Repo agencies unprepared for fall auto default surge

Auto repossessions are expected to surge above pre-pandemic levels as lender deferral programs begin to peter out in the coming months, said Cox Automotive Chief Economist Jonathan Smoke in a quarterly conference call. The agencies responsible for repossessing vehicles on behalf of lenders, however, may not be primed for the upsurge of defaulted accounts.

Repossession rates could experience a 20% to 35% uptick from the baseline rate in coming months as a direct result of the COVID-19 pandemic, said Les McCook, executive director of the American Recovery Association (ARA). The baseline rate is usually 2% of vehicle sales annually, he said. ARA works with more than 260 professional repossession agencies in more than 27,000 cities worldwide.
The quality of repossessions, for one, is expected to dip, McCook said. Due to the pandemic-induced three-month moratorium on involuntary repossessions, for the first 90 days after repossessions start lenders could be chasing down low-quality client information, such as outdated addresses, McCook said. Agencies, therefore, could end up searching for vehicles where their owners no longer reside.
Repossession agencies have been squeezed financially as business has dried up, with some shifting gears toward alternative sources of revenue, such as private towing and voluntary repos. Many have also had to cut lender-required insurance on tow trucks in response to business closures, McCook said.
For some agencies, such as Marion, Ill.-based Top Notch Recovery, involuntary repossessions are 80% of a company’s revenue, owner Clayton Morse said. “Some of the repossession agencies [in the Midwest] went from making $40,000 to $50,000 a month to not even being able to pay their bills.”
The backlog on repos is staggering. Morse said he works with about 50 lenders, some of which have 200 to 300 orders waiting to be distributed to repossession agencies.
“It’ll be absolutely ridiculous the number [of vehicles] that will be repossessed because you have the lenders on the back burner and they’re just biding their time,” Morse added.
On top of this, repossession agencies lack manpower, and wonder how many of their employees will return as the coronavirus continues to spread throughout the country. “[Employees] don’t want to get in somebody else’s car. They don’t want to be near it. They don’t want to come near other people,” ARA’s McCook said.
The repo moratorium began in April when involuntary repossessions halted as lenders extended deferral assistance programs for customers experiencing financial hardship due to the COVID-19 crisis. Many state governments, such as in Illinois, simultaneously enacted executive orders to prohibit all involuntary vehicle repossessions until further notice.

Yet, there remains some ambiguity around whether lenders can legally involuntarily repossess vehicles, McCook said. The courts in Illinois, where Top Notch Recovery does business, determined that the state government could not legally enforce a moratorium on involuntary repossessions. Nevertheless, the governor’s executive order is still intact.
Delayed repossessions could also destabilize used-vehicle prices when repossessed vehicles flood the market, Cox’s Smoke said, reducing what lenders can recoup on total losses. Currently, there is a shortage of used inventory, which should insulate pricing exposure to an influx of vehicle repossessions; however, it is unclear how many vehicles will have to be repossessed after deferral programs expire.
“Principally, we think the biggest source of supply is going to be delayed repossessions that basically have already taken place, or are in the process of happening, that would have been coming into the market earlier this year,” Smoke said.