Fresh data from DBRS shows that subprime loans securitized with mostly prime issuance outperform subprime loans in mostly subprime securitizations, according to the rating agency’s Figures on Automotive Securitization Tapes (FAST) report published last week.
An issuer’s ABS transaction is categorized as a prime or subprime shelf based on the weighted-average Fico of each securitized pool. While a transaction may be classified as prime, DBRS noted it’s common for issuers to extend loans to obligors across the credit spectrum.
While subprime loans in a prime shelf and subprime loans in a subprime shelf may seem similar, key differences in loan-to-value ratios and Fico score differentiate the potential loss amount and severity of these two subprime groups, according to DBRS.
The average LTV is 106.9% in a prime shelf versus 107.7% in a subprime shelf, while the average Fico is typically 587 for prime and 559 for subprime. As such, cumulative net losses (CNL) for subprime loans on prime shelves peak at 5.46%, while subprime obligors in subprime shelves post CNLs of 7.49%.
Other characteristics, such as borrower loyalty to a particular OEM and origination through a franchise dealer with “exceptional service,” are also thought to play a role in subprime loan performance. “Not all subprime loans are created equal,” the report read, noting a mostly prime originator’s ability to discern which subprime loans to fund appears to “create better-performing assets.”
The FAST report represents 4.7 million loans with about $76.9 billion of outstanding principal balance as of May 2019.
