Thirty-day delinquencies inched up slightly to 2.44 percent in the fourth quarter from 2.42 percent in the fourth quarter of 2015, Experian reports. Sixty-day delinquencies increased to 0.78 percent from 0.71 percent.
“Delinquencies are always an important indicator of the overall health of the automotive lending market, but it’s equally important to watch how lenders react when they see a rise,” said Melinda Zabritski, senior product director of automotive finance for Experian Automotive.
In this case, creditors are shifting more loans toward customers with better credit.
The average credit score rose to 714 from 712 for new vehicles and to 654 from 649 for used.
Financing for deep-subprime and subprime customers decreased to 20.82 percent of the total lending market from 22.05 percent in the fourth quarter of 2015. Lending to prime and super prime customers jumped to 59.41 percent from 57.86 percent.
“The shift to a higher percentage of prime and subprime customers is a natural consequence of the slight growth in delinquencies,” Zabritski said. “Overall, we are still looking at a very healthy lending market.”
The concern for the general public is a dramatic rise in auto delinquencies and repossessions will harm the credit situation for already vulnerable consumers. The concern for Wall Street is harm to the asset-backed securities backed by these auto finance contracts.
Two of the major ABS ranking firms see little need to worry.
Kroll Bond Rating Agency stated in a recent report that while auto finance originations are at their highest level, the growth since 2010 is still below the decrease seen during the Great Recession and is not disproportionate to any risk category.
KBRA expects slightly lower originations for 2017 due to lower vehicle sales and tighter credit from lenders.
KBRA has seen more aggressive risk tolerance in terms of longer tenor loans, higher loan-to-value ratios and lower purchase discounts from dealers since 2010. However, underwriting remains tight.
Delinquency and charge-off rates for 2015 and 2016 originations to borrowers with subprime scores are above peak levels while rates for near prime and prime borrowers are in line with the best performing vintages and are performing within a narrow range. But KBRA sees subprime creditors tightening credit standards.
Fitch Ratings places a Stable outlook on the subprime auto sector, although the firm sees some downside risk.
Subprime auto ABS performance is pressured in 2017 due to softer performance in the 2013-2015 vintage securitizations, which have weaker credit quality pools., Fitch reports.
Subprime annualized net loss index are predicted to range between 10 percent and 12 during 2017, and could rise to peak levels recorded back in 2008-2009 of approximately 13 percent were the pace of losses to pick up beyond expectations, said Hylton Heard, senior director of Fitch Ratings.
Through January, Fitch’s ANL index stood at 10.30 percent.
Fitch continues to have a positive rating outlook for prime auto loan asset-backed securities (ABS) in 2017, despite higher losses expected this year.