Securitization risk-retention requirements have taken center stage as regulators hammer out implementation of the Dodd-Frank Act. Yet a newly released white paper authored by Grant Thornton and the Auto Finance Council offers a critical look at performance trends among various asset classes, ultimately suggesting a lower risk-based capital requirement for automobile loans.
Throughout the recent credit crisis, auto loans were lumped with mortgages and other consumer asset classes which experienced higher chargeoff rates. As regulators sought a strategy to stem losses and restore the financial markets’ viability, automobile financiers were burdened with risk-based capital requirements similar to those mandated for lenders of first and second mortgages, assets that experienced record losses.
Despite the economic downturn, automobile loans have withstood the pressures of the credit crisis, ultimately outperforming first and second mortgages, according to the report, titled Risk-Weighting of Automobile Loans. The research was conducted by Grant Thornton, an audit, tax, and advisory organization, and the Auto Finance Council, a group that brings together the top auto lending and leasing executives to share information and best practices to help shape and improve the industry and its regulatory environment.
Credit default data provided by Standard & Poor’s and Experian served as the backbone of the analysis. The S&P/Experian Auto Default Index is one of a series, which consists of a composite, as well as specific indices for automobile loans, first mortgages, second mortgages, and bankcards. The indices measure default behavior across a representative sample of Experian’s consumer loan database.
In typical economic periods, consumer defaults follow a normal pattern where default rates on real estate loans are lower than on automobile loans. Historically, consumers that cannot meet all of their monthly debt service obligations will traditionally pay the mortgage payment on their home before making their automobile payment. Using the S&P/Experian data, this pattern held true from 2004 until late 2006 before reaching an inflection point in 2007, where automobile loans start to outperform first mortgages.
While the mortgage sector “imploded,” the automobile finance industry really seemed to hold its own during the index period, for several reasons.
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