Weakening credit quality to bog down auto ABS in 2020

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Loan quality within auto securitizations is expected to weaken, driven by higher delinquencies and a potential economic slowdown, according to a Moody’s Investor’s Service 2020 outlook.

While the risk of a recession should limit loose underwriting, lenders continue to actively pursue nonprime customers, Moody’s said. “Auto originations are no longer being bolstered by borrowers with especially strong credit profiles relative to U.S. consumers in general,” the report said. The rating agency noted that several auto loan ABS shelves will continue to include obligors “with very low scores” next year, as will a handful of lease deals.

Additionally, other collateral attributes outside of credit quality, such as lengthening loan terms and elevated loan-to-value ratios, continue to worsen. However, a solid job market and used-car price strength should offset those risks. Specifically, prime auto finance exhibits strong credit quality, even as the share of borrowers falling 90-or-more days delinquent continues to rise in other consumer debt categories. Used-car market strength will likely buoy slower new-car sales and support loan recovery rates and residual value performance in lease deals.

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