Moody's: Underwriting Standards, Borrower Credit Declining

Derek Kreindler
by Derek Kreindler
moody s underwriting standards borrower credit declining

The global outlook for Auto Back Securities (ABS) is steady – except in North America, where underwriting standards and borrower credit are slipping.

The latest news comes from ratings agency Moody’s, which issued a new report on the popular investment vehicle. Sanjay Wahi, Vice President and Senior Analyst, stated

“Globally, auto loan ABS pools will continue to consist primarily of loans to prime borrowers. The exception is the US, which has a sizable market for securitizations backed predominantly by near-prime and subprime borrowers.”

Moody’s has long been bearish on subprime ABS in the United States. Both Europe and China are cited as having safer loan pools due to stronger underwriting standards and more rigorous loan terms. But the United States is unique in the predominance of subprime loans, perhaps in part due to the demand for specific sections of ABS (called “tranches” in the investment world) which are comprised of the riskiest subprime loans.

ABS has become a popular security in recent years, with subprime driving much of its growth. With fixed income yields at historic lows, investors are hungry for securities that will provide decent returns. ABS, particularly the subprime tranches of these securities, are among the few products that can provide them – their greater risk profile entails the potential for a higher return. Some have argued that the demand for ABS has led to the growth in subprime financing, with looser underwriting standards (in some cases, they are laughably lax) and a number of OEM captive financing arms that are all too willing to finance buyers with poor credit so that they can “move the metal”. Traditionally, the thinking has been that most buyers are sufficiently trustworthy enough to make their payments on time, and able to offset the few delinquent buyers – but that trend appears to be reversing as of late, with delinquencies on the rise. And if the latest trends outlined by Moody’s are any indication, this isn’t likely to reverse.

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  • Point Given Point Given on Jun 11, 2014

    I think the risk is lessening on the sub prime loans thanks to a little bit of technology. Whenever we sell a sub-prime car it comes with a little GPS unit that the auto finance company can disable the car if you don't make your payments, and if they want to repossess it know exactly where it is. It makes a sub prime piece a bit more retrievable (and secure) and not being able to drive despite the car being in your driveway forces more people to make the payment in order to be able to drive. Someone like Carfinco, who sends out high interest loans (20%++) has a surprisingly small delinquency rate.

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    • Point Given Point Given on Jun 12, 2014

      @ajla I'm a fleet guy, I don't deal with subprime people at all and am only vaguely aware of what goes on downstairs. That said, I'd bet money it's in the contract somewhere as a term and condition. However, mr. customer just blindly signs 99% of the time (bet it's 99.9% of the time with a subprime cust). Payment is this, sign here kinda thing. Should a subprime person pay off the car I'd think they'd shut it off and forget about it. I can't imagine too many of those loans are ever completely paid off though. Possible that the finance company would call and arrange to remove it. When units are traded in with such devices we do take them out. Liability follows the installer, which we outsource to an independent shop(both cost and liability reasons), or the product manufacturer. Standard risk management practices on a non-auto manufacturer product.

  • Hybridkiller Hybridkiller on Jun 11, 2014

    "The global outlook for Auto Back Securities (ABS) is steady – except in North America, where underwriting standards and borrower credit are slipping." Derek, considering the context and tone of the article I'm assuming you were being serious, and this was not an attempt to be clever/witty/whatever (if it was, it's much more misleading than amusing). Especially since it is unlikely that most readers here are fluent in investment-speak. ABS = Asset Backed Security If you're going to address matters with such a broad scope, please pay some attention to getting the terminology right.

  • Art Vandelay Pour one out for the Motors Liquidation Corporation
  • Bill Wade Norm, while true I'll leave you with this. My 2023 RAM is running Android 8 released in 2017.My wife's navigation on her GM truck is a 2021 release, I believe the latest. Android Auto seems to update very week or two. Now, which would you rather have? Anybody with a car a couple of years old NEVER sees any updates. Heck, if your TV is a few years old it's dead on updates. At least cell phones are rapidly updated. If your old phone won't update, buy another $200 phone. If your GM vehicle doesn't update do what, buy another $50,000 GM vehicle?
  • Lou_BC Once again, Mustang is the last pony car standing. Camaro RIP, Challenger RIP.
  • FreedMike Next up should DEFINITELY be the Cadillac Eldorado. On the subject of Caddies, I saw a Lyriq in person for the first time a couple of days ago, and I'm changing my tune on its' styling. In person, it works quite well, and the interior is very nicely executed.
  • Probert Sorry to disappoint: any list. of articles with a 1 second google search. It's a tough world out there - but you can do it!!!!!!