finance their education and improve their financial health. LendKey’s streamlined processes simplifies the lending experience, making it easier for our members to access the financial support they need.

[12:59] Vince Passione: We were talking to Tony Battelle, he was on from Origins, right? He’s got his big Tesla program from running in. I think that’s what they see. It’s certainly a higher credit quality customer. And do you hear anything about subvention in this space? Because when I see Musk turn around and move price, I’m like, “Why don’t you just use subvention?” I mean, what you care about is the cost of ownership, right? So you can subvent the… There’s things you can do without changing the MSRP.

[13:25] Bill Moniz: Cash buyers and, yeah, the typical Tesla is what I’ve read. Specifically, Tesla is more cash buyers than financing. So you’re not really going to subvent your population of customer. It’s good question though. I mean as soon as you take that price down, then you’re impacting all of your consumers and future consumers because their vehicle was 60,000. Now it’s 50. Just it’s hard. It’s hard to play that game. But I’m not going to question you on though.

[14:05] Vince Passione: Yeah, no, no. That’s right. That’s right. But residual values are a scary thing, right? Especially if you’re leasing that vehicle, and you expected to come back after those 36,000 miles and you have a price in mind, right? A worth. So, no, that’s great. So almost to the end here of our time, Bill, what do you think the top trends are as you look into 2025, some of the risks and trends for auto finance and credit unions that are out there thinking about this and some banks about the auto finance market. What are you seeing?

[14:33] Bill Moniz: Yeah, so I mean there’s been a lot of turmoil in the markets over the last few weeks. Rapidly change in electric outlooks. The volatility is not over. I mean it’s just beginning. I think that there’s still projections for soft landing in ’25, but that could still lead into a recession. I think things are up in the air. I think credit is going to remain slightly tighter than it has in the past. We’re not sure where the aggressive rate cuts are going to lead us.

[15:11] Bill Moniz: So I think if there’s rate cuts that are significant for the market, you’ll see a lot more reentry on the purchasing side. Like you said earlier, “Inventories are there.” I mean, for most vehicles, I mean I know there personally, there’s a couple Toyotas out there that they’re just not getting delivered yet. It depends on the make and model, but I think it’s going to be continue to grow. I think the auto market had a pullback on basically leasing inventories and so forth. I think we’re going to get back to where we were in the late teens over the next couple years.

[15:56] Vince Passione: Yeah, I don’t think things are going to go exactly back to the way they used to be, right?

[15:59] Bill Moniz: No, no.

[16:01] Vince Passione: I hear you.

[16:02] Bill Moniz: When prices go up, how often do they really come back down?

[16:06] Vince Passione: That’s right.

[16:07] Bill Moniz: We’re going to see new car vehicles continue to climb on cost. And same with the used for some time. I mean, it might not be as drastic and quick to get there, but they’re not coming down so…

[16:21] Vince Passione: That’s great. What are you seeing on the Fintech side?

[16:23] Bill Moniz: I’ve been seeing cutbacks on the auto side. The companies that came out when liquidity was at the height and mark on the credit union side. A lot of these lending companies pop up mostly unsecured, and then they tried to get into auto. They really didn’t make a splash though in auto, from what I’ve seen and from a volume perspective at least. But now they’re more so dialing back, and from what I’ve read this year, originations are pretty low. They’re still doing them though. I mean from what I see, but not at the levels where they wanted to be in 2022, let’s say.

[17:10] Vince Passione: Yeah, from my perspective, it looks like it’s more direct to consumer. You still see innovation direct to consumer, right? Consumers are still, they struggle with the sales process going into the dealership, arming them with more information. Some of the stuff we talked about, right? I mean, you’re going to be in your car for a longer period of time. Things like maintenance become a bigger issue. Managing warranty, dealing with gap insurance, these are all things that for a lot of consumers are kind of new, and I’m seeing some direct to consumer plays that really better help you manage the asset, set you up so that you understand here’s a credit line for you to have with you as you think about the vehicle.

[17:53] Vince Passione: And then more importantly, what’s your vehicle worth, right? There’s always that wonderful Carvana ad about the husband and wife, and she’s picking the appropriate time to sell the minivan. She shouldn’t have to check, right?

[18:05] Vince Passione: And what’s the right time? What’s the bid and the ask, and then what’s the vehicle you’re trying to get into and let’s go find it. And I think the other thing is inventory management, right? When I was at Dealertrack, we were constantly on it. Now at Cox, they’ve got a good purview into inventory. But is there a way to create a virtual inventory where, look, everything’s for sale at the right price, then why wouldn’t you expose all inventory? All the vehicles that you’re putting people in right now, why wouldn’t it be open to buy if someone gave them the right price?

[18:36] Bill Moniz: Right. And some dealerships do that. I mean, not companies, not finance companies, but dealerships do more than I would say the finance side. The other thing we didn’t talk about, Vince, was CDK. You know, that definitely interrupted some of the market for about two weeks. There was dealers out there that couldn’t write a contract. E-contracting help during then because they couldn’t use their paper systems. But that messed up management, the inventory management systems, even cutting checks for the simple fact of daily operations.

