S&P: Longer-term auto loans are back-loading losses in prime ABS pools

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S&P Global Ratings reports prime auto lenders will likely see more back-loaded losses on securitizations as a result of longer loan terms on deals.

In a report Tuesday, S&P stated that as more loans stretch into 72 months or even 84 months as a result of rising new-vehicle prices, auto ABS investors must be mindful of increased credit risks that accompany extended-term loans.

S&P stated such risks have already been borne out from its study of 2012 and 2014-vintage pools of prime loans securitized by lenders such as Ally Bank, Ford Motor Credit, Hyundai Capital America, USAA and American Honda.

S&P found that the growth in extended terms pushed back the peak loss period on deals toward the latter stages of portfolio amortization. For example, the 2014-vintage deals with an average pool term of 64.9 months had a peak 55.7% of total-deal losses incurred by month 18, compared to 62.2% of 2012-vintage losses occurring during the same period.

“To the extent that loan terms lengthen, the severity of loss could increase due to the slower amortization of the loan balance,” the report stated.

The losses become back-loaded as greater vehicle depreciation levels deeper into a loan’s maturity, and owners become more exposed to financial risk from delayed equity status in a vehicle.

“[B]ecause longer-term loans delay the point at which a borrower starts to build equity in the vehicle (and could sell it to repay the loan), the borrower may have less incentive to continue making payments on the vehicle in the event of financial distress,” the report stated. “Moreover, longer loan tenors increase the likelihood of the borrower experiencing a job loss or a medical emergency while the loan is outstanding.”

S&P found that lenders with the longest weighted-average original maturities, including Ally, CarMax and regional Toyota captive-finance lender World Omni Financial Corp., had the lowest percentage of total losses through month 24 of a securitization.

S&P’s report is being issued as Experian reports that the most common loan term for a vehicle loan is 72 months, as rising average interest rates and vehicle prices would otherwise drive 60-month loan prices up an average of “roughly” $100 a month. Loans with terms of 73 to 84 months now make up 30% of new-vehicle loan origination volume, with the WA original terms of prime pools increasing to 66 months from 62 months a decade ago.

“The continued shift to larger vehicles and new vehicle technology, including more driver assistance systems, may push median transaction prices higher over the coming months, thus creating demand for longer loan terms,” S&P’s report stated.

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