Subprime auto securitization has been firing on all cylinders lately: the strong financial condition of borrowers, good loan underwriting and a solid market for used cars have all kept investor losses on the 2009, 2010 and 2011 vintages to a minimum.
But Fitch Ratings says it’s only a matter of time before the market loses some power. That’s because demand for bonds backed by auto loans, leases and dealer financing is making it ever cheaper for lenders to fund loans. This could result in a loosening of underwriting practices as they compete with each other for new borrowers.
The ratings agency said today it expects securitizations that come to market in 2013 to include weaker collateral quality than prior years, including extended loan terms and weaker credit tier distributions. While that won’t translate into losses right away, over the longer term, it’s a potential risk to the market, especially if the economy loses steam.
“If another recession or downdraft in the market coincides with this expansion, we would expect a significant challenge to many vintages,” Fitch said in a report released today.
For now, Fitch is only predicting that performance in subprime auto ABS, or loans to weaker borrowers, will likely “tail off” for 2012 and 2013 vintages.
The ratings agency also said future loss performance may be more closely tied to new jobless claims than overall unemployment.
That’s because the strong performance of 2009, 2010 and 2011 vintages was helped by a winnowing out of weaker borrowers in these pools when they defaulted. Fitch said this contributed to a continued decoupling of subprime auto ABS from the overall employment rate beginning in 2010. “In our view, trends in new jobless claims may provide a better leading indicator going forward because it more closely tracks the financial condition of borrowers remaining in the pools,” it said.