The auto loan sector has lately become a darling of the ABS market, with issuance motoring at an ever-faster clip.
But at least one speaker at Information Management Network's ABS East detected a potential bubble forming in the subprime segment. “The number of lenders jumping into that space looks like something we’ve seen before,” said Kevin Duignan, global head of structured finance at Fitch Ratings, making a reference to the subprime mortgage market. He acknowledged that the U.S. consumer was in much better shape than before the crisis but noted that underwriting standards for auto loans to more credit-challenged borrowers could deteriorate.
Recent figures released by Standard & Poor’s bear out the explosive growth in subprime auto loans. Credit in this segment soared 48% year-on-year in October, coming off September’s figure of 63%. Roughly 42% of auto loan borrowers have FICO scores below 670, a much larger share than the 27% posted in January 2010.
Another speaker at ABS East,Tony Hughes, a senior director at Moody’s Analytics, expressed some skepticism that the subprime autos could experience a bubble analogous to the one that blew up in the faces of subprime mortgage players.
The housing boom, he said, had particular dynamics that do not lend themselves to the auto market. For instance, people would be unlikely to end up speculating on the prices of used vehicles in the same way that mainstream Americans did on houses by buying and flipping.
Subprime net losses rose 45 basis points in August to 5.34%, according to S&P. The agency lay the blame on lower FICOs and higher LTVs as well as on seasonal factors and weaker recovery rates.
In the first ten months of the year, the subprime segment made up 23.7% or roughly $15.8 billion of all auto ABS, according to data compiled by Wells Fargo Securities. The percentage is a post-crisis high.
During the second quarter, used-vehicle loans made up 74% of subprime collateral and 21% of prime auto ABS. Used-vehicle sales climbed to 3.5 million units in the first 20 days of October, an 8% year-on-year increase, S&P said.