When Fitch Ratings reported recently that U.S. subprime auto ABS delinquencies ballooned to levels not seen in almost 20 years, the development sparked plenty of industry reaction.

To clarify whether or not this market segment is in a profound tailspin, SubPrime Auto Finance News reached out to Equifax chief economist Amy Crews Cutts, who refuted many of the assertions the report made and offered some perspective on what finance company executives might be seeing next.

At the start of a conversation this past Friday, Cutts stressed that, “What I want to make totally clear here is I’m looking at the total market portfolio of America. Fitch is narrowly looking at ABS securities. They’re different populations and theirs is a subset of ours.

“This is important because the mixture of who is issuing securities, what those investors are looking for, what will the market bear on those securities, can influence the performance of those differently than we might see in the broader market,” she continued. “In particular what I found disturbing with the Fitch report was the concept that this is the highest delinquency rate that we’ve seen.”

Cutts explained that she combed through Equifax’s data, looking through vehicle installment contracts held by commercial banks as well as finance companies, the sector that often underwrites the most subprime paper.

“In the total market view, we’re not seeing this sort of record level of delinquency,” Cutts told SubPrime Auto Finance News. “We’re seeing a small increase in delinquency, but it’s still from very low levels.

“Historically we had much higher delinquency rates in 2009 when the Great Recession really got rolling and lots of people lost their jobs. That had a profound effect on auto-loan performance,” she continued.

Last Monday, Fitch analysts indicated subprime delinquencies of 60 days or more hit 5.16 percent for February reporting, marking the highest level observed since October 1996 (5.96 percent). During the most recent recession, the firm indicated delinquencies peaked at 5.04 percent in January 1999.

Fitch also determined February’s delinquencies represented increasing of 11.63 percent year-over-year and 3.63 percent on sequential basis.

So why are the conclusions so different between Equifax and Fitch?

“Within that narrow context of what Fitch is looking at, I dug a little deeper and I think part of it is are new entrants who came into particularly subprime lending since the Great Recession. Some of these are new issuers and I think they’re going through some growing pains. Those issuers were not in the Fitch index prior,” Cutts said.

Cutts elaborated about why she spent a significant amount of time reviewing Equifax’s data before sharing these asserts with SubPrime Auto Finance News.

“I wanted to be very cautious in this, but I feel there was a tremendous overreaction to what happened in the Fitch report as opposed to the bigger picture,” she said. “Part of the bigger picture is that I do believe that there is an appropriate amount of lending that should happen in the marketplace. The trick is knowing when you are doing it right, given the business cycle, given the technology that’s available.

“My experience has been after something like the Great Recession and any time there is tremendous credit losses, lenders get very, very conservative, too much so. Basically the only people who can get credit are those who don’t need it,” Cutts continued.

“As we’ve come out of this financial crisis, which really caused lenders of all kinds to really rethink their models, we’ve seen tremendous change brought about not only by the investors demanding much more prudent use of their money but also regulators stepping in the court of public opinion which has made subprime a dirty word,” she went on to say.

Cutts also mentioned that she’s not noticing a tremendous erosion in credit quality in the auto space with respect to consumer credit scores. She pointed out this deterioration happened when subprime mortgages grew tremendously 10 years ago.

“I was looking at these and saying I should be able to see this and pinpoint where this is happening and I can’t see it in our data,” Cutts said. “The credit score for the 10th percentile — so 90 percent of credit scores are better than this — and we’re seeing no change at all overall.

“I looked at banks. I looked at finance companies. These guys are doing the same things they’ve been doing for four years,” she continued. “I don’t know why the recent ABS that Fitch pointed out is performing so poorly relative to those that came before because at least on the face of it I’m not seeing in our data.

“With mortgages, there was a tremendous erosion of the quality of those loans as people bet on you can’t lose in real estate.  There’s not that speculative piece here with cars,” Cutts went on to say.

SubPrime Auto Finance News then questioned whether this reaction would spook the market and finance companies would find difficulties finding capital to keep underwriting volume moving higher. Cutts replied by stating, “Do you want the rational or the emotional answer?”

First, Cutts gave what she called the rational perspective.

“The rational answer is that just as in any financial market dealing, whether we’re talking about equities or bonds or whatever, there are those that perform very, very well and those that don’t,” she said. “They perform very well meaning meeting expectations.

“The rational response would be to look at those issuers who have issued this ABS that are not performing relative to expectations and to find out what it is about these lenders and those ABS. Then you can figure out as an investor if you want to pursue that or not. Maybe I want to go to different one but I’m still happy with ABS,” she continued.

Then came what Cutts called the emotional response.

“‘Oh wow as a group, which is the Fitch numbers, these things are suddenly looking really bad.’ So the emotional answer is I’m just not going to invest there,” Cutts said. “We see these kinds of emotional moves in the markets, which creates tremendous volatility.”

In the final analysis and considering current data and past precedents, Cutts offered a hopeful forecast — or at least one that might benefit finance companies most.

“My hope is that investors will do the right thing, which is to be very vigilant about who they do their business with and how they place their money and hold these companies accountable for answers to these questions before they’re willing to extend capital,” she said.

“I think it would be a shame certainly for investors to pull out of this market because I think there is a tremendous amount of good lending that’s happening by finance companies that are the primary issuers of these kinds of ABS right now,” Cutts went on to say. “As a blanket statement I think that would be both unfair and losing out on a tremendous opportunity.”