Repo Madness

The following appeared on page 1A of the Tuesday May 13, 2008 issue of the St. Paul Pioneer Press.

Late on a car payment? Beware. Delinquencies are rising, and impatient lenders aren't waiting long to call out the tow trucks.

By Jennifer Bjorhus and Nicole Garrison-Sprenger
Pioneer Press

It's 3 a.m. - do you know where your car is? If you're late on payments, your local towing company probably does.

High and rising auto-loan delinquencies, now above 2001 recession levels by one measure, are speeding u action in the repossession lane. Some Twin Cities car and truck towing companies are reporting a significant uptick in orders from lenders, which they attribute to mounting economic ressures on stretched borrowers.

But accelerating debt collection by lenders appears to be another factor in the rise of repossessions. The country's top auto lender, for instance, said it is cracking down on delinquencies and "moving up the timeline" on recovering unpaid debt.

It's not just the auto industry that's getting more aggressive. Some department stores and retailers are accelerating action on delinquent accounts, according to a Twin Cities debt collectors association, because they too need the cash to pay bills.

All Corey Albertson knows is business is hot after a slow winter.

"Probably in the last four weeks our fax machine started kind of getting bombarded with more repossessions," said Albertson, president of American Towing and Recovery in Hastings.

Auto lenders pay Albertson $300 to $500 to tow away cars and trucks, typically after borrowers are 90 days late on payments. Like other companies, his crew usually works from 2 a.m. to 5 a.m.

"That way, most people are in bed and don't see us coming," Albertson said.

Many of the car owners Albertson deals with are families with two or more vehicles who are prioritizing bills and let the extra car slide, although he recently repo'd the cars of a husband/wife Realtor team in Shakopee who lost their Cadillac and Jaguar. Albertson said he's repossessing more SUVs and trucks than before, which he attributes to the escalating cost of filling up the tanks.

Across the board, nearly all the auto lenders Albertson works with have boosted orders recently, he said. But he's seen particular growth with First 1 Financial Corp., a subprime auto financer out of Massachusetts. First 1 Financial didn't return phone calls.

Missy McMurray, owner of an American Lenders Service Co. franchise in St. Paul and Hudson, Wis., said her Minnesota vehicle repo accounts nearly doubled in the first quarter from a year ago. There's been a notable increase in semi-truck repos, said McMurray, who also attributes it to rising fuel costs. McMurray declined to name the lenders she works with.

"I just think more people are falling behind," she said.

Some auto lenders have responded accordingly.

Bobbie Britting, senior analyst in consumer lending at Needham, Mass.-based researcher TowerGroup, said auto lenders are "not waiting as long as they used to" on delinquencies. That varies by the type of portfolio, she said, such as whether it's prime or subprime loans to borrowers with poorer credit.

Detroit-based GMAC Financial Services, the nation's largest auto lender, told analysts in a February conference call that it has added 400 collections associates and has accelerated contact with borrowers. Spokesman Mike Stoller said in an interview that most auto finance companies contact consumers with a letter or call after a borrower is 30 to 45 days late on a payment. If payment is still due after 90 days, lenders turn to more aggressive tactics.

"While repossession isn't likely to happen on day 91, that kind of activity comes into play," Stoller said.

Banks are in "clean-up mode," Mike Jackson, chief executive of Fort Lauderdale, Fla.-based AutoNation, told analysts two weeks ago. Lenders are "accelerating repossessions on any vehicle that they see out there that has a question mark over it. They are proactively trying to deal with it now rather than later," said Jackson, whose company is the country's largest auto dealer.

Along with the uptick go disputes. At least one Twin Cities attorney reports more wrongful repo calls coming in. Tom Lyons Jr., president of the Consumer Justice Center, a Vadnais Heights law firm, said he's preparing to file two such cases. In one, a Hugo woman alleges she climbed into her car in her attached garage to go to work early one recent morning, and after she opened the garage door, a repo crew raced in and dragged her out of the car.

"I think the banks are getting more aggressive on their willingness to wait for consumers to catch u," Lyons said.

Not everyone is rolling in new orders. "The business is either chicken one day or feathers the next," said Dale Hedtke, owner of Midwest Recovery Bureau Inc in Maple Grove.

National Asset Recovery Group in Wayzata, which specializes in repo'ing heavy equipment, aircraft, RVs and large boats, said business is up, but the repo trends are different for larger vehicles.

President Dan Paselk said his boat business is up at least 15 percent from last year. He attributes most of the surge, at the moment, not to eager lenders but to the fact boat owners recently hauled their big toys out of storage, where repo crews cannot easily get to them and have them parked on the water.

Lenders are less aggressive about repossessing such large equipment because they're much harder to liquidate in a slow economy than cars and trucks, Paselk said. Some lenders are rewriting loans on these big-ticket items, doing what they can to accommodate strapped borrowers, he said, because they don't want the equipment back.

