By Robin Wigglesworth at Financial Times
Delinquencies on poor-quality US car loans have climbed to their highest level in almost two decades, according to Fitch Ratings, reinforcing concerns over the rapidly growing market.
The rate of “subprime” motor loans overdue by more than 60 days rose to 5.16 per cent in February. This surpassed the post-financial crisis peak and was the highest since the 5.96 per cent reading in October 1996, according to the rating agency.
Subprime car loans have long been a concern for analysts, some of whom feared that rapid issuance since the crisis and weakening lending standards would cause problems in the market for securitised motor loans. There, banks repackage loans into asset-backed securities and sell them on to investors, much like they did with subprime mortgages in the 2000s.
“Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year,” Fitch Ratings said in its report.
The overall US car finance market passed $1tn in 2015, powered by strong car sales. Issuance of US motor loan-backed ABS climbed 17 per cent to $82.5bn last year, according to data provider Dealogic, the strongest year for such sales since 2005.
Fitch tracks the performance of almost $100bn of car loans that have been securitised into so-called asset-backed bonds, of which just over a third is considered subprime. The delinquency rate on prime US motor ABS stood at just 0.46 per cent in February, up slightly month-on-month but flat compared to the same month in 2015.
Subprime typically means borrowers with scores below 620 from FICO, the biggest credit risk scorer, which rates consumers from 300 to 850.
Fitch expects both prime and subprime car loan ABS performance to improve this spring because of tax refunds, but that the seasonal benefits will be more muted given the weakening of loan quality and the expected softening of the US wholesale car market.
“Both the prime and subprime sectors have been buoyed by strong used-vehicle values over the past five years, contributing to lower loss severity on defaults,” the report said. “However, with new-vehicle sales and expected off-lease vehicle supply levels at historical highs entering 2016, Fitch anticipates weakness in the wholesale market.”
After bouncing strongly back from the depths of the post-crisis recession, the Manheim Used Vehicle Value Index slipped 1.4 per cent in February. “Any future declines in the Manheim, as well as other market indicators, will likely contribute to higher loss severity for defaults and drive losses higher,” Fitch noted.
In a note last month, Oxford Economics, a consultancy, highlighted the market as a possible warning sign for the wider credit cycle. While consumer lending looked resilient, the one “area of some concern is subprime auto credit, where delinquencies and charge-off rates are expected to increase”, the consultancy wrote.
However, analysts at Jefferies have argued that the intense competition in the subprime car loan market peaked in 2012-13 and led to a “mini-cycle” and correction in 2014, and now believe that supply and demand have rebalanced.
“We believe credit concerns for companies in this space may be overdone currently,” the US investment bank argued in its flagship note on consumer credit last November.