Understanding Your Collateral Risk

Understanding Your
Collateral Risk
CUNA Members
About Black Book…..
• Founded in 1955 in Gainesville, GA
• Owned by The Hearst Corporation
•Business Media Division along with Fitch Ratings, Motor, etc.
• Independent Source with the most Timely updates and most Accurate values
• Over 3K lenders nationwide use Black Book as their Trusted Values in all
aspects of the life of a vehicle/vehicle loan
• We provide:
•
Wholesale, Trade-In, Retail, Residual and Historical values updated
daily
•
Used Car, New Car, Powersports, RV & Cars of Particular Interest
• Various delivery methods available
• Integration (flat file, portal, web service & API to look up multiple
vehicles at one time)
• Internet Suites (electronically look up values 1 at a time)
• Book Subscriptions (manually look up values 1 at a time)
• 31 of the top 40 auto finance providers use Black Book
Auto Finance News – Auto Exec Survey
1
3
2
4
Source: Auto Finance Risk Survey
Recent study shows auto executives consider collateral risk to be extremely important and
comparable to credit risk for volatility.
2008 Models : Year Over Year Used Car Market
Year-Over-Year
6 Segments UP
6 Months
12 Segments UP
Month-Over-Month
2 segments UP
Quarter
15 segments UP
The used car market continues to be strong. But our in-the-market research and information is showing
us that it is a critical time for lenders to start paying closer attention to vehicle value movements, not
only at the segment level but model by model as well.
Depreciation
Vehicle Values (and as a result LTVs) can change dramatically after origination and
DEPRECIATION CURVES VARY CONSIDERABLY between years/makes/models.
This results is an industry-wide difficulty in predicting and understanding loss severity/recovery
rates. Even within the same segment, depreciation rates after 1-year can vary dramatically.
Why should you refresh your Portfolio?
-
Collateral Value Refreshes:
- Show how LTVs migrate from the time of origination to now
- Identify pockets of highest versus lowest collateral risk
- Show the future value (12, 24, 30, 36 up to 72 months) of each vehicle in the
portfolio
- Provide ancillary data on the portfolio like fuel mileage, vehicle
classification, etc.
- Help track the effects of other variables on LTV (Credit Score, Term, vehicle
segment, fuel economy, etc.)
-
Lenders currently use refresh values to:
- Develop credit and collection models
- Forecast Loss and recovery rates
- Implement dealer management strategies
- Enhance collection strategies
Portfolio Management
Clean
Wholesale
July 2011
LTVJuly
2011
What was the LTV at origination?
What is the current LTV?
What will the LTV be in 12 months? 18 months? 24 months?
Sample File
DATA SOURCE
Sample
Total Records
Jan 1, 2006 - Aug 31, 2011 Selection Criteria
October 1, 2011
Sample Size
Lender
Originations Period
Report Date
AVERAGES
Average Origination LTV
Average Current LTV
36%
Average BBR Score
Average Origination FICO
5,000
Random
5%
ACCOUNT AT HIGH RISK
110% Low FICO (<660)
200
4.0%
120% Low BBR Score (<-50)
120
2.4%
170
3.4%
-50 High Current LTV (>140%)
710
LTV ANALYSIS
LTV migration since originations
•
•
•
•
For Used vehicles, 28% of high LTV originations (over 140%) are now under 100% LTV
38% of new vehicles originated at 120% LTV or lower are now OVER 120% LTV
Of the loans originated over 140%, 58% of are still over 140% LTV
For used cars, 88% of the loans originated at 80% or lower are still at 80% or lower
Current LTVs by FICO bands
FICO Band
New
<580
580-<620
620-<660
660-<700
700-<740
740+
Used
<580
580-<620
620-<660
660-<700
700-<740
740+
•
•
•
•
<80%
80-<100%
Current LTV
100%-<120% 120%-<140%
140%+
N/A
Row Total
50%
67%
37%
29%
26%
35%
0%
0%
28%
20%
16%
21%
0%
0%
15%
23%
20%
20%
0%
0%
11%
14%
19%
14%
50%
33%
9%
11%
17%
9%
0%
0%
1%
3%
2%
2%
100%
100%
100%
100%
100%
100%
100%
57%
40%
33%
25%
34%
0%
14%
24%
18%
20%
19%
0%
0%
11%
24%
26%
22%
0%
29%
16%
17%
18%
15%
0%
0%
6%
4%
11%
9%
0%
0%
3%
4%
1%
1%
100%
100%
100%
100%
100%
100%
Highest Risk
High Risk
Average Risk
Good Risk
Best Risk
20% of new car loans and 22% of used car loans between 620-660 have a current LTV over 120%
