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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (60187)	12/13/2017 12:06:34 PM
From: robert b furman	1 Recommendation Recommended By Truedarkblue Read Replies (2) of 78419

Hi Paul, A bit of history regarding ALLY and its sub prime loans. Just before GMAC became ALLY they bought a sub prime auto loan maker and consolidated it into their automated loan decision making. If a persons credit was say below a beacon score of 585 then it was rejected by GMAC and automatically sent to the sub prime review. The purpose of sub prime is two fold - it boosts market share - often by selling slow movers that consequently have the largest rebates on them and generally lower in price. Both of these attributes tend to minimize a repo loss - which can range from 3500 to 5500 in good times. This sub prime companies major appeal was that its collection methods resulted in very acceptable delinquency rates - it was the main reason Gmac bought them. The technique utilized was a phone calm to the consumer a day or two before the loan payment was made - it eliminated the I forgot to mail the check and it also kept close tabs on the where abouts of the vehicle. So I higher yield on a loan portfolio is a good thing - especially when you stop the big repo losses. As a note the subprime loans taken in had a higher interest rate but the amount outstanding was really worked hard - stipulations that more down payment money be made - or a dealer would stretch on the ACV of the trade. Another tool used by subprime car dealers is to assign a fee for buying the paper - if money down was not able to be boosted - the dealer could pay a fee (which reduced the gross profit to the dealer) but it made it a deal. That deal very often was associated with a vehicle that had an overage issue and it was beneficial for all to make the deal. As you point out since this summers hurricanes - the price of used cars has been bumped by about 1500 per car/truck. Our current used inventory of about 75 cars is an easy 200k - 300k higher than last years levels (trucks and SUV are through the roof). When a vehicle is repo'd - it quickly goes to a national auction yard awaiting the necessary time requirements before disposal can be legally done. The day of the sale - payment is made. Repo's pulling an extra 1500 -2000 per unit also greatly helps minimizing repo losses. It could be said that subprime loans are in the goldi-locks sweet spot not seen for many years now. In short I would not be troubled by a subprime portfolio - in fact if properly done - it is a definite plus. The deal would allow an extended service agreement so a service customer was also made. These fees were reserved and utilized to offset repo losses. There have been a plethera of sub prime loan fears in the auto' loan market as the uninformed authors equate sub prime cars to subprime housing. Two completely different subjects. Dealers are responsible for repo loan losses if there credit ap had any factual discrepancies. This certainly was not the case with housing in 2008 - mortgage originators were never held responsible - so the level of fraud was outrageous in housing. Autos have instant liquidity. Since the mass shuttering of auto plants in 2008 - used car values have defied residual estimates. When the manufactures flood rental units with excess inventory over the dealers lots - that's time to worry about repo losses and declining used vehicles. GM has done a credible job by not selling more than 5% of a years production to the rental fleets. In fact the japanese car makers have been more aggressive in rental fleets getting a bigger share of production. Bob

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