RALEIGH, N.C. — Finance companies are working quickly to adapt to new challenges resulting from the rapid economic changes that the industry has experienced over the past several months.

Recent announcements by several in the remarketing community suggest that a change is in the air, specifically on how we remarket assets today and into the foreseeable future.

Lenders are struggling with increasing charge-off and delinquent accounts. Repossessions have increased dramatically, and only because of the decision by many lenders to stop originations over the course of the last year and the resulting portfolio shrinkage, has repossession assignment volumes been kept in check. 

When Things Go Bad

Faced with increasing delinquencies and charge-offs, lenders must be diligent in a soft economy, focusing on those best practices that will drive the highest possible values and prove effective in the management of the repossession, recovery and remarketing of assets.

Of course, the best defense is a good offense. In order to control losses from charge-offs, lenders are reallocating resources to collections. By managing non-performing assets within the portfolio to first and foremost prevent the need for repossession is the best possible outcome for both the lender and the debtor.

Ultimately, keeping the debtor in the car and paying current creates revenue, in contrast repossession and remarketing most often results in a loss, negatively impacting revenue. It therefore makes sense to align resources with that part of the business that creates a profit.

One of the biggest factors impacting charge-offs and losses is the performance from remarketing efforts and the percent of book recognized after the asset is liquidated.

Recently, prices at auction have been very attractive. This is because demand for used vehicles has been higher. A debt-weary public and lack of readily available easy credit, has caused a switch from buying new, higher-cost vehicles in favor of buying lower-cost, quality used vehicles that are just a few years old.

But the good times are ending with recent trends indicating that prices of used cars are already starting to normalize and values are adjusting down.

Now that lenders are getting back into the indirect lending market and with funds becoming easier to obtain, loan programs are becoming available to meet the needs of the new-car buyer and sales will start to increase.

So the focus will turn on how best to liquidate the large number of vehicles repossessed in a way that obtains the highest possible value for the asset, in the shortest possible amount of time. 

Time Stands Still

For the most part, assets are remarketed today very much the same way they have been in the past. A majority of assets are still sold at "brick and mortar" facilities where they are marshaled together, prepped and then scheduled into a queue to run in front of regional buyers on certain days of the week.

The time to process a vehicle through the remarketing process can vary but in general will fall somewhere between 22 and 25 days. This time frame and "turn to cash" is crucial for several reasons, Market conditions can change rapidly. Asset values continue to fall as they age, and there is the value of money that must be considered.

Compressing the remarketing timeline can be challenging. Most lenders have assets geographically distributed in agent-impound lots throughout the country that must be transported to an auction location for sale. The logistics of securing, transporting, prepping, and selling a vehicle is a time consuming process.

It can be complicated even more by title processing, state laws governing cure periods, and the redirection and transport of vehicles to different regional markets based on market analysis and demand.

All of these elements combine to impact the timeline for "turn to cash." Traditional methods from the past are being reevaluated, technologies and methodologies are emerging which leapfrog the physical boundaries of brick and mortar auctions exposing assets to buyers in multiple markets simultaneously.

We no longer operate in a 2D world that processes tasks sequentially, we operate live in a electronic global community not bound by regional markets where tasks are executed in real time 24/7.

Reengineering the Remarketing Process

Remarketing, too, has evolved. Online auctions are not new but like any emerging technology must mature and become accepted. Most remarketers that have their roots in brick and mortar auctions, have deployed online auction sites based on traditional thinking, which is to move the asset to a marshalling center, prep the vehicle and then run a simulcast online auction in parallel with scheduled physical auctions via the Web in the hope of expanding the buyer base.

The thought was that by getting more buyers eyes on the vehicle the asset valuations would increase. Adoption to purchasing cars online was slow but several years later, it is now becoming more accepted. 

Indications are that asset prices have seen small increases on average for typical passenger vehicles. But the real impact has been with specialty assets in which regional sales could not consistently generate enough buyers to assure good valuations.

In these cases, online auctions have been invaluable by exposing hard-to-sell niche items to a broader base of customers, and has demonstrated significant increases in asset valuations.

A good everyday example is eBay and Craigslist, two very effective online auctions that serve different needs. Although one might use Craigslist to market garage sales or household items to local buyers and be well-served, you might not market an antique Victrola and expect the same results.

However on eBay, which has a global buying community, the Victrola would do very well as would find more qualified buyers versus the one or two collectors in a local market.

However, trying to sell last year's garden hose reel on eBay would be expensive and most likely less effective than selling it locally on Craigslist, where shipping and advertising costs would not be a factor, or at least proportional to the value of the item being  sold.

Though some success has been demonstrated with asset valuations from online auctions, the impact on the "turn to cash" timeline has been insignificant. It still takes about the same amount of time to remarket an asset as it has in the past.

Recently, OPENLANE and SmartAuction, providers of online auctions, announced their intent to develop off-site auctions. These auctions are executed online but the vehicle is not moved, it is left off-site at impound or at some other location rather moved to a traditional brick and mortar auction or marshalling center, where it would sit until a sale date and auction run was scheduled.

The purpose of these auctions is to adjust the whitespace within the remarketing process reducing the timeline. Time lost to transport and vehicle prep is pushed downstream in the process post sale. This can shift several days from the remarketing process to the delivery process and allow assets to be exposed to potential buyers earlier.

Consolidated Asset Recovery Systems realized a few years ago that there is the opportunity to reduce the "turn to cash" timeline and developed an online auction that marketed vehicles off-site in which, assets need not be moved from agent impound in order to start remarketing them.

But rather than create an online auction in conflict with physical auctions, CARS modeled its online auction as a pre-marketing tool that complemented the current timeline and processes of remarketers.

By launching a contingent online auction, assets could be previewed during the "cure period" in which a vehicle is not available for sale. Pre-marketing the asset exposed future sales and bid opportunities to potential buyers, and within hours of a vehicle becoming available for sale, a viable bid-log is generated and presented to lenders. This allowed the timeline to be compressed because assets did not have to age before being placed into a queue and scheduled for sale.

Metrics showed that it was possible to remove seven to 14 days off the typical timeline, making the "turn to cash" faster than previously possible. 

In addition, the entire auction takes place at a point in the process that does not negatively impact the traditional remarketing timeline even if there is a "no sale." This means assets can be marketed at a variety of venues after the off-site auction runs with the overall timeline remaining the same.

The last barrier to adoption was now removed by pushing the auction upstream in the liquidation process, where it can complement the downstream physical auction providing a two tier auction model and closed-loop remarketing solution to lenders. No longer was there a need to decide what venue to use. Lenders could now use both in a complementary way.

Online auctions have matured to a point where there is broad acceptance. They are now evolving to find a place of their own within the remarketing process rather than as a tag along to the traditional auction. Their ability to increase exposure of an asset to hundreds of thousands of buyers globally, operate 24/7 and avoid logistical restrictions associated with physical auctions, has set the stage for reengineering the way assets will be remarketed from now on.

By leveraging the best of online and physical auctions, losses are reduced through increased performance that realizes a higher percentage of book value and a compressed timeline that reduces the "turn to cash."

Terry Groves is the senior vice president of sales and marketing for Consolidated Asset Recovery Systems.