Fitch Expects Subprime ABS Performance to Soften
Subprime auto ABS losses reached the highest level in four years last month, according to the latest quarterly auto ABS index from Fitch Ratings. The report also said used vehicle values have fallen for five straight months.
Despite the jump over the past quarter, asset performance remains on track within Fitch’s initial forecasts to date. That said, subprime ABS performance will likely be softer moving into late 2014 and early 2015, according to the company.
“While still healthy, the wholesale auto market will be pressured from rising volumes into 2015,”said Senior Director Hylton Heard in an email statement.
Recent vintages continued to see YOY increases in losses. Losses on the 2010–2011 vintages are tracking at approximately 9.5% while the 2012–2013 vintages have projections of 10.0%–10.5% to date.
Fitch said recovery rates on subprime securitizations have been softer because of the softening wholesale vehicle market. The ratings agency said it will continue to closely watch collateral trends and wholesale vehicle market conditions in late 2014.
Meanwhile, Fitch noted that Federal bureaus have begun investigations into subprime lenders over concerns over the lending practices of subprime originators. Santander Consumer USA and General Motors Financial received such subpoenas. Nonetheless, Fitch so far believes the regulatory investigations will not negatively impact those company’s outstanding transactions.
Primed and Ready
On the prime side, losses and delinquencies rose in 3Q14, driven by seasonal pressures and shifting collateral trends. But levels observed have been within expectations and remained low relative to historical experience.
The overall climb in delinquencies and losses for U.S. auto ABS during third-quarter 2014 followed the typical fall season patterns, Fitch said, indicating the slowdown will likely to continue this quarter and into next year. Although delinquency and loss levels were higher than a year ago, losses were still well within historical levels and in line with the solid 2005–2006 period.
Lease residuals are also seeing some pressure. Auto lease ABS residual values losses rose in 3Q’14, with some platforms now seeing losses for the first time in several years. Fitch’s RV Index declined to a 2.1% gain through 3Q2014, down from 8.4% through Q2.
Auto lenders are all competing for marketshare as car sales hovered at 16.5 million units. Not surprisingly, that increased market competition is contributing to the recent market volatility.
“With auto lenders jostling for market share, both underwriting and credit quality will suffer if lenders look to expand share and grow their portfolios aggressively,” said Heard.