[19:19] Bill Moniz: So that was a big disruptor of ’24 in my opinion, even though it was short-lived, which thankfully so. There was a good amount of dealerships down. But, yeah, I mean going back to the finance companies out there, I do see that they are more successful and unsecured on the origination side, but I don’t know if you’ve seen it, but I have not. What is the performance of those? I haven’t dug into that at all.

[19:55] Vince Passione: Well, you’re talking about personal unsecured loans?

[19:57] Bill Moniz: Yeah, I know you guys do them, but I’m saying, “The other

[20:01] Vince Passione: No, no, it’s

[20:01] Bill Moniz: … [inaudible 00:20:02] people.”

[20:02] Vince Passione: Okay. I think for lots of reasons, and I think it’s the macro, is that the expectation performance, certainly these loans have underperformed and that’s a concern. And I think everybody was very infatuated going short, which is why I think a secured short asset, right? Auto loans has always been part of the bread and butter of the credit union’s balance sheet. So I think there is across the board, right? There’s a flight to quality. With Cecil, you there and say, “Yeah, okay, great. I’m going to write that loan, that personal unsecured loan at 14%.” But when all of a sudden you start seeing Cecil reserves go up, it doesn’t feel as good and the same kind of return. So I do think there’s a pullback. We’re starting to feel that from our clients, their personal unsecured loans, they’re pulling back a little bit. There’s demand for it from the consumer for lots of good reasons, right? Someone doesn’t want to revolve on a credit card. Taking an installment loan to do that makes a lot more sense.

[20:59] Vince Passione: But I do think, as we talked about earlier, there’s a flight to quality. People are tightening up, and they’re tightening up not just in their credit box, but also looking across assets and saying, “Which ones were more riskier during this downturn.” But I agree with you that look auto finance and look, you and your team, you guys are experts at it. You’ve been at it a long time. It’s not for the unwashed or the unexperienced, right? There’s a lot of nuances to this business that take a long time to learn and to understand, and you have to go through cycles, right? I remember back in early, what, 2002 when residuals dropped like a rock, and everybody’s leasing like crazy.

[21:38] Bill Moniz: All those leases. Yep.

[21:40] Vince Passione: Yeah, you’ve got to [inaudible 00:21:41]

[21:41] Bill Moniz: Insurance companies went under. Those type of things, yeah, and that was part of it too. For these finance companies that spin up an auto, just indirect auto specifically, you need the experience. I mean, we could hand over all of our secrets, but you still got to execute. So it’s having the right team in place and what we put together.

[22:04] Vince Passione: Yeah, we talked about refinancing, and it’s a really interesting part of the industry and it’s a small part, but one of the challenges always been titling, right? If you script a title, and you try to hook that vehicle and you got it wrong, guess what? You’re not getting that car. And there’s still a significant number of states that require wet signature on all those documents, which makes that process. It can’t be fully digital to the way we want it to be.

[22:31]: So I think there’s some friction points in that process that hopefully will change, and when they do, then your comment about refinance I think will take off. But there’ve been a lot of entrance in that refinance market over the past 10 years, right? And it’s still, as you say, “It’s still pretty nascent.”

[22:47] Bill Moniz: Yeah, and outside of the credit union banking world, yeah, mostly just Fintechs basically spinning up refi markets. It is difficult, and I agree with you 100% on the titling. That’s pretty much 80% of it. We have a great group here, fortunately, so we’re able to work efficiently and it is coming down to a lot of electronic is getting put into place, wet, not wet, e-signature, but we still got a long way to go. There’s many states that are.

[23:27] Vince Passione: That’s right.

[23:28] Bill Moniz: So…

[23:29] Vince Passione: So, Bill, September 17th rates come down. What’s the immediate impact? What do you see happening the next 30, 60, 90 days in your world?

[23:38] Bill Moniz: Yeah, so I mean we pretty much, like I said earlier, we change rates regularly several times a week. So we’re more looking at following the two-year treasury and what’s become of that. So currently that’s already baked in, so we’ll be looking for the next rate cut or so forth. I mean, obviously we follow the market trends, we have competition. We want to make sure we’re within the elasticity of getting the volume we need with the return that we need. So we’re not going to be the industry leader on cutting rates, but we’re following the market pretty regularly.

[24:18] Vince Passione: Great. Well, Bill, listen, again, congratulations on your success. Thanks so much for spending the time. It was a great conversation. I wanted to thank all of our listeners as well and don’t forget to subscribe so you can enjoy future episodes, and I’ll meet you back here at our next 22 Minutes in Lending. Thanks, Bill.

[24:33] Bill Moniz: Thanks for having me, Vince. Appreciate it.

[24:35] Narrator: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode.
You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to
subscribe and leave us a five-star review.