Repos Rise Amid Troubled Economy
Last updated Saturday, May 3, 2008 5:20 PM CDT in Business
By Kim Souza and Tara Muck
THE MORNING NEWS
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Jay Smith's 2006 Ford Focus was repossessed in December when he could no longer make the payments.
Smith (not his last name) was between jobs and hated to let the car go but really had no option. He had fallen 90 days behind on the payments and the car's market value was less than his loan balance.
Though he was able to buy a used car with his tax refund, Smith is still dealing with the repo aftermath.
Ford Motor Credit recently sent him a bill for more than $3,600 to settle the outstanding balance on the vehicle, which was sold at auction for $6,200.
At Arvest Bank in Fort Smith, consumer loan manager Danielle Rogers has seen an increase in delinquencies in auto loans processed through her department. But even though repossession occurs after 90 days of no payment, they try to work with the customers before it gets to that position.
"We're not in the business of repossessing collateral," Rogers said. "We're in the lending business, so we're going to do all we can to keep that loan going."
Rogers said lack of communication is the main reason repossessions happen. If a customer is having problems making a payment, it's important they let their lender know. There are several options to keep repossessions from occurring, she said.
MEDICAL, GAS COSTS
Billy and Veronica Jones, a Benton County couple, suffered a similar fate as Jay Smith when Billy was injured in a work-related accident.
Juggling a $1,200 mortgage and new car payment proved to be too much for the young couple. The car was eventually repossessed and their Pea Ridge home sold just short of foreclosure.
Situations like these are more common as the economy struggles and the relatively stable economies of Northwest Arkansas and Fort Smith are no exception, credit experts said.
Car loans are among the latest round of trouble for many consumers facing nearly $4 per gallon gasoline and inflationary food prices.
Fitch Ratings recently reported that the number of auto loans that were at least two months delinquent - typically the point at which lenders take action to repossess a car - hit a 10-year high in January, though it did not disclose specific numbers. Fitch attributed the rise to increasing pressure on the consumer in a weakening economy.
Alisha Cercovsky, a debt counselor with Credit Counseling of Arkansas, said auto loans are presenting more problems for consumers on a tight budget.
"Most of the consumers I counsel have two car loans totaling as much as $1,000 per month. Many times they are upside down on both vehicles (owe more than the car is worth), which makes trading or downsizing to something more economical near impossible," Cercovsky said.
These consumers who fall behind on car payments have few options, she said.
While Ford Motor Credit and GMAC will sometimes allow customers to defer one payment, that is not a long term solution. Cercovsky said local banks will work with customers, but when personal income won't stretch to cover expenses, choices have to be made.
AUCTION UPTICK
Before the bank repossesses anything, the customer is issued a demand letter, giving final notice, said Rogers, with Arvest in Fort Smith. If nothing is done, then they contract out a recovery service to pick up the property and issue a repossession letter, which calls for getting the account up-to-date within 10 days. If that isn't done, cars then end up in the hands of auctioneers like Shawn Looper.
Looper, of Looper Auction Service in Greenwood and Huntington, reported a 25 percent increase in the number of automobiles sent to auction in the past eight to 10 months.
Many of the cars - mainly mid-price range vehicles - come from local finance companies, Looper said. Those companies may collect 15 or 20 and then have an auction.
And every vehicle is sold because finance companies want to recover whatever they can, Looper said. Buyers are a mixed bag of dealerships and those who just want a car to drive.
Jan Hanna, CEO of Northwest Arkansas Credit Union in Fayetteville, said auto loans represent the vast majority of the company's loan portfolio.
She said people are having a tough time, but the credit union's delinquency rates have not increased.
"I have seen several requests for $2,000 to $3,000 withdrawals and signature loans among members who are looking to buy small used cars on a cash basis, so they can park the diesel truck or Tahoe until fuel prices come down," Hanna said.
Cercovsky said the scope of the problem has reached beyond the construction sector to many whose overtime hours have been cut in manufacturing jobs and service jobs in the retail and restaurant industry. Others have simply been laid-off or downsized out of employment.
Gas prices alone are pushing some people into debt overload. Cercovsky said consumers who live 20 or more miles from work have seen their fuel bill rise as much as $200 per month since January. She urges consumers struggling to make payments to seek professional debt counseling as soon as possible.
