According to its latest analysis of auto loan ABS transactions shared with SubPrime Auto Finance News, S&P Global Ratings said it is expecting managed portfolio losses to rise for the remainder of 2016 and possibly 2017.

However, in reviewing these managed portfolios, S&P Global Ratings analysts insisted that they have observed that the rate of performance deterioration appears to be slowing in the subprime segment.

“Elevated loss levels have resulted in higher expected loss levels for certain auto loan asset-backed securities (ABS) issuers, though this has been addressed with greater credit enhancement, in our view,” analysts said in a report titled, Auto Loan ABS Portfolios Demonstrate Cyclical Trends.

They continued by stating, “Therefore, while managed portfolio and securitization losses may continue to rise as the economy enters its eighth year of recovery, we expect auto loan ABS ratings to remain generally stable to positive, especially for transactions carrying investment-grade ratings.”

Since 2015, S&P Global Ratings indicated, the rate of performance deterioration has been slowing in subprime auto finance companies’ portfolios. Analysts determined that average losses for subprime issuers increased only 8 percent in 2015 to 9.03 percent from 8.32 percent. They pointed out this development compares favorably with the 17-percent acceleration in losses in 2014 to 8.32 percent from 7.11 percent.

Further, S&P Global Ratings pointed out that losses rose only 3 percent to 7.96 percent for the first half of 2016 compared with 7.71 percent for the same period in 2015.

Similarly, analysts mentioned that average 31-plus-day delinquencies — which spiked 23 percent in 2014 to 10.89 percent at year-end from 8.44 percent at year-end 2013 — rose by only 10 percent in 2015 to 11.99 percent as of year-end.

S&P Global Ratings went on to note that the slower rate of increase continued for the first half of 2016 with late payments rising only 4 percent to an average of 10.03 percent as of June 30 compared with 9.64 percent as of the same date in 2015

“We believe the slower rate of growth in delinquencies and losses in 2015 and first half 2016 is the result of companies tightening their lending standards,” analysts said in the report. “Some lenders have accomplished this by reducing their origination volumes and moving up the credit spectrum while others have benefited from more conservative loan structures, including lower LTVs.

“Although the rate of increase in delinquencies has recently slowed, delinquencies rose rapidly between 2012 and 2015,” they continued. “This was due to several factors, including easy access to capital, which prompted new subprime finance companies to enter the field and allowed others to grow their lending portfolios. As the market became more crowded, competitive pressures intensified.

“To maintain their growth targets, some companies responded by sacrificing underwriting standards and lending to even less creditworthy obligors, or by providing more aggressive loan structures (such as higher LTVs, lower down payments, and longer loan terms), or by doing both, in some cases,” analysts went on to say.

S&P Global Ratings reiterated that it mentioned in report published on Aug. 31, 2015 that certain finance companies are allowing borrowers more time to make payments before repossessing their vehicles.

“Some lenders have also adopted ‘softer and gentler’ collection practices in response to increased regulatory oversight, which has shed light on alleged fair debt collection violations,” analysts said. “These relaxed collection practices include calling the delinquent borrower fewer times, refraining from calling the borrower's references and no longer calling the borrower's place of employment upon his or her request.

“As a result, it sometimes takes longer to arrange a payment plan with the borrower or locate the vehicle for possible repossession, thereby keeping the account in delinquency status longer,” they continued. “In addition, slower growth among some participants has increased the average age of their portfolios, causing them to be in their peak delinquency and loss periods.”

So what did changing collections practices by subprime auto finance companies do to what S&P Global Ratings is projecting in that portion of the auto ABS space?

“At this time, we believe our ratings on investment-grade auto loan ABS transactions are likely to remain stable,” analysts said. “However, speculative-grade classes could be vulnerable to downgrades because they have much lower credit cushions than senior securities to absorb higher-than-expected loss levels.”