It has recently been reported in the media that more subprime car buyers are falling behind on their auto loan payments. This report used Equifax data that ostensibly show 60+ day delinquencies for subprime auto loan and lease borrowers (those with FICOs of less than 620) totaling 8.5% for March 2022, up from 7.9% for March 2021. According to these data, delinquencies on subprime car loans and leases hit an all-time high of 8.8% in February. The data S&P Global Ratings collects from monthly servicing reports, on the other hand, indicates that 60+ day delinquencies for subprime auto loan ABS remained below pre-pandemic levels in the first quarter of the year. Sixty-plus day delinquencies were 3.82% as of March 2022, up from 2.65% a year earlier, but down from 5.01% in March 2020 and 12% lower than the 4.34% reported for March 2019 (see chart). Our data also show that February 2022's 60+ day delinquencies were at 4.43%, which was not a record high. In fact, delinquencies that month were down from February 2019 and February 2020's levels of 4.99% and 4.94%, respectively.
Accounting For The Discrepancy
This isn't the first time that our data and conclusions have differed from others reported in the media. In March 2019, we noted that there were differences between how the Federal Reserve Bank of New York (FRBNY, which uses Equifax auto data for its Quarterly Report On Household Debt And Credit) calculates 90+ day delinquencies and how we do (see "The Severity Of Subprime Auto Loan Delinquencies Is In The Eye Of The Beholder," published March 18, 2019). The FRBNY's data dictionary states that 90+ day delinquencies are accounts that are either 90 days late, 120 days late, or "severely derogatory" (i.e., include reports of a repossession, a charge-off to bad debt, or foreclosure). In our view, the inclusion of charge-offs in this delinquency metric is the main reason why the FRBNY was reporting 90+ day delinquencies of 4.47% on all auto loans for the fourth quarter of 2018, while our data indicated only 0.11% for prime loans and 1.6% for subprime loans at Dec. 31, 2018. We believe that the 60+ day delinquency data used in the recent media report similarly included severely derogatory accounts, inclusive of charge-offs.
In auto finance, once loans are charged off or considered to have defaulted, they are no longer included in the delinquency statistics: that would be double counting (counting the loan as delinquent and as a charge-off). Banks and auto finance companies generally charge off delinquent accounts around the 120th day of delinquency--or earlier if the vehicle has been repossessed and liquidated (although some lenders may have slightly different policies). We believe including charge-offs in delinquencies overstates the degree of late payments.
In addition to a difference in calculation method, Equifax' data differ from ours in that they include a wider swatch of the auto finance market. Our data include only loans that have been securitized. In 2021, approximately $43.8 billion in subprime auto loans were securitized, which represented approximately 36% of the $123.3 billion in subprime auto loans that were originated, as tallied by the NYFRB in its February 2022 Quarterly Report On Household Debt And Credit.
Other Subprime Auto Loan ABS Metrics
Although subprime auto loan 60+ day delinquencies have been normalizing and are nearly back to pre-pandemic levels, subprime loan losses remain well below pre-pandemic levels, in large part due to record recovery rates (see chart above). Annualized losses for March 2022 were only 4.10%, which was 42% lower than March 2019's level of 7.11%.
At the same time, the recovery rate was 63.6%, up from 49.1% three years prior. The record recovery rates we've been seeing is due to the tremendous demand for used vehicles, caused, in part, by the scarcity of new vehicles resulting from semiconductor and other component shortages. Not only are new-vehicle buyers shifting to used vehicle ownership, but rental companies in need of expanding their fleets are buying used vehicles as well. During 2020 and 2021, used-vehicle demand also benefited from consumers being flush with additional savings from the receipt of stimulus checks, and many wanting a vehicle to travel safely to work or go on a driving vacation. Many urban dwellers also moved out of cities, and with that came the need to purchase a vehicle.
We expect recovery rates to normalize to pre-pandemic levels because the more recently financed vehicles, which were sold at much higher prices than two years ago, are not likely to experience the same run up in values that we saw from 2020 through 2021. Therefore, to the extent consumers eventually default on these loans, future recovery rates are likely to be closer to historical averages, in our view. We take this into account when determining our base-case cumulative net loss proxies.
While we expect recovery rates to decline and losses to normalize, we believe that the investment-grade (rated 'BBB-' or higher) subprime auto loan ABS we rate are adequately protected due to the significant amounts of credit enhancement in the transaction structures. Further, we test these deals for a recessionary-type environment, with losses increasing between 1.4x and 1.75x our base-case cumulative net loss (CNL) level (1.4x is generally the 'BBB' multiple we use for pools with base-case CNLs of about 25%, and 1.75x is used for pools with base-case CNLs of about 10%-15%). We do not assign ratings of 'AAA' or 'AA' if this 'BBB' moderate stress scenario indicates that we would downgrade the classes below 'AA' and 'A', respectively, over a one year period or below 'BBB' and 'BB', respectively, over a three year period (see table). However, as we move down to 'BB' (the first category below investment-grade level), the classes have much less credit enhancement and are more susceptible to downgrade and default. At time of this publication, we do not have any auto loan ABS classes on CreditWatch with negative implications.
|Maximum Projected Rating Deterioration For One- And Three-Year Horizons Under 'BBB' Stress|
Monitoring For Early Warning Signs
Although we disagree with the reports stating that subprime delinquency levels have recently reached a record high, we do recognize that this sector bears close monitoring. Subprime borrowers are likely to be affected to a greater extent from higher prices at the pump and elevated housing costs. Also, inflationary pressures are outstripping wage growth and could eventually affect these borrowers' ability to meet their financial commitments. Many may have spent their COVID-related savings and are having to adjust to the loss of the expanded child-tax credit payments (the last payment was in December 2021). With that said, the unemployment rate, the most impactful economic variable on auto loan performance, remains low at 3.6% and our outlook is for it to stay in that vicinity for the rest of 2022. This should provide a strong tailwind as we progress through the year.
We continue to closely watch extensions and delinquencies, as these are often early warning signs of higher losses down the road. Currently extensions in the subprime segment remain near pre-pandemic levels, and delinquencies for March 2022 were still slightly below those reported in March 2019. On a vintage static pool basis, wherein losses are assigned to the period in which the underlying loans were originated (or securitized), we are seeing some weakness in the 2021 third-quarter vintage, although this seems to be issuer-specific thus far and may be more attributable to growth and competitive forces than any macroeconomic factor.
- U.S. Auto Loan ABS Tracker: March 2022 Performance, May 13, 2022
- S&P Global Ratings Definitions, Nov. 10, 2021
- The Severity Of Subprime Auto Loan Delinquencies Is In The Eye Of The Beholder, March 18, 2019
This report does not constitute a rating action.
|Primary Credit Analyst:||Amy S Martin, New York + 1 (212) 438 2538;|
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