Subprime securitizations: Lower delinquencies offset higher losses

There’s a tug-of-war going on in the securitization sector that will determine how subprime transactions fare in 2021. Subprime securitization performance trends indicate opposing dynamics at play. For starters, lenders have been tightening underwriting guidelines, which, combined with loan extensions, have spurred declines in 30- and 60-day delinquencies. On the flip side, cumulative net losses are rising, and extension rates are picking up again. Since COVID-19 started, lenders have stiffened underwriting criteria to mitigate risk in their portfolios. Credit scores and loan-to-value ratios have improved. Last quarter, subprime securitizations sported a weighted average FICO score of 591, compared with 575 in the first quarter, according to S&P Global. The weighted average APR in those deals declined to 16.1% from 19.5%, and the weighted average loan-to-value ratio decreased to 109.8% from 116.2% — levels unseen in more than a decade. Carvana , for one, has tightened underwriting guidelines. Subsequently, it issued its first prime securitization last month, a $420 million transaction. The majority of the auto loans in the pool were made to prime borrowers with a weighted average FICO of 710. That compares with a 554 average FICO in Carvana’s March nonprime transaction. The weighted average interest rate for the prime transaction was 8.2% versus 19.2% in the nonprime deal. Meanwhile, the 30-day delinquency rate in subprime securitizations has dropped an average of 37 basis points to 9.46% since January 2019, while the 60-day delinquency rate fell 13 basis points to 3.50%, according to a JPMorgan Securities analysis of 185 subprime deals — both public and private — issued by 23 securitizers. For instance, Santander Consumer USA ’s 30-day delinquency rate dropped more than 600 basis points since January 2019 in both its SDART and DRIVE transactions, to 6.06% and 10.92%, respectively. A major contributor to the declining delinquency rates is the widespread usage of extensions granted to borrowers during the summer, at the height of the pandemic. In May, 10.1% of the loans within subprime securitizations were modified to allow for repayment leniency, according to JP Morgan data. Extension rates at some companies topped 20%. Santander was one of the most prevalent users of payment deferrals, with a 20.8% rate in its DRIVE deals and a 17.8% rate in its SDART transactions. While the average extension rate among securitized loans fell to 2.7% in September, it has been nudging upward for the past two months, according to JP Morgan. The 2.9% recorded in November was likely prompted by the expiration of the federal government’s enhanced unemployment benefit. Flagship Credit Acceptance , for one, has noted a 160-basis-point increase in extensions since September, to 4.3%. Prior to the COVID-19 pandemic, Flagship didn’t have a rate that high since August 2019. And Exeter Finance recorded a 5.4% extension rate in November, the highest rate — prior to COVID-19 — in more than two years. These extensions are presumably enabling consumers to stay current on their loan payments. An analysis of Consumer Financial Protection Bureau complaints indicates declines in consumer issues related to the ability to pay and lenders working with them to reduce payments. Since midyear, 524 consumers complained about issues related to struggling to make loan payments, down 11.5% from the first half of the year. Further, the number of complaints from those whose requests for lower payments were denied dropped 23.8% to 231. Meanwhile, though, cumulative net loss rates among subprime securitizers have nearly doubled in the past two years, according to JP Morgan. On average, cumulative net losses averaged 6.3% in November, up from 3.2% in January 2019. Those loss rates will likely continue to climb for the near term. Of the 39 transactions that S&P reviewed in October, expected cumulative net loss rates (ECNLs) were lowered on 11 and maintained on seven, but raised on 21. “The upwardly revised ECNLs are primarily on the second-half 2018 and more recent transactions, and take into account potential deterioration resulting from high unemployment levels,” S&P wrote in a Nov. 18 report. “In fact, most of the transactions are not currently trending toward the higher loss levels, but their higher-than-historical extension levels and future economic uncertainty led us to increase our base case.” Historically, securitizations have been well shielded from economic downturns. In 2009 and 2010, S&P Global Ratings downgraded 12 auto tranches, while upgrading 157. So far this year, S&P has downgraded eight tranches and upgraded 242. So, for now, the tug-of-war will continue.

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