There is evidence of correlation in the state of the wholesale vehicle market and annualized net loss (ANL) rates in auto loan asset-backed securities (ABS). Fitch Ratings recently assessed between how wholesale vehicle values affect recoveries of defaulted auto loans, and concluded that the values in turn impact loss severity and, ultimately, loss rates in auto ABS, thus creating an inverse relationship between wholesale vehicle values and ANL rates in auto ABS - as wholesale vehicle values rise, ANL rates invariably fall and vice versa.

Therefore, the healthier the wholesale vehicle market, the lower loss severity in auto ABS as vehicle recovery rates increase and, hence, loss levels ultimately decrease. Fitch's analysis confirms that loss severity is an important driver of ABS loss rates and, combined with the current higher default rates, it will continue to put pressure on auto ABS performance.

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