Auto ABS Losses Inch Up, but Horizon Remains ‘Healthy,’ Fitch Says
Prime auto loan ABS losses rose to the highest level in over four years through September, but loss rates were still well below the 10-year average, according to Fitch Ratings’ In the Auto ABS Driver’s Seat 3Q report released Friday.
Prime transactions in the mid-range, with significant concentrations of 600–700 FICO obligors, are the biggest driver of losses over the past year, according to the report, with monthly annual net losses climbing as high as the 2%–4% range. Typical prime pools comprising mostly of FICO scores over 700 though, continued to perform at very low loss levels.
Delinquencies 60+ days for prime auto ABS pools did rise to 0.39% through 3Q, but remain flat on a year-over-year basis, Fitch said.
Prime loss rates are expected to increase “marginally,” Fitch said, but the agency expects ABS pools to perform within expectations in 4Q and early 2016.
Subprime Losses Rise as Issuance Levels Soar
Asset performance in the subprime auto sector is softening, which stems from weaker credit quality and rising severity as recovery rates continue to decline from peak levels in 2012, Fitch said.
Subprime annual net losses rose to 7.54% in the 3Q, up from 5.44% in 2Q, and were 6.5% higher versus 3Q14.
“Subprime ANL levels are now approaching recessionary levels last seen in late 2009,” Fitch wrote in the report. “Although they remained well within Fitch’s expectations for Fitch-rated transactions.”
Auto sales have remained strong, with “intense” competition in the subprime sector, causing subprime auto ABS issuance levels to peak at $23.2 billion for the year through 3Q15, 31%higher than in 2014, according to Fitch. “Should this pace continue, 2015 will be the heaviest year for subprime issuance since 2006.”
Regulatory Scrutiny Continues
The third quarter saw multiple regulatory fines issued on auto lenders, mainly by the Consumer Financial Protection Bureau, in the third quarter as well. Such fines include those issued on American Honda Finance Corp., Fifth Third Bank, Westlake Finance Services, and most recently Security National Automotive Acceptance Company (SNAAC).
“Regulatory bodies, including the SEC, DOJ and CFPB, continue to dig into lending practices, which will continue into late 2015 and early 2016,” Fitch wrote. “This could affect subprime lenders, particularly those who are thinly capitalized or not profitable and potentially change their business practices, which could constrain origination volumes and result in higher operational costs.”
No Major Cause for Concern
Despite rising losses and delinquencies, Fitch reported that there were “no major concerns on the horizon,” citing a healthy job market, low interest rates, steady unemployment numbers, and robust auto sales heading in the last quarter of 2015 and early 2016.
“Additionally, new model lineups with advanced styling, technology and higher fuel efficiency are also supporting the near-record sales volumes,” Fitch wrote.
