Honor Finance issued its first ever securitization at the end of November, backed by $100 million in deep subprime auto loans, and it looks “riskier than many pre-financial crisis residential mortgage backed security offerings,” said Joe Cioffi, chair of the insolvency, creditors’ rights and financial products practice group at Davis & Gilbert.
Loans in the trust have a weighted average Fico of 538, and a weighted average LTV of 135.12%, according to a presale report from Kroll Bond Rating Agency. Meanwhile, expected losses are over 20% Cioffi told Auto Finance News.
Honor Finance did not respond to inquiries from AFN.
“The Honor offering has attracted attention because it goes deep at a time of widely reported increases in subprime delinquencies and a pulling back by some lenders,” Cioffi said. “But it’s not that out of the ordinary to see this disconnect. A lag between market performance and new entrants and offerings also occurred pre-2007 with subprime mortgages.”
In the mid 2000s, the housing market looked very stable and a lot of new entrants that entered the mortgage ABS market attracted capital for expansion, he explained. However, it takes a while to build a business. So by the time these entrepreneurs got on their feet and began investing, the market had become far more unstable and made the crash more severe by the time the securitization market froze.
Think of it like a car crash, where the front of the car has already collided with the wall but, the back end is still traveling forward at 60 mph, he explained.
“That’s not to say subprime auto lending will suffer the same fate,” Cioffi said. “It remains to be seen if the current market reflects a longer trend downward.”
One of the biggest differences this time around is that companies have to disclose more information about the securitizations than they did back in 2007, he continued. However, if the bottom falls out and consumers owe more on the loan than their car is worth, they may choose to walk away like many chose to do with their home.
“At least with the housing market, borrowers would weigh walking away [against] the possibility they could regain equity in their homes, if prices rebounded,” Cioffi said, noting the tendency for home values to appreciate and car values to depreciate. “That possibility just doesn’t exist with the autos backing these loans.”6 - Readers Like This Post