Moody’s Investors Service said in a report today that the credit quality of auto loan securitizations will remain stable in 2014 despite the continued weakening in underlying credit trends. The ratings agency also said that auto loan securitization new issuance volume will remain strong, but flat in 2014.
"ABS collateral pools are going to reflect the persistent weakening of auto lending standards, as lenders respond to both macroeconomic and competitive changes," says Jeff Hibbs, a Moody's assistant vice president - analyst and author of the report. "Nevertheless, we are maintaining our stable outlook for the sector, because rational lending, healthy used car prices and strong 2014 new vehicle sales will support the steady performance of the collateral backing auto loan, lease and floorplan asset-backed securities in 2014."
The trend of taking on more risk was apparent in 2013 vintage deals. This trend is driven by the growing competition in auto lending created by low pool losses, combined with persistently low interest rates.
"Competition and eased lending standards add the most risk in subprime lending," adds Hibbs. "Lending standards in the prime-quality borrower segment have been easing ever so slightly for just over a year, but in the subprime-quality borrower segment, they've been easing for several
years and they're moving back to their pre-crisis levels.”
However the steadily improving economy means that even on this lower end of the credit spectrum, Moody’s expects loan losses to rise only modestly from the current historically low level.
The ratings agency also said that auto loan securitization new issuance volume will remain strong, but flat in 2014. Lease ABS issuance will continue to make-up a bigger share of overall volumes as lease penetration rates continue to rise. The US lease penetration rate (this is the percentage of vehicle sales that result from leasing) increase in 2013 to above 28% from just below 19% in 2007, according to Moody’s.