Moody's Ratings anticipates a benign U.S. economic environment in 2025 that will broadly support the consumer and commercial assets backing securitizations, if at relatively weak levels, and assets such as agricultural equipment and RMBS face ongoing risks.
Continued economic growth, falling interest rates, and inflation approaching central banks' target levels should support most asset-backed securities (ABS), according to the rating agency's December 16 "Structured Finance—Global" report. However, some consumer financials remain constrained by increased prices and a slightly cooler labor market, weakening U.S. consumer credit performance that will persist into early 2025 and stabilize in the second half, the rating agency says.
Among areas of weakness, Moody's says, are outstanding auto loan ABS whose collateral losses will remain high as borrowers struggle with high monthly payments and insurance costs, and a weaker used-car market today pressures recovery rates. Pockets of weakness will push up credit card ABS charge-off and delinquency rates, buffered by most underlying accounts strong credit quality and significant seasoning.
Performance in unsecured consumer sectors, such as marketplace loans, will mostly deteriorate in the first half of next year as unemployment rises slightly, Moody's says, and agricultural equipment ABS delinquency levels will remain elevated in 2025 as net farm income continues to face pressure.
RMBS will also remain relative week. Transactions backed by non-qualified mortgage loans will likely remain much weaker than before the pandemic and compared to prime mortgages and those backed by
Moody's says commercial-mortgage-backed securities will for the most part benefit from positive economic factors, which will support commercial real estate values and borrowers' ability to service debt.
"Fairly steady employment levels will support consumers' finances and property rents, bolstering cash flow for industrial, retail, multifamily, hospitality and even office properties to some extent," Moody's says.
On the corporate ABS front, strong asset demand and solid structures will help the performance of most existing ABS and the credit quality of new transactions, Moody's says. Shortages of aircrafts and aircraft engines combined with strong air travel demand will help increase values and lease rates supporting aircraft ABS. However, the skies could turn less friendly.
"Geopolitical tensions pose risk to aircraft ABS," Moody's says, adding, however, that "strong demand will likely offset much of this risk."
