Despite Honor Finance’s previous unorthodox loan extension practices, new research by Kroll Bond Rating Agency maintains that loan extensions remain a viable loss-mitigation tool for securitization servicers.
“In moderation, extensions are a very useful tool — they maximize cash flow to the ABS trust,” Brian Ford, senior director of structured finance research at KBRA, told Auto Finance News. “But when they get out of hand, it can certainly be to the detriment of the ABS noteholders.”
Upon analyzing extension data in 2017 securitizations issued by GM Financial and Santander, KBRA noted that 40% to 50% of borrowers who received loan extensions remained current or paid off their loans within the next 12 months. Conversely, only 10% to 15% of borrowers 30-days delinquent remained current or paid off their loans in the next year.
Also read: Seasoned Loans Outperform Unseasoned Loans in Subprime Securitizations — Eventually
“This provides some evidence that extensions are an effective loss-mitigation tool, as borrowers who receive an extension are four to five times more likely to pay their loan in full or remain active and performing one year later compared to borrowers who go into delinquency,” according to the report.
Monthly extension rates for subprime issuers average between 2% and 6%, the report notes. Honor Finance reported an extension rate “well in excess of industry standards” — 22% at the beginning of 2018 — which can increase bond duration and expose ABS investors to risks later in the securitization term.
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