PLANO, Texas — The growing popularity of loan terms over 60 months is a concern for the subprime auto securitization market, Amy Martin, senior director of structured finance at S&P Global Ratings, said at the Nonprime Auto Finance Conference last week.
“We’re concerned about the lengthening of loan terms because that could lead to a higher severity of back-loaded losses,” Martin said, noting that the rating agency has looked at the effects this trend has had on the ABS market in the prime space.
“[In prime], 84-month loans have twice the level of losses as 60-month loans,” Martin said. “Fortunately, those 60-month loans have low losses, between about 20 to 60 basis points.”
Martin noted that this trend is growing among captive lenders, who are originating more 84-month loans but have not yet securitized them in U.S. markets. Toyota is looking to bring to market its first extended-loan securitization, which will have a maximum term up to 84 months.
Bank of the West is originating 84-month loans “in a big way,” Martin said, noting the weighted average original maturity of its portfolio is 77 months. In addition, Fifth Third Bank and Bank of Montreal also are securitizing 84-month loans in their prime ABS, and Santander Consumer USA securitizes lengthier loans in its nonprime pools, although these loans make up less than 10% of the lenders’ overall pool. In fact, 83% of all subprime auto loan ABS in 2018 had original terms greater than 60 months, according to S&P securitization data.
Auto ABS issuance is on the rise overall, topping out at $82 billion in 2018, compared with $73 billion in the year prior. Subprime auto ABS issuance made up $30.5 billion in 2018, which represents 26% of overall subprime originations. “With this growth comes higher losses,” Martin said.
Average original maturity also is on the rise in 1Q19 at 69.2 months, the same as it was in 2008 during the financial crisis. Nevertheless, Martin said “there is a very strong, healthy appetite for subprime ABS in general.”
Data provided by the rating agency noted that there has been 1,035 upgrade actions on subprime securitizations since 2015, compared with only three downgrades, all of which involved Honor Finance’s first and only securitization. S&P considers asset pools to fall into the subprime category if its expected cumulative net losses are greater than 7.5%.
