Auto Loans

Subprime Auto: 2019 60-Second Market Review and Insights

Sep 19, 2019 | By JOSEPH CIOFFI

Originations and Issuances, by the Numbers

Total auto loan debt increased to $1.30 trillion in Q2 2019, up from last year’s $1.24 trillion, and accounted for 9.4% of the $13.86 trillion in national household debt – greater than credit card debt, but less than student loan and mortgage debt, according to Federal Reserve Bank of New York data.

In the first half of 2019, new auto loan originations totaled $294.6 billion, of which $60.6 billion was subprime, (credit score <620). The share of subprime loans increased slightly to 20.6% through Q2 2019, up from 20.1% the previous year. Auto ABS issuance reached $65.9 billion in the first half of 2019, representing a 15% year-over-year increase.

Performance and Practice

4.69% of auto loan balances were 90+ days delinquent in Q1 2019, up from 4.26% in Q1 2018 – the highest level in seven years. Subprime 60+ day delinquencies peaked at 5.74% in January 2019 – the highest level since 1996, according to Fitch. Subprime delinquencies fell to 4.52% in June 2019, but remain above same-month financial crisis levels. Auto defaults are holding up and stood at 0.87% in June 2019, down from 0.93% in June 2018.

Subprime auto annualized net loss rates for deals tracked by Fitch reached 10.35% at the start of the year, up from 9.65% the previous year. Loss rates decreased to 6.56% in June 2019, reflecting seasonal trends. Lenders, including Exeter Finance and Prestige Financial, are experiencing greater-than-expected losses on subprime auto bonds, which have been attributed to increased competition following “renewed growth in subprime lending.”

Despite deteriorating delinquencies, underwriting standards do not appear to be improving. Santander reportedly verified income on less than 3% of subprime loans this year, in contrast to 17% in 2017, which may mean lower quality collateral in deals. Loan terms are creeping up and reached “record highs” in Q2 2019, averaging 72.90 months for subprime new vehicle loans, according to Experian. DBRS reported that extensions, which were a significant factor in the downgrade of Honor Finance’s 2016 securitization, are the main form of modification in auto ABS transactions.

Looking Ahead

While subprime originations are increasing, subprime auto ABS performance has been steadily worsening, with delinquencies exceeding peak financial crisis levels and ratings agencies raising their loss expectations in a number of deals. Increased competition may fuel looser underwriting standards and more risky lending practices, and could ultimately lead to higher losses and additional downgrades if credit enhancements fail to keep up. Market conditions have been made more precarious by the inversion of the yield curve last month, and if delinquencies and losses continue to rise, this could tip the balance.

Emily Hatchett, a paralegal in the Insolvency, Creditor’s Rights and Financial Products Group, assisted with this post.