BUSY REPO MEN
Rising delinquencies generally mean an uptick in business for recovery professionals like John Six, a recovery agent for American Lenders Service Co. of Fort Smith, and Dean Melton, owner of Arky Towing and Recovery in Johnson.
Melton said he averages about 80 repos a month for local and regional banks.
He and Six said the spring months are typically slower for the auto recovery business because people use income tax refunds to catch up on payments.
"We usually see the recovery calls increase in the summer and peak in November and December," Melton said. "I expect the tax stimulus rebates will help some people hang on a little longer."
Melton said the construction industry woes accounted for roughly 50 percent of his recovery business in recent months. He's picked up everything from concrete mixers to four-wheelers to a Hummer.
"With five wrecker gas tanks to fill at a hundred dollar bill each time, I understand why so many consumers are having financial difficulties, and I don't look for the economy to improve anytime soon," Melton said.
A common link in the majority of the recoveries is tied to Northwest Arkansas' sagging construction sector, said Melton, who is also a recovery agent for several of the area's largest banks. Construction rigs, travel trailers, boats, cars and trucks have been pledged against numerous construction loans on homes that sit empty, leaving banks with no choice but to claim the collateral, Melton explained.
"(Repossessions) have been picking up (in the Fort Smith area)," Six said. "It stayed pretty steady, then really in the past six months there's been more volume, especially in SUVs and trucks."
More recreational vehicles are being repossessed, Six said, such as ATVs, campers and motorcycles. In one week, the Fort Smith office of the national chain picks up about 35 vehicles a week.
The Fort Smith office covers the northwest Arkansas area, as well as a 50-mile radius inside Oklahoma and Missouri.
Six said some reasons for many of the SUVs and trucks being repossessed are because gasoline prices are taking a hit on the owner, not being able to afford to drive it and make payments on it. Diesel prices have also affected owner-operators of tractors, causing independent contracted work to not be economically feasible.
USED CAR EFFECT
Consumers who suffer a repossession often seek replacement vehicles from buy here, pay here car lots like Springdale-based Automatic Auto Finance or Bentonville-based America's Car-Mart Inc.
AAF operates seven used-car dealerships between Bentonville and Fort Smith.
Juan Marquez, AAF sales manager in Springdale, said foot traffic on car lots has been steady. With an average downpayment requirement of $700 and payments of $75 per week, he said AAF provides consumers with credit problems and past repossessions the opportunity to buy a car.
Patti Baez, an account manager with AAF, said the company keeps a tight reign on collections and has not seen an uptick in auto delinquencies.
"We start calling customers who are 1-day delinquent and try to work out payment arrangements as soon as possible, even accepting partial payments." Baez said.
The company repos between 20 to 25 cars a week normally, Baez said that represents about 2 percent of the total loans. She said very few of the cars repossessed are reclaimed, most are sold at local wholesale auctions.
Baez encourages consumers who can't make timely payments to contact their lender as soon as possible. When the communication stops, the repo trucks roll, she said.
America's Car-Mart, the largest publicly traded buy here, pay here dealership, is in a unique position to benefit as the economy slows, analysts said.
Car-Mart CEO Hank Henderson told investors during the company's March earnings call several lots had recently reported an uptick in new customers, who formerly were bank-quality prior to foreclosures and repossessions.
Jill Clark, manager of Car-Mart's Springdale store, said that is occurring locally.
"Lately I have seen a number of new customers who had recent (within the last two months) repos," Clark said. "In most cases we can help these people get back into a vehicle, if they have sufficient income."
AT A GLANCE
• Late payments more than 30 days past due rose during the fourth quarter for closed-end auto loans.
• Indirect (third party) auto loan delinquencies increased to a record 3.13 percent from 2.86 percent, and direct (car dealership) auto loan delinquencies to 1.90 percent from 1.81 percent.
• All eight loan categories tracked by the American Bankers Association - home equity, property improvement, personal, mobile, marine, recreational vehicle, indirect auto and direct auto - increased 21 combined basis points to 2.65 percent of all accounts during the fourth quarter, which is the highest level since 1992.
• James Chessen, ABA chief economist, said the rise was largely attributed to auto loan delinquencies, which makes up about two-thirds of all closed-end consumer installment loans.
Source: American Bankers Association
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