Servicers See It All – Are They the Bellwethers for Subprime Auto’s Future?

As we continue to break down and analyze the responses to our subprime auto survey, covered in our inaugural market study, servicers, deserve a closer look given the unique vantage point they have in securitizations.

It could be easy to overlook them in favor of originators and investors, the alpha and zeta in the chain. Servicers may not have originated the loans, and they may not be as vested in performance as investors, but no other group is on the frontline of collection and loss mitigation. They are the participant group in the proverbial front seat with the best view ahead – who better to point the way?

So, which way do servicers point versus originators and investors? Servicers are:

  • Less likely than originators and investors to believe performance will deteriorate;
  • Much less likely than originators and investors to believe downgrades will occur;
  • More likely than originators and investors to believe credit enhancements are sufficient to protect investors on senior tranches, but share investors’ concerns on subordinated tranches;
  • Most concerned with the downgrades of Honor Finance’s HATS 2016-1 subordinated notes; and
  • More likely than investors to believe credit extensions will have a positive impact.

Overall, servicers are more bullish on performance, yet less likely to see past downgrades as an aberration and see trouble ahead for subordinated tranches. On one hand, this would seem to reflect the confidence that comes with control – the ability to positively impact performance through skilled servicing – and, on the other hand, concerns that come from knowledge of issues seen on the front lines of collection and loss mitigation.

The dynamic raises a fair question: what do servicers know that others don’t that make them the most concerned about the Honor downgrades and as concerned as investors that subordinated tranches will not be protected?

Looking Ahead

It would seem that quality servicing, including specialized loss mitigation expertise, is about to become even more important to loan performance achieving market expectations.