Fitch Ratings says the auto loan and lease sectors will continue to experience deteriorating credit performance throughout 2017, as defaults accelerate among subprime borrowers and used-car values in decline.

In a report detailing auto asset quality through the fourth quarter of 2016, Fitch reported that net chargeoffs and serious delinquencies (60-plus days) will continue to mount despite strong macroeconomic conditions (such as jobs growth) and tightening underwriting standards among prime lenders.

The worsening conditions will be more “acute” in the subprime sector, due to the expansion of new subprime auto lenders “that have demonstrated higher-risk appetites and less underwriting discipline,” the report stated.

"Subprime credit losses are accelerating faster than the prime segment, and this trend is likely to continue as a result of looser underwriting standards by lenders in recent years," said Michael Taiano, a Fitch Ratings director, according to a release from the ratings agency. 

The looser standards for upstart lenders is offsetting the tightening of underwriting criteria being practiced by banks and established lenders, who have in some cases decreased originations due to the concerns of rising default-related losses and – more concerning – the sharp drop in residual values that may befall defaulted loans and lease-return vehicles over the next two years.

The NADA (National Automobile Dealers Association) Used Vehicle Index declined over 6% last year, and was already down 8% year-over-year in February, according to Fitch. Prices dropped 1.6% on the index between January and February, the eight consecutive monthly decline and the steepest for the NADA index since November 2008.

While that may have been the result of new IRS rules delaying tax refunds, Fitch noted, “the broader trend is being driven by an increase in off-lease vehicle inventory and a sharp increase in new-vehicle incentives.”

That is one reason that captive finance companies affiliated with auto manufacturers continued to build market share in new-car lending last year, growing their fourth-quarter 2016 market share to 52% from 50% at the end of 2015. Banks, meanwhile, continued to retreat with market share falling to 30.6% in the fourth quarter from 34.6% the year prior, losing share primarily to captive-finance firms, credit unions (which have an 11.9% share).

That is not expected to reverse course anytime soon, with U.S. light vehicle new-car sales expected to fall slightly to 17 million this year (from 17.6 million in 2016), and a number of banks – including JPMorgan Chase, Wells Fargo, BB&T and Ally Financial – already having reduced auto loan originations by 10% in the fourth quarter, according to a report in Autonomous Research.

The Federal Reserve’s January 2017 senior loan officer survey showed 11.6% of auto lenders reported tightening underwriting standards, compared to a five-year average of 6.1%.

Fitch reports that the declining share, a result of deteriorating asset quality, “primarily reflects the seasoning of vintages originated in a sustained period of looser underwriting standards, particularly from 2013-2015,” and involving a rising share of nonprime lending. Those tighter standards relate primarily to pricing and loan-to-value ratios, but not to loan tenure: Fitch stated that more loans continue to be originated within the 72-to-84 month categories for nonprime lenders.

Experian said the average new-car loan for deep-subprime and subprime borrowers was 72 months at the end of 2016, compared to 70 months for prime borrowers.

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