As Fitch Ratings shared its latest update on the auto ABS market, analysts at the Federal Reserve Bank of New York indicated 3.6 percent of auto financing contracts stood at 90 or more days delinquent at the end of September.

Meanwhile, total outstanding auto balances jumped by $32 billion year-over-year during the third quarter.

What’s making these New York Fed observers uneasy, however, is how they’ve determined the overall delinquency rate “masks diverging performance trends” across the two types of finance sources. According to these experts the primary difference is operations that book lots of subprime paper and ones that often do not.

In a blog post titled, “Subprime Auto Debt Grows Despite Rising Delinquencies,” analysts Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw wrote, “It’s worth noting that the majority of auto loans are still performing well — it’s the subprime loans that heavily influence the delinquency rates. Consequently, auto finance companies that specialize in subprime lending, as well as some banks with higher subprime exposure are likely to have experienced declining performance in their auto loan portfolios.”

The New York Fed contingent explained the 90-plus day delinquency rate for finance company contracts worsened by a full percentage point during the past four quarters, while delinquency rates for bank and credit union auto paper have improved slightly.

“An even sharper divergence appears in the new flow into delinquency for loans broken out by the borrower’s credit score at origination,” these analysts said. “The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years.”

Haughwout, Lee, Scally and van der Klauuw closed their post with this conclusion.

“The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly 6 million individuals at least 90 days late on their auto loan payments,” they wrote.

“Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” they added.

Fitch: Losses inch higher for U.S. subprime auto ABS

Losses fell for U.S. prime auto ABS while subprime losses continued their slow climb, according to the latest monthly index results from Fitch Ratings.

Analysts found prime auto loan ABS annualized net losses declined on a monthly basis in October, while subprime losses rose 32 basis points to 9.61 percent. Fitch pointed out subprime annualized net losses remain within levels recorded earlier this year.

Fitch reported subprime annualized net losses crept up 3 percent month-over-month in October and were 19.4 percent higher on an annual basis. The 9.61 percent rate recorded in October was the highest since 9.74 percent spotted in February.

Despite the small increase in losses during October, analysts noticed the pace of monthly increases slowed versus the prior four months. Subprime annualized net losses so far in 2016 have ranged from a low of 6.32 percent in June to a high of 9.74 percent in February, and continue to trend higher this year consistent with prime index trends.

Speaking of prime, Fitch indicated annualized net losses in that sector declined to 0.68 percent in October, down 2 basis points versus the prior month but were still 27 percent higher versus October 2015.

In terms of delinquency, Fitch said prime 60-day delinquencies declined to 0.68 percent in October, improving 2.7 percent month-over-month. However, the rate spotted in October was 27 percent higher year-over-year.

In subprime, delinquencies stood at 5.07 percent in October, virtually unchanged from 5.05 percent recorded in September and 11 percent higher on a yearly basis.

When assessing the broad impact, Fitch mentioned wholesale vehicle values continued to decline over the past month.

“This is translating to lower recoveries for auto ABS as auto values move off peak rates recorded earlier this year,” analysts said while referencing that the Manheim Used Vehicle Value index declined to 126 in October, down from 126.9 in September to the lowest level since June.

“The index is still at solid levels overall in 2016, and recent declines have been minimal,” Fitch added.

Analysts went on to say, “Most vehicle segments are experiencing lower values with rising depreciation, including trucks and SUVs which have been very strong in 2016 but come down off recent highs. The fall months are typically the weakest period of the year as dealers look to clear their lots to make way for the new incoming 2017 models.”

Fitch closed by touching on what the latest data might do to its ratings.

“The performance declines still have no adverse effect on ratings performance in 2016,” analysts said. “Fitch upgraded 67 classes of subordinate notes in 2016 through late November, down slightly from 77 last year.

“Looking ahead, Fitch has a positive rating outlook for the prime sector and stable outlook for subprime ratings despite recent loss increases,” analysts added.

Fitch’s auto ABS indices total $97 billion of outstanding securitized collateral, of which 59 percent is prime and the remaining 41 percent is subprime collateral.