Underwriting standards will keep slipping for auto loans over the next year but deals performance won't suffer, according to Moody's Investors Service.
New transactions will feature a growing share of loans with longer original payment terms, which appeal to borrowers looking to reduce their monthly payments but carry higher credit risks.
The share of loans with original payment terms ranging from 75 months up to 84 months rose in 2015 pools. In 2015, several bank auto ABS issuers including USAA, Bank of the West and SunTrust Bank, came to market with deals backed by loans pools that included loans with 84-month original terms.
This trend will continue, particularly amongst the bank issuers. That is because the longer terms help banks compete with captive finance companies, which can offset lower interest rates as a result of manufacturer incentives.
The loans can also help lenders compete for borrowers looking for lower monthly payment who might otherwise opt for a lease.
However extended loan terms may incentivize less credit worthy borrowers to buy more car than what they can afford. This can be a credit negative for ABS transactions, said Moody's.
Longer-term loans can also result in higher default risk because the loans will be outstanding longer and borrower will need additional time to build equity in the vehicles.
Also on the decline in auto loan pools are FICO scores. Moody's expects the proportion of lower FICO loans to continue to rise in prime ABS pool. FICOs have been on decline since 2012; in prime pools FICO scores declined to a weighted average 733 in 2015 compared with 743 in 2012 transaction.
Nevertheless performance of auto loan transactions should continue to weather underwriting deterioration for two reasons: deals are structured to deleverage and build credit enhancement and the improving U.S. employment and other macroeconomic factors will support lower losses.
Moody's expects losses will rise on 2015 vintages slightly above levels of the past few years as the credit quality of deals issued every year since 2010 has slipped.
On the subprime side, securitizations are also expected to continue to perform well. Moody's noted that credit performance of subprime loan vintages for transactions has weakened only marginally since 2012 as a result of relatively consistent underwriting criteria and the strengthened macroeconomic environment. However, Santander Consumer USA, the largest issuer of subprime loan ABS, began securitizing weaker subprime loans in 2015 under its DRIVE platform, which will result in higher losses for the subprime sector's 2015 vintage.
Subprime deals could also feel the pinch of regulatory scrutiny. Defaults and delinquencies on subprime loans could rise if regulatory scrutiny of subprime auto lenders results in required changes to loan servicing and collection practices.
For example, the credit performance of securitizations sponsored by subprime auto lender Consumer Portfolio Services (CPS) continues to show the negative effects of changed servicing and collection practices following a $5.5 million settlement with the Federal Trade Commission in May 2014. Since adjusting its servicing and collection practices, CPS pools have had higher delinquencies and losses.
