March 26, 2007 / 6:10 PM / in 11 years

Subprime mortgage crisis may hurt auto loans: S&P

NEW YORK (Reuters) - The crisis in risky subprime mortgages may be bleeding into lower-quality auto loans, Standard & Poor’s said.

A slight increase in delinquent payments on subprime auto loans, or loans to borrowers with damaged credit, may be “an initial trickle-down of the fallout from the subprime mortgage crisis,” S&P said in a recent report.

Homeowners with subprime mortgages may face difficulty making payments on auto loans as interest rates on their adjustable-rate mortgages reset higher.

Borrowers faced with resetting home loans may have “less cash flow available for other expenses, including auto loan payments,” S&P analyst Mark Risi said.

Securities backed by subprime mortgages have sunk in value in recent weeks as investors have grown worried about rising delinquencies and their potential impact on the broader U.S. housing market.

Some investors fear that the subprime mortgage crisis could spread to higher-rated mortgages, or even other sectors, like autos.

“With the subprime problems not going away and actually looking like they are spilling over into other subprime lending areas like auto loans, people are looking for ghosts,” said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.

So far, even top-rated subprime mortgage securities have been well-insulated from losses, providing a safe haven for investors.

But S&P’s report, published on March 22, suggests that some subprime auto loan borrowers may already be feeling an impact.

“For the subprime sector, 60-plus-day delinquencies (on 2005 loans) once again moved above the levels seen in the 2003 and 2004 vintages after a steady five-month increase,” S&P said in the report.

Another factor that could be prompting delinquencies is that some subprime auto lenders like Capital One Financial Corp. (COF.N) have relaxed their standards for the type of loans they will underwrite, S&P’s Risi said.

But the fallout from deterioration in the U.S. subprime mortgage industry may ultimately be limited for auto loans because a majority of subprime auto borrowers are renters, not homeowners, Risi said.

Higher-rated or “prime” auto loans, like prime mortgages, are still performing well, he added.

S&P has also remained fairly comfortable with its ratings on auto loan securitizations.

“After a record 91 upgrades on auto loan securitizations in 2006, the first two months of 2007 saw 13 ratings raised, compared with just seven in the entire first quarter of 2006,” Risi said. The 13 upgrades affected 10 prime auto loan deals. There have been no downgrades on auto loan transactions since 2003.

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