Deliquencies for U.S. Subprime Auto ABS fell last month, after hitting a 20-year high in February, according to the latest monthly index results from Fitch Ratings, released Thursday. However, that reprieve will be “short-lived,” Fitch forecast.
Delinquencies on U.S. subprime auto ABS decreased to 4.15% in March, from 5.16% in February, due in part to borrowers taking advantage of tax returns to pay off debt, Fitch said. While subprime delinquencies are still 16.5% higher than the same time a year ago, “performance metrics will improve as 2016 shifts into the spring months, though to what extent remains to be seen.”
“Pressure from weaker underwriting standards in 2013-2015 transactions will continue to negatively affect the indices in 2016 irrespective of seasonal trends,” Fitch wrote. “Increased lending to borrowers with weak or limited credit history will move delinquency and loss frequency levels higher, while negative shifts in LTV and extended term loans will drive loss severity up.”
The weakened credit standards have largely come from newer nonprime lenders who have entered the market since 2010 and now account for a larger portion of the index. For example, Santander Consumer USA and GM Financial accounted for 93.5% of the notes issued into the market in 2010. Today, the two lenders account for 49.5% of the market, according to the ratings agency. The wealth of new market participants caused lenders to weaken underwriting standards in order to gain market share.
