Under the Hood: Quick Subprime Market Inspection

Is that a cliff or a bridge up ahead? There are positive signs and even slight improvement in some auto figures, but there’s still a looming question of what’s around the corner and whether further government support will be forthcoming. Things could go from stable to not in a New York minute. As we look for signs to the future, recent reports from S&P and KBRA give some indication of where we stand today.

Tensions around Extensions

Focusing on four major public subprime auto shelves (AmeriCredit, Santander’s DRIVE and SDART and World Omni’s Select) S&P shows subprime extensions declined from 15.75% in April to 8.9% in May. There appear to be a number of factors contributing to the decline in extensions, including the reopening of businesses and furloughed employees returning to work in areas of the country where lockdowns have been lifted, government enhanced unemployment benefits belatedly rolling out in many places and consumers’ receipt of government stimulus checks.

Though new extensions dropped nearly 44%, of the subprime loans that have been extended since March, 81.5% remain in extension status. In fact, many who sought extensions in March received multi-month extensions which could be skewing the trend line, as the most recent figures would not reflect multi-month extensions that already exist. For example, Ally has offered a four-month extension period (the longest of the companies discussed), while others offered three-month extensions.

Even with these May declines, as reported by S&P, “the percentage of loans receiving extensions remained higher than February's pre-COVID-19 levels.”

Performance Anxiety

KBRA’s performance data reflects a certain calm on the surface for reasons similar to the trend in credit extensions. Based on June remittance data (which reveals May collections), they report that delinquency rates “either held steady or fell across most consumer ABS asset classes, with no meaningful change in charge-offs.” 30+ delinquencies were down 5.87% and were lower month-over-month and year-over-year. 60+ delinquencies showed modest declines in May too.

A month-over-month comparison across 21 issuers revealed stable or lower figures in auto loan delinquencies, which appears attributable to the government stimulus programs and payment assistance programs with lenders.

Beneath the surface though, subprime borrowers enrolled in hardship programs have reached over 23% (versus prime, which stayed flat at 8%). Based on an analysis of these programs and loans 30+ days delinquent, KBRA was able to identify “impaired loans,” for which subprime borrowers show greater sensitivity to the labor market issues of the moment.

As we’ve often pointed out, there are risks to using longer and longer terms in new and used auto loans. Here, KBRA notes that loans with terms of 72+ months or with higher payments amounts are more likely to fall into the impaired loan category.

Looking Ahead

The numbers show a market that appears to be managing through this stressful economic moment, but the economic uncertainty is clouding the finish line. Given the spread of the virus and potential rollbacks of re-openings throughout the country, further government assistance is likely key to keeping delinquencies down. Yet, Congress is still debating whether to extend supplemental unemployment benefits at the end of the month and, if Congress does act, there’s a chance of delay in getting checks out. This would put the onus on borrowers to reach out to servicers for more deferments and increase risk to private lenders and ABS investors.

Your move, Washington. The market is waiting.

In case you missed it…

Credit Chronometer’s second annual market study, available here, has been giving industry participants a behind-the-scenes look at how originators, investors, servicers and trustees are viewing the effects of the pandemic on the subprime auto securitization market.

Nicole Serratore, an attorney in the Insolvency, Creditors’ Rights and Financial Products Group, contributed to this post.