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    Lending | 3 min read

    How the Semiconductor Shortage Will Impact Auto Lending in 2022

    Semiconductor supply chain issues caused major headaches for auto lenders throughout 2021 and vehicle production continues to suffer into 2022. In this blog post, we’ll take a deep dive into how demand for computer chips is expected to impact auto sales in the coming months.

    Tracking the Chip Shortage

    When the pandemic first began in March 2020, almost all major automakers, including GM, Tesla, and Fiat Chrysler, cut way back on output. Initially, this was in anticipation of lower sales due to changing consumer demand in the first months after the pandemic. This was soon coupled with manufacturers closing facilities to prevent the further spread of the virus among their workers.

    After slacking somewhat, consumer demand for automobiles shot back up in 2021. Unfortunately, new car manufacturers could not ramp production up quickly enough to keep up with this renewed demand because the semiconductors needed to build the computer components in their vehicles were in critically short supply worldwide.

    Why the shortage? Many semiconductor manufacturers also had to halt production for a time when the virus first began. The almost-overnight switch to remote work for millions of Americans caused a massive surge in demand for PCs and other consumer electronics. These electronics also rely on semiconductor chips, and the companies that manufacture these chips tend to prioritize orders for smartphones and electronic goods because they are usually more profitable.

    Because they cannot access the semiconductors required to manufacture new vehicles, many automakers have ceased the production of new cars. This means dealers have less inventory, and consumers can expect to see fewer sales incentives and offers.

    The supply of semiconductors for new cars also has a ripple effect in the used car industry. Tired of waiting months for their preferred new car to be available for purchase, many consumers are turning to the used car market.

    This increased demand is having a predictable effect on the sticker price of used vehicles. According to November 2021 data from the New York Times, “Used car prices are up about 45% over the past year...New car and truck prices are up about five percent over the past year.”

    Pent Up Consumer Demand and Low Dealer Inventory Creates Car Sales Frenzy

    After being cooped up during early COVID-19 lockdowns and receiving an influx of government stimulus, consumers were more than ready to purchase cars in 2021, and many have been struggling for months to find the right vehicle to purchase. This has created something of a car-sale frenzy.

    Mark Scarpelli owns two Chevy dealerships outside of Chicago. When it comes to recent car sales, he told the New York Times he’s never seen anything like it. “Never, never, never.” Scarpelli’s dealerships normally have around 600 to 700 cars in stock. Now, he has about 50. He’s getting 20 new cars each week, but those disappear quickly because of customer waiting lists.

    At dealerships across the country, virtually everything on the lot is selling, from electric vehicles and sports cars that cost more than $100,000 to the used ‘05 Volvo parents are buying for a first-time driver.

    Outlook for Semiconductor Shortage and Other Auto Lending Challenges in 2022

    Artificially high vehicle prices resulting from pent-up consumer demand and supply chain bottlenecks will inevitably come back to earth. There is concern this decline in valuations of used vehicles combined with extended loan terms (like 72-84 months) at low-interest rates (3–4% or below) will become a significant risk to lenders with large used car portfolios in the coming years.

    Additionally, wages increased by 4-5% in 2021; however, headline inflation increased by 7.5%, resulting in a decrease in consumer purchasing power (real wages). Inevitably, this will lead to a strain on consumer balance sheets and an increase in delinquencies.

    Furthermore, with car prices (particularly for used vehicles) increasing at historic levels and longer loan terms, buyers will likely have negative equity in their autos for a longer period of time.

    Conclusion

    Your auto loan portfolio can be your organization’s biggest liability. With a loan portfolio of any size, verifying and tracking insurance can be burdensome. That’s where SWBC’s CPI program can help reduce your financial institution’s portfolio risk.

    Our team was the first to offer the now-popular, Hybrid CPI Program. We built Hybrid CPI from the ground up to meet your institution’s needs while serving borrowers a program that is less intrusive than Traditional CPI.

    Since launching Hybrid CPI, we have seen a reduction in our clients’ issues related to sticker shock because the price point of this program is substantially less than traditional CPI programs.

    We’ve also seen a reduction in repossessions which happen when consumers cannot pay the additional cost of the lender-placed insurance. This is a very important component, and ultimately, allows consumers to stay in their vehicles and make their payments on time.

    In addition, our clients’ cash flow has improved significantly because no one has to “front” the expensive cost of traditional lender-placed insurance. Our Hybrid CPI clients also report a significant reduction of member noise after implementing the program.

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    Michael Dippo

    As Senior Vice President of Automotive Products, Michael works closely with our Collateral Protection Insurance (CPI) carriers to manage existing CPI programs and develop new coverages for our clients. He is responsible for underwriting, corrective action, skip tracing, and asset recovery as they pertain to our CPI and blanket VSI products.

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