Transportation collateral value declines push down repossession rates

Dropping transportation values created less incentive for lenders to repossess commercial vehicles despite default rates remaining elevated this year. 

Despite some collateral types weathering the storm of the past year, industries such as transportation felt the impact of declining values, Lewis Cohn, managing partner at Boston-based law firm Cohn & Dussi, told Equipment Finance News. 

“The transportation industry is one that had undergone major changes over the past year with collateral values dropping dramatically — particularly in the non-prime market,” Cohn, who represents commercial lenders, said. “Other markets affected in a similar way include construction equipment and micro-tech.” 

Heavy-duty truck retail values declined 21.6% year over year in October, according to Sandhills Global auction data. Meanwhile, medium-duty truck retail values decreased 15.2% YoY. 

The lower values of transportation, construction and micro-technology equipment also influenced equipment financiers to favor recouping their losses through accelerated balances, which make the entire loan due upon default, rather than repossessions, he said. 

Equipment lenders would rather recoup money owed from borrowers than repossess the equipment, as that would eliminate the possibility of repayment, Rich Whittaker, owner of automotive and equipment repossession agency West Coast Recovery Services, told EFN. Banks also favor voluntary repossessions to recovery agencies over involuntary repossessions through the legal system.

A perfect storm 

Mixed inventory, demand and values across sectors resulted in less repossession activity than anticipated, Cohn said.   

He said that in 2022 there were four repossession drivers incentivizing lenders to secure collateral: 

• High default rates; 
• Limited market inventory; 
• High demand at auction; 
• High collateral value. 

“Fast forward to today’s marketplace with a continued high rate of default, one would predict the same support for repossessions,” Cohn said. The prediction proved false as some markets increased inventory, while demand and values decreased. 

Payments remain strong 

While market conditions remain tight, many borrowers continue to find ways to make payments and avoid repossessions, Kit West, business development director/broker relations at equipment lender C.H. Brown, told EFN. 

“Ninety-five percent of our borrowers are making a living [and their payments], whereas 18 months ago, we had 99% of our borrowers making all their payments on time,” he said. “We had very few defaults [and] no repossession.” 

By comparison, on-time payments dropped as low as 60% in 2020, West said. C.H. Brown advertises lending to nonprime B- and C-credit customers. 

Not every industry avoided the increased pressure of high interest rates, as farms have seen a rise in equipment repossessions, West Coast Recovery Services’ Whittaker said.