By on May 7, 2013

Seeing delinquencies and credit losses going up while used car sales and lending standards deteriorate, rating agency Fitch warned today that “U.S. auto lenders will likely report further weakening in asset quality metrics this year.” Translated into English, lenders will become increasingly dependent on sub-prime loans and exposed to their perils.

Fitch saw average credit losses go up 16 basis points in the first quarter, delinquencies rose 67 basis points. Double-digit increases in auto leasing volumes may boost auto sales, but Fitch views this “with caution, particularly since used car values will likely return to more typical levels after recent rises.” Translated into English: Their residual value assumptions are based on fantasy, and there will be a rude awakening.

According to Fitch, “the expected weakening in asset quality for auto lenders is occurring after a period of record-low losses and delinquencies, and we believe the weakening of metrics will remain within historical norms, supporting ratings.” In plain English: Fitch won’t change the credit ratings of auto lenders just yet, but if this trend continues, they have been warned.

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11 Comments on “Sub-Prime: Fitch Sends Shot Across Bow Of Auto Lenders...”

  • avatar

    “residual value assumptions are based on fantasy”
    So are the leasing companies using the same fantastical residual value assumptions? If one is to belive Fitch, and not the financing institutions, what does that do to lease deals?

  • avatar

    Ratings agencies use alot of assumptions, but I think the metrics they base their ratings on are grounded in reality and fact for the most part. Interestingly, I recall seeing recently that auto loans have the lowest default rate of any category of loans. I am no accountant, but I think that 67 basis points equates to less than one percent.

    So, I think some subprime lending is probably a safe bet in terms of a return, however, I do think that using subprime customers as a base to fuel growth is a poor business stragegy in general if used too extensively. The glut of used cars with “pie in the sky” residuals will probably pose a greater threat to auto lenders than default. Personally, as a consumer, I am a fan of the easy terms and incentives thrown on hoods, but from a business perspective, it does seem to be a bit of a return to the bad old days when domestics were sinking in inventory and incentives putting incredible strain on their finance arms to subsidize a sinking ship.

    I dont think we are anywhere near that point yet, and this time it looks like plenty of foreign brands have thrown their hat into the ring too. Those who dont learn from history are doomed to repeat it.

    • 0 avatar

      The residual valuation thing is interesting. Basing it solely on history is tricky when we saw such a dive in SAAR in recent years that is only now coming back up. Used car valuations have been extremely high, so it makes sense that they’ll come back down.

      Bertel already quoted the money shot: “we believe the weakening of metrics will remain within historical norms, supporting ratings.” Basically, it won’t be that bad, it just won’t be like the last few years.

  • avatar

    Yes, because subprime auto lending performed so poorly during the Financial Crisis.

    Oh, wait, that’s right, it was about the best asset class out there. The cartoon is referring to subprime lending for mortgages, an entirely different ballgame.

    Foreclosing on a car is as easy as Repo’ing it. And, for subprime auto lending, the lender generally keeps a key.

    Very curious as to what “the perils” are that are mentioned in the post. Perilous because…in bad times it outperforms most other asset classes? Watch out.

    • 0 avatar

      I think the peril which is being referred to is that saturating the market with off lease used vehicles will bring about a decline in used car prices, thus making the assumed residual values those transactions were based on worth less, creating losses for the finance arms. Coupled with a saturated used car market having low prices which will erode the new car market by lowering residuals, damaging lease volume and stealing new car market customers based on a huge inventory of low priced used cars. It is a viscious cycle. Basically, it is not good business for the automakers to create artificial demand to dump its access supply. Cutting supply is the answer, conquests remain the true and most lucrative area of growth.

    • 0 avatar

      Auto lenders are in the business of lending money, not selling cars. They can repo a car, but then have to get their money out of it, which they are not qualified to do well.

      A bank may be able to easily repo a car, but their money is still tied up until they sell the car. If used car prices don’t stay high, or if the owner has damaged the car, the bank has to take a hit liquidating the car. Also, they have to pay to store the cars they repo. In all, these are expenses and risks the lender would prefer not to take.

      But the buy-here, pay-here folks are different. They are in business to sell cars, so they can store them and do everything else needed to get their money back quickly. And as a previous article here on TTAC noted, those places may actually want lendees to default because they then get to sell the car again to some other poor soul, who will hopefully also default and start the cycle again–perpetual revenue from a fixed product.

  • avatar

    If the lenders come out and say there is nothing to worry about and criticize Fitch, then it will be time to worry. Mean while you can ride the tide of short term investing.

  • avatar

    LOL! It would seem not everyone is on board with subprime lending (of ANY kind).

    Properly underwritten or not, subprime anything is just not a good idea.

    It makes me wonder what the folks advocating subprime lending have been smoking, toking or taking. Whatever it is, it must give them great touchy-feely warm and fuzzies.

  • avatar

    “U.S. auto lenders will likely report further weakening in asset quality metrics this year, driven mainly by lower used car values, **a loosening of underwriting terms** and further seasoning of loan portfolios, according to Fitch. ”

    A loosening of underwriting terms is a big problem. Properly underwritten subprime is fine. Poorly underwritten loans of any type are a big problem.

  • avatar
    Domestic Hearse

    Santander’s and Chrysler’s check to Fitch is in the FedEx, along with a note of thanks. “Keep scaring the other guys off subprime, and getting the media to equate subprime auto loans with the recent foreclosure wave and real estate bubble. Leaves the entire market open to us and it’s the highest return / safest market niche available to us. And all ours. We’re printing money and gobbling market share. Couldn’t ask for more.”

  • avatar

    I am just about speechless. I really am. And then we see a story yesterday where they are relaxing the 20% down for a house! Do we never learn our lesson? This Country is in such horrible financial shape for several reasons. We just spend, spend, spend. We let everyone and anyone get a loan. No money down? No problem. You have a DVD player we can hold on to as collateral. I mean, REALLY!!! We are now allowing people to put down shotguns, televisions, Playstations and DVD players as a downpayment on a car?!!!! When this bubble burst again; I don’t want ANY taxpayer dollars used to bail these Banks out. Fool me once shame on you. Fool me twice, shame on me. I won’t let it happen.

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