The post-tax refund decrease in consumer loan delinquencies did not materialize as strongly as analysts had hoped, according to new research from Conning, an affiliate of Generali Investments Holding.
Defaults have also bumped up, another problematic indication of stress for investors in securitizations of consumer loans, particularly the lower rated tranches.
"Post-tax season, we thought we were going to get a big decline in delinquencies and defaults," said Mike Nowakowski, head of structured products at Conning, an affiliate of Generali Investments Holding S.p.a. that manages about $190 billion in assets, primarily for insurance companies and pension funds. "But delinquencies and defaults did not come down as much as we had thought."
Nowakowski said that such a decline is part of the typical seasonal pattern structured into securitization trusts, in which delinquencies and defaults climb during the holiday season then start to decline in March.
Post-tax season, we thought we were going to get a big decline in delinquencies and defaults.
Republican tax cuts last year should have resulted in more significant declines in delinquencies and defaults than normal. After analyzing the remittance reports of the deals it invests in, however, Conning found that the declines were little changed from the year before, with subprime auto falling about 10%, unsecured consumer loans down 2% to 4%, and prime auto about 14%.
Nowakowski said that IRS data had indicated refunds for subprime borrowers as high as 25% compared to the year before, and while the reality turned out to be closer to a 17% increase, it should have provided a tailwind for consumers.
"They're obviously spending a lot of it on higher energy costs now," he said.
Another warning–although Nowakowsk described it as a yellow flag as opposed to a red or even an orange flag–is the increase in unsecured consumer-loan defaults. They have increased upwards of 12% so far this year compared to 2025, when the default rate throughout the year was fairly flat. He added that the increase is somewhat misleading, because the default rate was so low last year, but "delinquencies of unsecured loans are starting to creep into defaults, which is obviously never a good sign."
Plus, consumer behavior reflected in consumer loan performance can also impact other securitizations, such as aircraft lease asset-backed securities (ABS) or container and rail ABS, he said.
Reasons for optimism
Nowakowski said that ABS technicals remain strong, pointing to another record year of issuance. Delinquency- and default-rate signals may subside.
Insurance companies and other institutions favoring fixed-income ABS to match liabilities are continuing to gobble up new deals. For example, he said, even after Spirit Airline's recent bankruptcy, aircraft ABS spreads have yet to widen and senior classes are oversubscribed by three or four times.
The market appears to be pricing in a quick resolution to current geopolitical issues, particularly the U.S./Israeli/Iran war, he said. That may be premature, given it is likely to require at least a few months to return to normal even after the Strait of Hormuz reopens permanently. Senior parts of the ABS capital structure are typically well-insulated, he said, but mezzanine portions could be impacted.
"We think that given the risks out there, spreads should probably be a bit wider," Nowakowski said. "Will inflation cut into savings and affect the behavior of some consumers? Consumer unsecured loans are pretty much at the bottom of the payment priority waterfall."
