Under the Hood: Securitizations point to unaffordability of used cars

Though vehicle values have been inching lower much of the year, recent securitizations indicate that consumers are increasingly relying on extended loan terms to afford their used-car purchases. Chase Auto ’s Aug. 11 securitization is a case in point. In the transaction, 84.6% of the underlying loans have original terms exceeding 60 months, according to Fitch Ratings . On the surface, that ratio is only three percentage points higher than the one in Chase Auto’s previous securitization — a credit-linked note transaction issued in August 2021. But there is a notable difference, namely, that only 46.3% of the collateral in the current transaction is backed by new vehicles versus 68.2% in the previous deal. In other words, consumers need more time to afford the used cars they are buying. Further, the average loan amount in Chase Auto’s current securitization is $29,377, a 17.7% jump from the average loan amount in the bank’s August 2021 ABS deal. Yet, that higher average loan balance is occurring in a transaction comprised of more used-car loans than new-car loans. Capital One Auto Finance Capital One ’s most recent prime auto securitization illustrates a similar dynamic. In the financier’s April securitization, 77.2% of the underlying loans had terms exceeding 60 months. That ratio was up from 73.7% in 2021 and up from 58.3% in 2020. Meanwhile, the new-car ratio in Capital One’s securitizations has dropped 10 percentage points in the past three years — to 34.4% — yet the average principal loan balance has increased 17.9% to $23,037. Notably, the loans in Chase Auto and Capital One’s recent securitizations were made to consumers with prime credit histories. The weighted average credit score was 760 in the Chase deal and 773 in the Capital One deal. So, even consumers with presumably strong financial positions are having a tough time buying used cars. Pentagon Federal Credit Union For ABS newcomer Pentagon Federal Credit Union , whose $484.2 million securitization closed in late August, the bulk of the loans in the debut transaction were made to prime borrowers, as well. The underlying collateral has a weighted average credit score of 770. In fact, 65.7% of the pool consists of loans with credit scores higher than 750, and only 10.9% of the obligors have credit scores below 700. Yet, as with the ABS deals of Chase and Capital One, used cars outweigh new ones in PenFed’s securitization; the ratio is 56% to 44%. PenFed is only the third-ever credit union to tap the ABS market, behind GTE Federal Credit Union in 2019 and Unify Financial Credit Union last year. In Unify’s debut securitization, 98% of the underlying securities were comprised of loans with terms longer than 60 months. In fact, 84.6% of the loans had terms exceeding 75 months, according to S&P Global. By comparison, the ratio of loans with terms exceeding 60 months in GTE’s 2019 securitization was 89.5%, whereas the ratio of loans with terms exceeding 75 months was only 30.8%. At that time, the Manheim Index was clocking in at about 140.3, compared with 219.6 in July. Climbing consumer debt Though auction values have been inching lower in recent months, the cost improvement appears to have yet to trickle down to consumers . For instance, the average amount financed for a used vehicle in the second quarter was $31,448, up 16.6% YoY, according to Edmunds . On a monthly basis, that translates to a monthly payment of $555 for 70.8 months. At midyear 2021, consumers were shelling out $478 per month, on average, for 68.9 months. Certainly, vehicle age factors into the degree of price inflation. For instance, 8- to 13-year-old vehicles are averaging $18,038, which is $5,416 — or 42.9% — higher than the projected value for those vehicles in a historical depreciation scenario, according to the “Return to Normal” index released by car-shopping app CoPilot . By comparison, price premium for 4- to 7-year-old vehicles was up $9,086 above projected normal levels — to $29,841 — while the price premium for 1- to 3-year-old cars was $13,145 — to $42,314. At this rate, be prepared to see higher average financing amounts and longer loan terms in upcoming securitizations, despite improvement in credit score data. Further, the deeper consumers get into debt on their vehicles, the tougher it will become to dig out of the negative equity that will inevitably result. Auto Finance Summit, the premier industry event for auto lending and leasing , returns October 26-28 at the Wynn Las Vegas. To learn more about the 2022 event and register, visit www.AutoFinanceSummit.com .

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