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Subprime Auto Loan Crisis Chronometer

Crisis /krīsis/: A turning point that results in a battle over loss allocation.

Will there be a crisis? Are we near one?

Practices and factors similar to those contributing to the subprime mortgage meltdown are now impacting subprime auto lending and related ABS. The gauges reflect our take on how they are impacting risks for lenders and investors.

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The Subprime Auto Loan Crisis Chronometer shows the risk of battles over loss allocation.
Aug 2018
Lending Practices and Factors i
Subprime originations have trended down but securitization volume continues to increase. Subprime delinquencies in the secondary market are on the rise and have surpassed peak levels. Risky practices are exposing specific lenders and their investors to losses, as evidenced by the closure of a number of smaller subprime auto lenders earlier this year.
ABS Practices and Factors i
Credit enhancements such as excess spread, overcollateralization and subordination have increased in new deals and continue to create a buffer from riskiest lending practices. Investors have not yet felt the sting of riskiest practices.
Auto Market Risks i
New and used vehicle prices are at all-time highs, but sales incentives and high supply of off-lease vehicles are accelerating depreciation and driving up negative equity on trade-ins. Advances in technology will likely accelerate depreciation further.

Timing Matters.

Stay Ahead with Credit Chronometer.

Featured Post

There’s a caution flag out for subprime auto loan securitizations. The Class C tranche of Honor Finance’s HATS 2016-1 – the deal that jump-started the debate as to how low deep subprime issuances could go before subprime auto ABS’s reputation for safety would be blemished – has been downgraded by S&P and KBRA. And now, what investors looked for yesterday is likely different than what investors will look for today. Two areas to watch: the strength of management and…

Latest Posts

Historically, investors in subprime auto asset-backed securities (ABS) have been able to sleep well at night. They have rested easy in part because credit enhancements in securitizations have protected them from losses.  Today, due in large part to the safety expected from credit enhancements, rumblings about the parallels between subprime auto lending and pre-financial crisis subprime mortgage lending – and the cataclysmic end those parallels could portend – have barely disturbed the subprime auto ABS market.

Overcollateralization (O/C) rates are often touted as particularly protective for subprime auto ABS.  It’s true, of course: As investors have rightfully demanded greater O/C rates on riskier pools,…

There’s a caution flag out for subprime auto loan securitizations.

The Class C tranche of Honor Finance’s HATS 2016-1 – the deal that jump-started the debate as to how low deep subprime issuances could go before subprime auto ABS’s reputation for safety would be blemished – has been downgraded by S&P and KBRA. And now, what investors looked for yesterday is likely different than what investors will look for today. Two areas to watch: the strength of management and the level of credit enhancements. Rating agencies are sensitive to both,…

Originations and Issuances, by the Numbers

To date since the inception of Property Assessed Clean Energy (PACE) financing, $5.17 billion has been advanced to homeowners under residential PACE (R-PACE) programs, and an additional $672 million has been advanced for commercial PACE (C-PACE) projects. In 2017, R-PACE originations totaled $1.6 billion, down 6% compared with 2016. In 2018 so far, R-PACE originations have reached $372 million. C-PACE originations, on the other hand, are on the rise, totaling $251.4 million in 2017, which is almost double 2016’s volume. So far in 2018, C-PACE originations have reached $84.8 million….

Originations and Issuances, by the Numbers

New mortgage originations reached $428 billion in Q1 2018, down from $491 billion in Q1 2017 (a 12.9% decrease), according to data from the Federal Reserve Bank of New York. However, housing debt climbed to $8.94 trillion in Q1 2018, up from $8.63 trillion versus a year ago (an increase of 3.6%). Housing debt remains the leading source of consumer debt in the United States at 68% of the $13.21 trillion in national household debt. As such, it can be a bellwether for consumers’ financial health and the direction of the economy….

“They are who we thought they were!”

Observing the rising tide of borrower delinquencies in subprime auto lending, I’m reminded of that famous outburst by the former NFL coach, Dennis Green. No one should be that surprised when subprime borrowers default. The question has always been and will continue to be whether credit enhancements – like overcollateralization and excess spread – will be sufficient to absorb the resulting losses.  Now that lower grade tranches have gained popularity among investors, and lower tranches are in greater danger than ever of going underwater,…

ABS Issuances, by the Numbers

Seven securitizations totaling $4.3 billion closed in Q1 2018, up 34% versus a year ago and representing the second-highest issuance in any quarter (after Q4 2017). Q1 issuances comprised $2.1 billion in student loan ABS, more than double Q1 2017 and the highest ever quarterly issuance of student deals. Total ABS issuance is expected to climb to $18 billion in 2018, up 30% from 2017.

Performance and Practices

Delinquencies increased in Q1 2018 across the consumer credit space, and reports of an influx of defaults on marketplace loans have prompted online lenders,…