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Subprime ABS Loan Losses Spiked in August

Securitized subprime auto loan losses surged 27% on an annualized basis August, putting the sector on a path to approach post-crisis record loss levels by year’s end, according to Fitch Ratings.

In a report issued Friday, Fitch stated that softened used-car values and higher losses from recent vintage asset-backed pools —primarily from start-up lenders serving lower-tier subprime borrowers –  drove losses to 8.89%, compared to approximately 7% in August 2015. The figure was also a 20% leap from July’s figures, and is expected to “pierce” 10% by year’s end.

Sixty-day delinquencies in subprime were fast-rising as well, moving to 4.86% in August – 6% over July’s figure and 22% year-over-year.

“When you enter into fall months it’s typically the weakest part of the year,” for auto ABS performance, said Fitch analyst Hilton Heard, a senior director in the U.S. ABS group.

Recovery rates and residual values decline as new-car model introductions push down prices and demand in the used car segment, he noted; in addition, more borrowers are strapped for cash after summer vacations, putting off car payments.

The seasonal woes also hit losses in the prime lending sector. Prime ABS losses and 60-plus day delinquencies tracked by Fitch’s prime ABS index also grew slightly. The delinquency rate rose to 0.41% for August , up 2% from July and 17% above the level recorded last year. Annualized net losses were up 25%, although its 0.6% rate remains well below that of subprime losses.

At 10%, the projected year-end loss levels for subprime ABS loans would attain levels not seen since the aftermath of the 2008 financial crisis, when rates jumped to 9.5%-10% during the peak loss period from November 2008 to February 2009. (February 2009 saw a one-month spike to 13.1% before settling back in the 9% range).

Last week, a Fitch report pointed to continuing deterioration in U.S. auto loan and lease credit performance through the end of the year and into 2017, pointing the finger as “less tenured” auto finance companies that have debuted on the market.

The weak performance of 2013-2015 vintage ABS pools played a key role in August’s losses, as more asset-backed become more populated with start-up second- and third-tier lenders (about 20 new issuers since 2012.

Losses have also somewhat impacted the platforms securitizing loans from more established subprime lenders like General Motors Financial Corp.’s AmeriCredit and Santander Consumer USA.

But Heard said those platforms continue to perform well within expected and historical loss ranges, and Fitch has issued upgrades to individual tranches of some of those lenders’ existing deals because of better-than-expected performance.

“Those big names are not driving losses in the mix today,” said Heard. “It’s more of the newer, as well as established players” focusing  on the deeper subprime segments of riskier consumers that are driving the surge in losses.

Three years ago, deals through the AmeriCredit  Automobile Receivables Trust and the Santander Drive Auto Receivables Trust comprised 84% of the Fitch ABS subprime index; as of August, AmeriCredit and Santander account for only 54% of the tracked volume.

Through August, Fitch has issued 52 upgrades this year even after adjusting its base-case loss proxies to account for weaker performances of existing deals, and expects the upgrades to continue at a “strong pace” the remainder of the year. “The outlook remains stable for asset performance and positive outlook for ratings performance through 2016,” a Fitch release stated.

Fitch’s auto loan ABS indices track the performance of $96.3 billion of outstanding collateral, with 60% backed by prime loans.

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