It’s Day Two at the ABS East Conference in Miami Beach and, while walking to a panel about new regulatory oversight, AFN caught up with the auto team from Moody’s, SVP Mack Caldwell, and VP Corey Henry.
Caldwell and Henry said the overriding theme in the auto ABS market is that underwriting standards are still rational. Most of the consensus Caldwell and Henry have heard is that today’s auto ABS market is very much a lesson learned from the 1990s.
The folks involved in securitizations are typically old hands, according to Moody’s. Even at a few of the startup lenders, company officers have backgrounds stretching back as far as 25 years.
The two told AFN they don’t think there’s going to be movement into risk areas that aren’t understood, as there was with mortgages back in the late 1990s. They think the focus of ratings agencies since the crisis has been very much on the operational risk, which is the idea that, if the sponsor fails, it could somehow adversely affect the performance of the asset. In the mortgage market, there were a lot of originate-to-sell type models. In other words, loans were made, specifically so they could get sold. That’s not so much the case these days.
“I think in autos you see much more risk alignment- retention of subordinate pieces, you see more skin in the game if you will,” said Corey Henry.
Still, the market does see portfolios that are heavily concentrated in securitization financing, he said. And those companies use securitizations as their primary financing vehicle. But they believe there’s significant amount of risk retention in the deals.
Both agreed there has been a significant amount of soul-searching that’s gone on since the crisis across.
Unlike real estate, auto is not for investment, they said. It’s a depreciating asset, one that’s very utilitarian, that facilitates an individual getting to work, as they put it.
When you think of a bubble in mortgages, that happened, the two said, because values can increase rapidly to sky-high levels, while auto is a depreciating asset. Vehicles, once sold, quicly lose significant value.
Also, with auto ABS, enhancement offers protection that increases as the transaction delivers, even when the loss is worse than expected.
The two say the assets themselves are straightforward. There’s not a negative amortization on a car loan. They are generally level-pay, five/six/seven years. To be sure, they admitted, people are extending terms to greater lengths, but they are not actually new products.
What did Caldwell and Henry think of the mood of investors at the conference?
This early in the conference, the two said they detect a desire to fulfill investor expectations. They haven’t heard much about new structures or synthetic deals or an increase in revolving transactions. The market is opening up. They think among the stable issuers, the structures seem to be delivering expectations on the part of the investor, not only in terms of performance, but in how they are structured.