For used car loans, 20% of the current 140%+ LTVs are in FICOs 700 and above
Only 29% of all Sub-620 FICOs are on loans with LTVs over 120%
For new cars with FICOs over 740, the distribution of current LTVs is
>100% LTV: 53%
Between 100% - 139%: 37%
Over 140%: 9%
LTV migration since originations
Current LTV
LTV at
Originations
New
<80%
80-<100%
100%-<120%
120%-<140%
140%+
Used
<80%
80-<100%
100%-<120%
120%-<140%
140%+
•
•
•
•
<80%
80-<100%
100%-<120% 120%-<140%
140%+
N/A
Row Total
71%
30%
19%
12%
9%
22%
31%
14%
6%
5%
4%
27%
27%
14%
6%
0%
9%
25%
25%
17%
0%
1%
13%
39%
58%
2%
1%
2%
3%
5%
100%
100%
100%
100%
100%
88%
42%
23%
13%
14%
11%
33%
22%
10%
14%
0%
22%
32%
24%
17%
0%
2%
18%
30%
22%
0%
1%
3%
20%
32%
1%
0%
2%
3%
2%
100%
100%
100%
100%
100%
For Used vehicles, 28% of high LTV originations (over 140%) are now under 100% LTV
38% of new vehicles originated at 120% LTV or lower are now OVER 120% LTV
Of the loans originated over 140%, 58% of are still over 140% LTV
For used cars, 88% of the loans originated at 80% or lower are still at 80% or lower
Worst Migration
Worse Migration
No Migration
Better Migration
Best Migration
Introducing the
Black Book Risk Score
The Black Book Risk Score takes a comprehensive look at a multitude
of micro, macro, historical, and projected factors to rank-order vehicles
with regard to their potential collateral risk, allowing lenders to better
understand their recovery rates and loss severity.
What Our Lenders Are Saying…
Almost every lender we meet with….
“Our recovery rates our great. That’s wonderful. But what about all this business we’re booking
using these sky-high vehicle values? When is the bubble going to pop?”
Head of Risk for Top 3 Auto Lender…
“We’re great at predicting who is likely to default, but we suck at predicting the severity of loss
for those that go bad”
What is Collateral Risk? – What does it affect
It is the risk associated with:
•
•
•
the retention of a vehicle’s value over the remaining balance during life of the loan
the impact of dealer entered adds and deducts
the likely condition (miles, wear and tear) of each vehicle at the time of sale at auction
It is influenced by several factors, including:
•
•
•
•
•
historical and projected depreciation curves at the vehicle year, make, model and trim level
the driving patterns and the maintenance of the typical owner for each vehicle
inaccuracy propensity of the collateral details
manufacturer - and model - related factors
macro factors such as supply/demand, oil prices and economy
While BBR cannot tell you what your recovery rate will be, it does show a rank order that has
correlated with recovery rates by specific vehicles. This is a similar approach to credit models built by
FICO and others.
The Black Book Risk Score (BBR)
•
Through several discussions with the auto-lending community, Black Book identified a need to report
collateral risk inherent in auto lending at the vehicle level.
In 2008 there was a sharp drop in collateral value causing higher than expected losses
In 2009 a significant rebound occurred; the reaction from lenders varied considerably
Currently, vehicle values are at a historic high causing originators and portfolio managers concern about the
risk this presents
Many lenders have very basic collateral risk assessments but acknowledge the need for more
•
Validation files have shown the score quantifies and rank-orders the degree of collateral risk by
vehicles down to the year/make/model/trim level.
Different vehicles have reacted very differently during the past 3 movements and this is a consistent
observation going back decades
Predictive data elements have been modeled and turned into an easy to use -150 to 150 score
•
Lender identified uses include: underwriting and pricing models; collections models, loss forecasting,
dealer profitability and credit analyst performance.
Using collateral risk scores will enhance yields, portfolio quality and returns and assist with better
dealer management strategies.
Different Vehicles
Depreciate Differently
There are many factors that affect depreciation curves; Black Book has historical depreciation curves
to understand how changes in the economy, vehicle model and the market impact vehicles over time.
