Rising Subprime ABS Losses ‘Vary’ by Lender, Moody’s Says

Net loss rates are increasing in the subprime-backed ABS sector, according to report from Moody’s Investor Services released yesterday. However, “much of the overall performance deterioration is a result of an increased number of ABS transactions from smaller lenders that cater to “deep” subprime borrowers who have particularly weak credit.”

Low losses on loan originations from 2010 and 2011, along with low interest rates that kept the cost of funds down, equaled higher profits, which “enticed new lenders into the auto ABS market,” according to the agency.

“Since 2010, issuance of US subprime auto ABS has shifted to include an increasing number of transactions from lenders that cater to borrowers with weaker credit scores,” Vice President and Senior Analyst Peter McNally said in a press release. “As a result, a greater proportion of the loans in ABS pools have incurred losses, and the average loss rate for US subprime auto ABS deals has risen.”

Among transactions that Moody’s rated, the loan performance in deals from smaller lenders Consumer Portfolio Services, Incorporated (CPS) and CarFinance Capital has generally weakened.

By comparison, however, loan pools from the larger subprime lenders are performing consistently within the agency’s expectations, Moody’s said in the report entitled Amid a Weakening Trend, Subprime Auto ABS Performance Varies by Lender.

“Most subprime auto ABS transactions that we rate, namely those sponsored by AmeriCredit and Santander Drive, are experiencing losses lower than or consistent with our initial expectations,” Moody’s wrote in the report.

The average current lifetime pool loss expectation on the outstanding AmeriCredit transactions that Moody’s rated is 8.4% of the pool’s original loan balance, down from the average initial expectation of 9.7%.

For outstanding Santander Drive transactions the average current lifetime pool loss expectation is 13.8%, down from the average initial expectation of 15.7%. Santander’s four deeper-subprime transactions, issued out of its Drive Auto trust in 2015, are also performing within initial loss expectations of 27%.

Larger Loans, Longer Terms Cause for Concern

Underwriting continues to weaken overall, thanks to an “increased willingness” of some subprime lenders to extend larger loan amounts with longer terms. The average amount that subprime borrowers financed for new vehicle loans was about $28,200 in the fourth quarter of 2015, up from $27,400 in the fourth quarter of 2014, and $26,900 in the fourth quarter of 2013, according to data from Experian.

Likewise, the average term for new vehicle loans for subprime borrowers was 72.2 months in the fourth quarter of 2015, up from 71.6 months in the fourth quarter of 2014 and 70.8 months in the fourth quarter of 2013. “By lengthening the periods for borrowers to repay loans, lenders are also at risk of greater losses in the event of borrower default because the customer pays the loan back more slowly,” Moody’s wrote.

Industry executives expressed concern over longer term auto loans during the CEO Panel at the AFSA Vehicle Finance Conference in Las Vegas last week.

“We take a conservative view on longer loans,” Dawn Martin Harp, head of dealer services at Wells Fargo, said during the panel. And 84-month loans comprise less than 1% of Wells Fargo’s books, she added. “Our view is that in the long term that may not be good for the consumer, and we are already  seeing some uptick in negative equity: that’s a concern,” she said.