RPT-Fitch: Longer-term loan rise not impacting U.S. auto ABS yet
Oct 3 (Reuters) - (The following statement was released by the rating agency)
Auto loans with original terms of 60+ months (longer-term loans) increased in 2012-2013 auto loan ABS transactions versus 2009-2011 pools. Though Fitch Ratings believes the growth of these types of loans could be negative, as they have potential for increased loss severity, we currently view these loans as underwritten to account for this additive risk and do not expect transaction asset performance to be significantly affected.
Overall, there has been a 20% increase in longer-term loans in auto ABS transactions in 2013 since 2010. The use of extended-term loans in nonprime ABS transactions increased with loan pools containing approximately 80% longer-term loans in transactions issued in 2013, up from 67% in 2010. Similarly, in the prime sector these loans comprised 43% of pools securitized in 2013 from 36% in 2010.
At this level, we do not view the increased use of longer-term loans to be materially impactful. In Fitch's findings borrowers that qualify for longer-term loans have higher credit scores compared to those in the overall transaction pools, mitigating some risk posed by these increasing loan terms.
However, if underwriting continues to normalize and loan terms lengthen, future ABS pools with increased concentrations of longer-term collateral may drive loss expectations higher, resulting in higher base case loss proxies and ultimately necessitating higher levels of credit enhancement.
Lenders' use of longer-term loans is nothing new to the auto lending space. We saw the increased use of 60+ month loan terms in securitized auto loan pools during the 2005-2008 pre-crisis period.
The risk posed from longer-term loans is captured when Fitch derives transaction loss proxies by forecasting loss performance stratified by credit quality and loan term, as well as other metrics. This level of analysis allows Fitch to analyze risks presented by the increased use of longer-term loans when deriving expected transaction proxies, providing a prediction of loss expectations.
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