Available Data for Score Development
Black Book has extensive data on vehicles that includes:
•
•
•
•
•
•
•
•
•
Historical (back to 1999) and current trends of vehicle values
Forecasted residual value trends (12 months to 72 months)
Auction vehicle and pricing data
Auction survey data on vehicle conditions
Manufacturer pricing data on options
Number of VINs mapped to a vehicle
Gas mileage efficiency by vehicle
Fleet usage by vehicle
Economic data (in partnership with our sister company Fitch Ratings)
Using the industry’s best data allows for the most informed decision-making regarding
underwriting, pricing, collections strategies and remarketing strategies
Black Book Risk Score – Results
80%
75%
70%
65%
60%
55%
50%
-150 to -100 -100 to -50
-50 to 0
0 to 50
Prime Portfolio Results
50 to 100 100 to 150
Non-Prime Portfolio Results
Validation shows a strong correlation between BBR Scores and recovery rates for both prime and
non-prime portfolios
Miles Per
Year
2007 Saab 9-3 Base 2D
Convertible
9,481
2007 Ford Taurus SE 4D Sedan
23,359
BBR
Score
Higher
Lower
% sold extra % sold
clean
rough
2006 Buick LaCrosse CX 4D
Sedan
2005 Pontiac Grand Prix Base
4D Sedan
52%
17%
2005 Lincoln Navigator 4D
Utility 4WD
BBR
Score
Higher
Lower
5%
8%
Higher
Lower
16%
Other Factors that Affect Collateral
Risk
Model year changes
Changes in supply and demand
Sensitivity to:
75%
One-Year
BBR
Depreciation Score
2005 Mini Cooper Base 2D
Hatchback
Sample Elements of
BBR Score
Gas prices
Unemployment rates
Incentives
Propensity to be power booked
Real adds that don’t bring value
Fraudulent adds
Understanding Collateral Risk By Dealer,
By Lender
Lender
Dealer Name
Lender 1
Lender 2
Lender 3
Lender 4
Lender 5
Lender 6
Lender 7
Lender 8
Lender 9
Lender 10
Lender 11
Lender 12
Lender 13
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
XYZ Automotive
Lender Specfic
Dealers average
average BBR Score
BBR Score
53
24
48
24
45
24
44
24
31
24
28
24
24
24
23
24
23
24
19
24
12
24
-22
24
-25
24
Lender
Lender 1
Lender 2
Lender 3
Lender 4
Lender 5
Lender 6
Lender 7
Lender 8
Lender 9
Lender 10
Lender 11
Lender 12
Lender 13
Lender 14
Lender 15
Dealer Name
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
123 Motors Inc
Lender Specfic
Dealers average
average BBR Score
BBR Score
32
-2
27
-2
22
-2
19
-2
17
-2
10
-2
2
-2
-1
-2
-11
-2
-15
-2
-15
-2
-37
-2
-41
-2
-44
-2
-48
-2
What are other lenders getting from these same dealers?
Are you being negatively selected?
20
BBR Scores by Segments of Your Portfolio
LTV
Opportunity
for more
business
<80%
80-<100%
BBR Scores
<-100
-100 to -50
-50 to 0
0 to 50
50 to 100
>100
N/A
31%
32%
35%
32%
37%
26%
21%
20%
21%
16%
18%
21%
19%
15%
BBR Score Band
<-100
-100 to -50
-50 to 0
0 to 50
50 to 100
>100
N/A
Grand Total
Under 700 FICO
2%
8%
24%
33%
17%
7%
9%
100%
100%-<120% 120%-<140%
26%
20%
27%
24%
18%
23%
15%
Over 700 FICO
7%
14%
30%
29%
13%
3%
5%
100%
140%+
15%
16%
16%
17%
13%
19%
17%
7%
11%
7%
7%
10%
12%
6%
100%
100%
100%
100%
100%
100%
100%
High risk
segment
Grand Total
5%
10%
27%
31%
15%
5%
7%
100%
Drive positive selection and avoid negative selection by better understanding collateral risk
LOW RISK BBR Score: 106
2010 Mazda MX-5 Miata
•
•
•
•
•
Lower relative historical depreciation
No unreasonable swings in recent values
Better than average condition in auction
Very low mileage at auction
Low number of add/deduct options
MEDIUM RISK BBR Score: -1
2010 Chevrolet Equinox
•
•
•
•
•
Average relative historical depreciation
No Unreasonable swings in recent values
Average Condition at Auction
Higher Mileage in Auction
Medium number of add/deduct options
HIGH RISK BBR Score: -106
2010 Honda Civic
•
•
•
•
•
Higher relative historical depreciation
Strong Recent Values at risk of dropping
Average Condition at Auction
Higher Mileage in Auction
Low Number of add/deduct options
How well do you know your collateral RISK???
Let us help you understand how your LTVs have been migrating and where your
collateral risk lies….
Lender Solutions
[email protected]
1-800-955-9266