Lenders specializing in auto loans to borrowers with imperfect credit say that a two-year industry freeze seems to be over.
Lending to auto buyers with low credit scores rose in the fourth quarter for the first time in more than two years, according to Experian Automotive, a Costa Mesa unit of Britain’s Experian PLC.
“Subprime auto lenders have access to funding again,” said Melinda Zab-ritski, Experian’s director of automotive credit. “The market is looking up after about two-and-a-half years of extremely tight credit.”
That’s good news for two local auto financiers. Consumer Portfolio Services Inc. and United PanAm Financial Corp., both of Irvine, are starting to make more loans after fighting for survival during the recession.
United PanAm former chief executive Ray Thousand is optimistic enough about an impending recovery that he’s planning to get back into subprime auto lending. His new company, Alliance Acceptance Corp., is set to open this week.
Alliance has leased 1,500 square feet of office space in Newport Beach for 15 months with hopes of expanding into bigger space, according to Thousand.
“We’re going to start out small, hiring up to about 10 people, and then slowly grow our loan portfolio over the next year,” he said.
The subprime auto loan market has bottomed, according to Thousand: “It’s a very good time to get back into the business. The number of competitors has thinned and there’s a lot of pent-up demand in the market.”
The industry is dominated by Fort Worth, Texas-based AmeriCredit Corp. and McClean, Va.-based Capital One Financial Corp.’s auto finance arm.
Consumer Portfolio Services averaged $100 million in auto loans per month during the market’s peak in 2007, said Robert Riedl, the company’s chief investment officer.
“But as the credit markets slowed and froze in 2008, we scaled back to buying at nominal levels,” he said.
Consumer Portfolio’s shares lost 95% of their value from late 2007 to its early 2009 low.
Now the stock is up about 300% in the past 12 months on a recent market value of $35 million.
Financiers started to warm up to subprime auto loans in the fourth quarter, said Riedl.
“We’d been without funding facilities for about a year at that point,” he said. “As institutional investors went away, the investment banks that gave us short-term credit went away as well.”
Consumer Portfolio funds loans made by auto dealers across the country. To make loans, Consumer Portfolio and others tap credit lines or use proceeds from sales of auto loans packaged as bonds.
Investors lost their appetite for subprime auto loans after the 2007 crash in mortgages made to homebuyers with imperfect credit.
Subprime auto financiers saw a similar bust in the late 1990s, when the global currency crisis scared investors away from risky investments.
Consumer Portfolio stayed alive during the recent downturn by downsizing and living off interest from loans and fees.
At the end of 2007, Consumer Portfolio had about 1,000 employees. Now, it has about 500, according to Riedl. About half of those employees are in the county.
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Now the company’s funding about $5 million auto loans a month, he said. In the first three quarters of 2009, Consumer Portfolio funded $3 million in loans, according to Riedl.
“This month, we’ll probably do about $7 million,” he said. “It’s nowhere near the levels of 2007, but we’re starting to grow again.”
United PanAm is starting to fund loans again, according to Chief Financial Officer Ravi Gandhi.
In the fourth quarter, United PanAm closed five offices, bringing its total to 20 nationwide. That’s down from 100 in 2008.
The company, whose shares trade on the low-profile Pink Sheets exchange, reported a net loss of $1.2 million in the fourth quarter, versus a profit of $690,000 a year earlier.
For all the pain of the past two years, subprime auto lending hasn’t been hit as hard as regular auto lending, said Casey Thormahlen, an analyst at Los Angeles-based market researcher IBISWorld Inc.
Auto lending overall has taken a hit as dealers wrestled with the worst sales downturn last year since the 1970s.
“It has been pretty widely believed that the subprime auto loan market would start to rebound sooner,” Thormahlen said. “The big question has been when.”
A more complete recovery still is at least six months away, according to Thormahlen.
“We’re expecting the market to show significant signals of a strong change in direction soon and more companies to get into subprime auto lending,” he said.
