Credit Chronometer

AUTO LOANS

Trends in subprime auto lending and related ABS have evoked comparisons to the subprime mortgage market. Where many see a potential crisis, others point to significant differences to pre-financial crisis RMBS. To shed light on the issue, the Credit Chronometer has identified historical indicators of performance – within lending practices, securitization practices and the underlying market for the assets backing the pooled loans – and analyzes the market using a disciplined comparative approach.

The Subprime Auto Loan Crisis Chronometer provides a quick view of risk in the market based on the indicators of crisis and their prevalence in subprime auto lending and ABS today.

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ABOUT THE AUTHOR

Joseph Cioffi is a partner at Davis & Gilbert in New York City where he is Chair of the Insolvency, Creditors’ Rights & Financial Products Practice Group, a multidisciplinary practice spanning corporate, insolvency and litigation. He has a unique perspective afforded by his experience in all stages of credit and market cycles, including in subprime lending investments, operations and litigation. Joseph and his group have been deeply involved in disputes and litigation resulting from the last financial crisis. He has written for or has been quoted by numerous publications, including American Banker, Law360, Asset Securitization Reporter, The Banking Law Journal, The Journal of Bankruptcy Law and Auto Finance News, regarding auto loans, student loans, marketplace lending, subprime residential mortgage-backed securities (RMBS) and environmental, social and governance (ESG) investing.

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ABOUT THE INSOLVENCY, CREDITORS’ RIGHTS & FINANCIAL PRODUCTS GROUP

Davis & Gilbert’s Insolvency, Creditors’ Rights & Financial Products Practice Group represents clients in a broad range of corporate, insolvency and litigation matters. The group has been actively involved in many of the most notable and highly visible business events in recent years related to the last economic downturn and has vast experience in the area of subprime lending, including the operation of origination platforms, relationships with servicers and defending large-scale asset-backed securities litigation. The broad and diverse experience of their attorneys makes them particularly well-equipped to advise clients in rapidly evolving markets, such as, those for auto loans, student loans, marketplace lending, mortgage loans and environmental, social and governance (ESG) investing. Additional highlights of the practice include the following:

Litigation: The group regularly prosecutes and defends litigation involving complex financial transactions and instruments and has defended residential mortgage-backed (RMBS) securitization litigation, including fraud and repurchase claims, involving nearly $2 billion in claims.

Bankruptcy: The group guides clients through financially distressed situations and helps formulate and execute creditor enforcement strategies, in particular, in the case of intermediaries facing obligations to third parties. The group has defended nearly $1 billion in fraudulent transfer claims brought by the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC.

Corporate: The group also advises on a full range of financing transactions, including secured revolving and term credit facilities, receivable financing arrangements, intercreditor agreements, warehouse lending facilities and loan purchase agreements.

For more information about the Insolvency, Creditors’ Rights & Financial Products Practice Group, click here.

Auto Loans

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

Jun 27, 2019 | By JOSEPH CIOFFI

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.