Along with some noteworthy developments about how finance companies are striving to improve the quality of paper flowing into their portfolios, the latest monthly U.S. Auto Loan ABS tracker from S&P Global Ratings contains other elements that should delight industry observers and participants.
Perhaps most notably, the analyst team at S&P Global Rating began its report by highlighting how bolstered collateral performance arrived because of “normal seasonal behavior.” S&P Global Ratings based its assessment of the U.S. auto loan asset-backed securities (ABS) market as of March.
“As tax refunds came in, consumers brought their credit obligations current and drove demand for used vehicles,” analysts said in the report shared this week with SubPrime Auto Finance News. The seasonal phenomenon caused delinquencies to decrease and recoveries to improve month-over-month. Subprime net losses also declined substantially month-over-month.
“On a year-over-year basis, the prime sector reported near stability in losses and delinquencies but recoveries weakened. Meanwhile, the subprime segment demonstrated weaker performance year-over-year with respect to net loss and delinquency performance,” they added.
Delving deeper into the numbers, S&P Global Ratings indicated that prime net losses were almost flat at 0.68 percent in March compared to 0.69 percent in February and were nearly stable relative to a year earlier at 0.65 percent.
As referenced earlier, analysts reiterated the subprime net loss rate improved “significantly” month-over-month, decreasing to 7.62 percent in March from 9.18 percent in February. However, subprime losses climbed on a year-over-year basis from 7.37 percent in March 2017.
As a supplement to its subprime index, S&P Global Ratings created the modified subprime index, which excludes certain high-loss deep subprime issuers including Santander Drive Auto Receivables Trust (DRIVE), American Credit Acceptance Receivables (ACA) and Exeter Automobile Receivables Trust (Exeter).
On a month-over-month basis, the report showed the modified subprime loss rate decreased to 6.37 percent in March from 7.24 percent in February and increased from 6.16 percent in March 2017.
“Auto losses typically decline during the end of the first quarter, largely because of seasonal factors,” analysts said. “Late payments and losses tend to peak at year's end due to holiday shopping and then decrease during tax season as refunds support consumers’ ability to bring their credit obligations current.”
When it came to recoveries, S&P Global Ratings spotting seasonal pattern there, too, resulting in improvements.
The prime recovery rate increased month-over-month to 58.74 percent in March from 53.91 percent in February. Analysts also noticed subprime recoveries picked up month-over-month, increasing to 47.45 percent in March from 39.21 percent in February.
“As expected, tax refunds led to increased demand for used vehicles and supported the month-over-month improvement in recoveries,” S&P Global Ratings said in the report. “Of note was the subprime modified composite, which excludes the three large deep subprime lenders, reporting lower recoveries (46.59 percent) than the overall subprime composite (47.45 percent), which includes these deep subprime lenders.”
Analysts went on to explain that normally these higher-loss issuers garner lower recovery rates than their lower-loss peers. However, Santander’s DRIVE platform experienced “exceptionally strong recoveries” in March with an average recovery rate of 53.90 percent across its outstanding issuances.
Looking on a year-over-year basis, S&P Global Ratings shared that prime recoveries remained lower, decreasing from 63.42 percent in March of last year.
Modified subprime recoveries decreased year-over-year, as well, to 46.59 percent.
Subprime recoveries including the deep subprime finance companies ticked up slightly from 47.30 percent in March 2017, due to strong recoveries on the DRIVE transactions.
Turning next to delinquencies, the seasonal theme continued, according to the report.
The prime 60-plus-day delinquency rate declined to 0.38 percent in March from 0.46 percent in February 2018, while remaining relatively stable year-over-year since the reading in March 2017 was 0.40 percent.
The subprime 60-plus-day delinquency rate improved to 4.28 percent in March from 5.15 percent in February. Looking on a year-over-year basis the metric still edged slightly higher from 4.04 percent in March 2017.
Analysts added the modified subprime 60-plus-day delinquency rate improved 77 basis points to 3.18 percent in March from 3.95 percent in February, but deteriorated by 15 basis points year-over-year from 3.03 percent in March 2017.
Finally, S&P Global Ratings closed its latest report by highlighting how much FICO scores have improved in connection with auto paper now in the market.
Analysts determined the weighted average FICO for prime transactions issued in the first quarter reached an all-time high of 757, up from 744 in Q1 2017 and 748 for the full year.
“In aggregate, subprime lenders appear keenly focused on maintaining improvements they’ve made in credit quality that began in 2016,” analysts said.
On the subprime side, S&P Global Ratings found that the weighted average FICO improved to 586 in Q1 — the highest reading since 2009. In Q1 of last year, it stood at 575 and 578 in all of 2017.
Also, the weighted average LTV remained nearly stable at 110.71 percent compared with 110.43 percent a year earlier and 110.57 percent for full-year 2017. S&P Global Ratings pointed out the reading remained significantly lower than their post-credit-crisis peak of 114.78 percent in 2014.
At the same time, the report mentioned the weighted average loan-to-value (LTV) ratio declined to 95.69 percent from 97.16 percent in Q1 2017 and 96.14 percent for all of 2017.
S&P Global Ratings acknowledged its metrics were “somewhat” affected by AmeriCredit, which did not issue in Q1 due to a planned servicing system upgrade.
Had it issued AmeriCredit Automobiles Receivables Trust 2018-1 in first quarter rather than May, the weighted average FICO and LTV would have been 585 and 110.03 percent, respectively, according to the report.