Auto ABS losses climb for 3rd straight month


With one subprime metric jumping to the second-highest point in 15 years, the latest monthly auto loan ABS index from Fitch Ratings released this week showed that losses for U.S. auto ABS continue their steady climb.

As a result, analysts noticed some finance companies are holding the line on underwriting quality.

Fitch reported that both prime and subprime auto loan ABS annualized net losses have increased in each of the last three months. Analysts indicated prime annualized net losses hit 0.70 percent — the highest rate since early 2011.

Meanwhile, subprime annualized net losses crossed the 9-percent mark for the second time this year.

Fitch determined U.S. auto loan ABS performance slowed in September due to higher losses from 2013-2015 vintage ABS and rising vehicle depreciation in the weak fall months.

Despite these negative trends, analysts pointed out loss rates across sectors are tracking within initial forecasts for outstanding Fitch-rated ABS transactions in 2016. They added prime loss rates on outstanding 2013-2015 transactions are currently tracking similar to 2004-2006 transaction losses, and well below the 2008-2009 peak recessionary levels.

“Further, prime and subprime ratings performance is solid and has not been impacted by slowing asset performance. Positive rating actions on subordinated notes in both sectors are on par with the number issued in 2015,” the firm said.

Interestingly, Fitch mentioned that some auto finance companies are attempting to curb underwriting declines to address declining asset performance.

“As a result, a number of auto ABS securitizations came to market last quarter with marginally better credit quality, including stable or marginally improved FICO scores,” analysts said.

“That said, only time will tell how long this trend will last," they continued. "And despite the pushback by some lenders, Fitch does not believe that these changes will have a significant positive influence on asset performance.”

Fitch’s data indicated prime 60-day delinquencies crept higher to 0.44 percent in September, landing 11.5 percent higher than a year ago. Annualized net losses in the prime space climbed 17.3 percent month-over-month and soared 31 percent higher than September of last year.

“The current rate is approaching loss rates consistent with latter part of 2010 and early 2011,” analysts said.

Fitch reported subprime delinquencies rose to 5.05 percent in September — the second highest level since 2001. Subprime delinquencies came in 13.2 percent higher than a year earlier.

For the second time this year, subprime annualized net losses rose above 9 percent, hitting 9.29 percent last month. That reading registered 4.6 percent higher month-over-month and 23 percent above September of last year.

“As Fitch has stated prior, subprime losses are higher due to poorer 2013-2015 vintage performance as well as a changing mix in its index,” analysts said.

“Smaller independent auto finance companies, including new market entrants with higher loss profiles, comprise a larger share of the index today versus two-to-three years ago,” they continued.

“Pressure on used-vehicle values is rising due to a combination of higher off-lease supply entering the secondary market, lower new vehicle sales and higher vehicle inventory, and higher incentive levels. This will impact loss severity and ABS performance over the next six months,” analysts went on to say.

According to Anil Goyal of Black Book, the fourth quarter typically experiences the largest depreciation in vehicle values, and this trend started to manifest itself in the first two weeks of October with the largest year-to-date weekly decline in car values.

Further, Goyal mentioned that stronger-performing trucks and SUVs — which retained values well during most of 2016 — are now starting to see an uptick in depreciation as well, driven by higher incentives on new vehicles.

Fitch’s auto loan ABS indices track the performance of $97 billion of outstanding securitized collateral. $57 billion represents prime ABS collateral (58.5 percent of the index) with the remaining 41.5 percent comprising subprime collateral. Further, the $97 billion of outstanding ABS collateral makes up only 8.8 percent of the total $1.1 trillion in auto debt outstanding.