No one had suffered any losses, or at least it seemed no one could remember having done so. S&P had not downgraded any subprime auto loan ABS since just after the turn of the century or any other auto loan ABS since 2011. Credit enhancements were widely deemed sufficient to absorb any worst-case scenario. With a long track record of success and protections in place, few blinked when one non-bank lender, Honor Finance, went decidedly deep down the credit scale.
It was 2016 and Honor Finance had just brought its HATS 2016-1 securitization to market….
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,…
“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,…
Usury has made quite a comeback from the dust heap of old law treatises to become a crucial concept that has shaped modern credit markets. It recently returned to public awareness in marketplace lending, where online lenders have avoided making loans in states comprising the Second Circuit, such as New York, due to an unfavorable usury decision. Now, light has been shed on subprime auto financing and an exception to usury laws that’s creating risk for an already shaky market.
Usury: It’s An Old Concept …
New York’s usury laws were put on the books as early as 1787 to protect desperate borrowers from being preyed upon by unscrupulous lenders who use that desperation as leverage….
New Tech, New Risks
There are always risks to forging a new path. When it comes to electric vehicles (EVs) like the Model S and Model X that back Tesla’s latest deal, there are peculiar risks beyond those that normally accompany auto asset-backed securities (ABS). Given a lack of historical data, there is the risk of uncertain residual or resale values, and moreover, the potential for those values to fall below expectations for any number of reasons. For example, new technology may emerge that leapfrogs the manufacturer’s current offering, or production start-up problems may prevent the manufacturer from fulfilling demand….
Joseph Cioffi recently sat down with William Hoffman, Associate Editor of Auto Finance News, for an episode of “The Roadmap,” a podcast from the Center for Auto Finance Excellence, a site dedicated to providing best practices for auto finance industry executives and investors. Joseph and William discussed trends apparent in recent subprime auto loan securitizations, and the outlook for the market going forward, including a close look at the interrelationships between credit enhancements, credit quality and credit ratings.
The discussion builds on Joseph’s thoughts first shared on a post on Credit Chronometer….