A rebound in subprime auto loan securitization comes with the relaxation of lending standards by originators looking to fuel loan growth.
Two reports published this week by Fitch Ratings and Standard &Poor’s highlight the loosening underwriting standards for subprime auto lending.
Experian Information Solutions Inc. noted a gain of 10.6% year over year (YOY) in new financing of subprime auto loans and a 19.2% gain in so-called deep subprime. Banks have extended close to 36.0% of loans to nonprime borrowers in the second quarter (Q2), a 2.0% increase YOY, according to this same source.
“Presently we observe marginally lower average credit scores YOY on most auto loan ABS securitized pools in the latter half of 2012 and 2013,” said analysts in the Fitch report. “We predict the 2012 and 2013 vintage performance will be slightly weaker relative to the strong 2009-2011 vintages, as the latter vintages contained the highest credit quality obligors, shorter loan terms and lower loan-to-value ratios. “
According to S&P, the weighted average LTV on S&P rated subprime auto loan ABS pools has increased steadily to 113% in 2012 and 114.5% year to date, from a low of 112% in 2010 and 2011.
S&P said that subprime loans are now being written with longer terms. According to the ratings agency, a 72-month term has become the norm that has replaced the 60-month term for the largest subprime lenders.
S&P also noted a return of loans made to borrowers with lower FICO scores. Some of the more established originators in the space have returned to lending to borrowers sub-600 FICO.
But the decline in credit quality hasn’t significantly impacted the performance of most issuer’s pools, according to S&P. Most deals continue to perform in line with or better that the ratings agency’s initial expectations.
Fitch said that the higher propensity to lend to weaker borrowers is likely “a relative normalization in credit metrics, seen previously with the 2004-2006 vintages.”