Fitch: Reprieve for U.S. Subprime Auto Delinquencies Likely Short-Lived
OREANDA-NEWS. Delinquencies fell last month for U.S. subprime auto ABS after hitting a 20-year high in February though the reprieve is not likely to last, according to Fitch Ratings in its latest monthly index results.
Delinquencies on U.S. subprime auto ABS decreased to 4.15% in March reporting from last month's 20-year high of 5.16%. Driving the decline was borrowers taking advantage of tax returns to pay off debts. The decline in delinquencies, while still 16.5% greater than the same period in 2015, follows seasonal trends observed in Fitch's Auto ABS Indices. Performance metrics will improve as 2016 shifts into the spring months, though to what extent remains to be seen.
Subprime annualized net losses (ANL) also improved in March, declining to 8.58% from 9.74% reported a month earlier. Despite the positive shifts downward, net losses were 30.4% higher over same period a year earlier.
Pressure from weaker underwriting standards in 2013-2015 transactions will continue to negatively affect the indices in 2016 irrespective of seasonal trends. Increased lending to borrowers with weak or limited credit history will move delinquency and loss frequency levels higher, while negative shifts in LTV and extended term loans will drive loss severity up.
Weaker underwriting is largely coming from newer nonprime lenders who have entered the market since 2010 and now account for a larger portion of the index. In 2010, Santander Consumer USA (SC) and GM Financial (fka AmeriCredit) accounted for 93.5% of the notes issued into the market. Today, the two lenders account for 49.5% of the market, highlighting the significant growth of new lenders. To gain market share, many lenders have weakened underwriting standards in the past few years due to the intense competition in the sector.
In the prime sector, delinquencies were lower at 0.63% in March, down from 0.69% last month while losses fell to 8.58% from 9.74%. Consistent with the subprime sector, delinquencies and losses for the prime sector are higher versus the same period a year earlier, with delinquencies 5% higher and losses up notably by 55.6%. However, both metrics remain historically low and well below recessionary levels.
The Manheim Used Vehicle Index, which has been historically high over the past five years, declined again in March to 122.5 from 123.5 in February. The supply of used vehicles on the wholesale market is expected to balloon to historically high levels over the next three years, as a result of the large increase in the volume of off-lease vehicles and higher vehicle trade-in volumes. If used vehicle values decline, so too will recovery rates on repossessed vehicles, which will only confound issues and drive up loss rates, particularly in the subprime sector.
Fitch's prime auto loan ABS index currently includes 126 transactions with $62.9 billion in collateral outstanding while the subprime index includes 134 transactions with $38.1 billion outstanding. Fitch includes transactions in each index based on both historical platform CNL levels as well as collateral attributes. Certain platforms which do not fit the criteria for either index due to their unique nature are not included.