The volume of auto-financing discussion — especially in the subprime space — Cox Automotive chief economist Tom Webb entertained at recent industry events and his quarterly conference call prompted him to ask a question.

Recent analyst reports from Fitch Ratings and Moody’s Investors Service highlighted deterioration in performance in the subprime auto ABS market, prompting several of the investment analysts who join Webb’s quarterly call to inquire about whether financing availability, particularly in the subprime space, is about to be reduced.

“The subprime area certainly has gotten a lot of notice as of late. And I’m actually beginning to question myself in that am I missing something? I think the cycle has longer to run simply because for the most part we’re in a low-interest rate environment so there’s a search for yield and auto loans provide that yield with very low risk actually,” said Webb, who hosted the call last week on the heels of being in Las Vegas for conferences orchestrated by the American Financial Services Association and the National Automobile Dealers Association.

“There’s certainly been some reports now of some smaller players in the subprime and new players in the subprime area; players that are doing something that really hasn’t been done before in terms of alternative measures in order to provide credit to people who have absolutely no credit history,” he continued.

“You would expect that there would be a little volatility,” Webb went on to say. “Whether it crops back up into the bigger subprime market, you have to be concerned when you get a lot of reports along those lines. However I do believe it will remain favorable for the used-vehicle environment. It’s extremely important for the used-vehicle environment.”

Some of those smaller finance companies were pinpointed by Moody’s in its report, which Webb acknowledged, “was a little more troubling for me; although these numbers really have not been a secret.” He then explained what can happen when ratings agencies such as Fitch and Moody’s push out a series of negative assessments about what’s happening in the space.

“To a certain extent as the ratings agencies get nervous, they can make their own predictions come true if you start dialing back on availability or changing the amount of enhancement that has to go into the ABS,” Webb said.

“Again, the overall financial market remains relatively flush with liquidity,” he continued. “Generally speaking, most delinquencies have not spiked in term of the overall numbers, and people do make their payments except when they have the shock of a job loss, illness or divorce; those three prime reasons.

“If the underwriting standards weren’t completely off the mark then you would think that the loans would continue to perform well. Again, the problems we’ve seen are from some very small players,” he added.

While the latest assessment about delinquency from the American Bankers Association’s Consumer Credit Delinquency Bulletin doesn’t carve out subprime financing specifically, the organization noticed only a slight uptick in auto finance delinquencies in the fourth quarter.

ABA indicated direct auto loan delinquencies — contracts arranged directly through a bank — rose from 0.74 percent to 0.75 percent. The association added that indirect auto loan delinquencies — financing arranged through a third party such as a dealer — climbed from 1.51 percent to 1.54 percent.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, remained at 1.41 percent of all accounts in the fourth quarter, according to the bulletin. ABA pointed out that what fueled the overall reading was home-related delinquencies were down significantly in two out of three categories, with home equity loan and line delinquencies continuing a downward trend and approaching their 15-year averages for the first time since the recession.

“It’s been a long, rocky road, but home equity delinquencies have finally worked their way back to historical norms,” ABA chief economist James Chessen said.  “The strong and consistent rise in home prices over the last three years has restored equity, which makes keeping loans current even more of a top priority for homeowners.  With rising home equity and shrinking delinquencies becoming the status quo, banks are more willing to extend new home equity loans and lines to qualified borrowers.”

Chessen is anticipating that continued consumer discipline and steady economic conditions will help keep delinquencies near historically low levels for the foreseeable future.

“The national savings rate is at one of its healthiest points since the recession and trending upward, which means people are well-positioned to repay their debts,” Chessen said. “Disciplined saving, along with steady job growth and climbing household wealth, signal that delinquency levels are likely stay near these historic lows for some time.”

But in the auto finance world, a metric to watch might be softening vehicle prices as the Manheim Used Vehicle Value Index is now on a streak of three consecutive months of declines. Should vehicle wholesale prices tumble significantly, Webb recognized that the trend could magnify what’s happening in the auto ABS space.

“We sometimes call it that there is a virtuous circle that can sometimes can turn into a vicious circle,” Webb said. “The virtuous circle is what we have had so far in this recovery where the recovery rates on any repossessions are extremely high, which gives the lenders more confidence to lend and make credit available.

“Of course, each one of those repossessions has to go back out and be re-retailed usually with a subprime loan attached to it. That just keep the cycle going,” he continued.

“Once recovery rates become poor, then the credit availability starts to dial back in and with credit availability dialing back in, your recovery rates fall further,” Webb went on to say. “A significant fall-off in used-vehicle values would hurt those recovery rates. But certainly as they say, the frequency of the loss is much more important than the severity of the loss.

“It can become a self-fulfilling vicious circle,” he added. “I don’t think we’re there yet in terms of wholesale pricing. But if credit availability were to dial back substantially then yes, you’re going to hurt used-vehicle values by that factor.”