"if they get back a Caterpillar and they have a $50,000 loan on it, they're better off rewriting the loan than running it through the auction," said Paselk. "These big-ticket items aren't selling."

Consumer lenders are going after rising delinquencies harder. Rozanne Andersen of ACA Internation, an Edina-based debt collectors association, said she sees a growing number of department store and smaller retailers both locally and nationally cracking down on delinquent accounts by starting the collections and recovery process much sooner. Most companies opting to accelerate the start of the debt collection process are cutting down the time they're willing to wait for payment by one-third, Andersen said.

"Businesses are in need of cash," she said. "They have determined they cannot afford to wait as long as they may have in the past before sending a debt to collection."

Albertson, at American Towing, said he feels the pinch of high fuel costs as his trucks rumble about picking up vehicles.

"I used to drive a Lexus SUV, and I sold it, and I went out and bought an older Honda Civic," he said. "It's a huge step down, but you have to."

Foreclosure filings rise 65% in April

The following appeared on page 2C of the Thursday May 15, 2008 issue of the St. Paul Pioneer Press.

More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday. Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.

Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the higest rate of foreclosure, the company said. Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.

One in every 519 U.S. households received a foreclosure filing in April. Foreclosure filings increased from a year earlier in all but eight states.

Default swaps carry uncertain risks

The following Edward Lotterman "Real World Economics" column was published on page 1C of the Thursday May 15, 2008 issue of the St. Paul Pioneer Press.

It is dangerous when anyone plunges into business deals they don't fully understand. Over the past 25 years, the securities industry has developed myriad new financial instruments intended to better manage risk. But it's becoming clear that not everyone dealing in these securities really knows the risks relative to the rewards.

Most people have never heard of a "credit default swap," but they're making news as the risks posed by such once-obscure financial instruments gain visibility.

A credit default swap is insurance against loss from default on another financial instrument. Suppose you own a corporate bond. It is highly likely the corporation will make all promised principal and interest payments. But you want to be sure, so you make periodic payments to a third party who agrees to make good your loss in the unlikely event that the bond goes bad.

This is little different from insurance on houses. I don't expect my house to burn down or blow away, but I am willing to pay several hundred dollars a year for the right to be reimbursed if that does happen.

At this basic level, a credit default swap is straight-forward and useful. One party wants to reduce their risk and is willing to pay a premium to do so. Someone else is willing to assume risk for a fee. Both can be better off in the long run.

But such swaps do differ from insurance in important ways. Insurance companies won't write policies unless the buyer has an "insurable interest." I can buy a policy on my own house, but I cannot go out and buy a policy on Joe Blow's house three blocks down the street. I can insure my own life, but I cannot buy policies that will pay me if Tom Hanks or Tiger Woods dies.

One can, however, either buy or sell protection against a bond defaulting even when neither you nor your counter-party actually owns the bond.

Moreover, default swaps fail a classic test for separating "investors" or "hedgers" from "speculators." Is a given party always on the same side of the transaction or not? Homeowners always are insurance buyers. Insurance companies always are sellers. Grain elevators contract to sell wheat in the future. Flour millers usually contract to buy.

But a financial institution may sell default protection on a bond one week and buy it for the same bond a week later, depending on its assessment of which side is more profitable.

The number of houses in a country limits the volume of mortgage lending. The borrowing needs of governments and corporations limits the number of bonds issued. The number and size of corporations limits the total value of shares of stock. A country's total stock of buildings puts an upper limit on how much property insurance can be sold.

But there is no limit to the volume of credit default swaps that can exist at any time. And their growth has been enormous.

In 1994, there were some $45 billion in such swaps. By 1998, that had quadrupled to $180 billion. Over the next six years the volume increased 44 times to $8 trillion. It is now estimated at $45 trillion, three times the U.S. Gross Domestic Product.

So what, you may ask. Why should the fact that large financial institutions have made large bets on unlikely events affect the average family?

There need not be any effect if all of the players in the credit default swaps market have correctly estimated the underlying risks, and if the prices paid for swaps fully reflect that risk. As long as everyone involved holds up their end of the bargain, come what may, these swaps need not affect the real economy.

However, the ongoing collateralized mortgage debacle demonstrates that financial institutions can be way off base in pricing new, poorly understood securities. Moreover, it is clear that many of the institutions that have jumped on the credit swap bandwagon, including obscure banks in Africa and Asia, don't have the financial wherewithal to pay up if some insured default actually occurs.

When financial institutions lose trust that other parties in deals are willing and able to carry through on commitments, fear comes to dominate markets and they seize up.

That is what happened to commercial paper last August and September. Fear that Bear Sterns no longer was a reliable counterparty is what brought that firm from apparent strength to near bankruptcy in days in March.

As with many other financial sector innovations, the horse is long out the door. There isn't much government can do right now to reduce the threat default swaps pose for the broader economy. We can hope that participants can unwind their positions smoothly in coming months, allowing firms' exposure to drop, without anyone going broke in the process. But don't count on it.