Net loss rates on securitized prime and subprime auto loans improved dramatically during the second quarter of 2006, thanks to steadily falling unemployment rates and rising values on used cars, according to Moody's Investors Service.
Among prime auto loans, the net loss rate fell to 0.45%, a dramatic improvement over the 0.59% rate from the same period a year ago. Also, the delinquency rate remained unchanged from last year's second quarter at 0.37%, which was also a historic low for the index. The Manheim Used Vehicle Value Index, reported that used car values at auction improved by 1.3% over levels for the previous year. Increased used car valued can directly affect net loss rates, because they can mean higher recoveries on repossessed vehicles, according to the rating agency.
In another positive for the prime auto ABS credit environment, year-over-year unemployment rates improved for the 10th straight quarter during the second quarter of 2006.
"The unemployment rate has historically been thought of as a leading indicator for prime auto net loss performance, and reached a level of 4.63% during the second quarter," the report said.
Of course, as Moody's points out, selection criteria may affect pool performance just as much as, or even more than the performance in the issuer's total service portfolio. Also, an issuer's recent change in underwriting or market focus might be reflected in a specific pool, but not in its portfolio as a whole.
When prime quality auto loan pools are securitized, Moody's said, accounts on which a monthly payment is 30 days or more past due are often excluded from the pool.
Some captive car finance companies underwrite weaker quality loans within the traditional prime quality category to sustain relationships with their franchised dealers. Lately, however, the captive finance companies have tightened their underwriting guidelines and have concentrated on higher credit quality obligors, said Moody's.
Subprime auto loan ABS deals fared well. The rating agency's static chargeoff indexes - which measures subprime auto loan ABS, while accounting for deletions and additions - were -2.0% for all pools -1.0% for low-loss pools, and -2.1% for high-loss pools. The last time that all three indexes saw a negative change was in the second quarter of 1996. It also marks the 11th consecutive quarter that the high-loss and all-pool indexes have seen declines in the percentage of charged-off loans.
Moody's said the general upward trend in the static index levels was primarily driven by an industry-wide shift to a more back-ended loss curve, which normally results in a historical norm of about 2% to 5% quarterly increase. The agency's market chargeoff indexes, which track cumulative loss rates on pools without additions or deletions, also improved. Among all pools, the market chargeoff index decreased by 7.5%, to 126.5. Chargeoff rates among high-loss pools decreased by 10.0%, to 161.9.
"This is the largest decline in [the] quarterly change rate we have seen in the history of the high-loss pool market index," Moody's said. "This is the 10th consecutive quarter that the low-loss market index stayed below 100."
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