U.S. Subprime Auto Loan Losses Reach Highest Level Since Crisis
2017-03-10 19:55:03.994 GMT
By Matt Scully
(Bloomberg) — U.S. subprime auto lenders are losing money
on car loans at the highest rate since the aftermath of the 2008
financial crisis as more borrowers fall behind on payments,
according to S&P Global Ratings.
Losses for the loans, annualized, were 9.1 percent in
January from 8.5 percent in December and 7.9 percent a year ago,
S&P data released on Thursday show, based on car loans bundled
into bonds. The rate is the worst since January 2010 and is
largely driven by worsening recoveries after borrowers default,
Those losses are rising in part because when lenders
repossess cars from defaulted borrowers and sell them, they are
getting back less money. A flood of used cars has hit the market
after manufacturers offered generous lease terms. Recoveries on
subprime loans fell to 34.8 percent in January, the worst since
early 2010, S&P data show.
With losses increasing, investors in bonds backed by car
loans are demanding higher returns, as reflected by yields, on
their securities. That increases borrowing costs for finance
companies, with those that depend on asset-backed securities the
most getting hit hardest.
American Credit Acceptance, one of nearly two dozen
subprime lenders to securitize their loans in recent years, had
one of the highest cost of funds last year with yields on its
securitizations as high as 4.6 percent, even as the two-year
swap rate benchmark hovered around 1 percent, according to a
report from Wells Fargo & Co. American Credit Acceptance didn’t
respond to a request for comment.
Lenders’ profits are eroding amid steep competition to win
new borrowers, S&P analysts said in February.
Performance of prime credit bonds has also worsened to
levels last seen in 2010. S&P blamed the weakening on “a couple
of regional banks whose auto loan ABS transactions we began
rating in 2014.”
Longer-term loans to finance the purchase of new and used-
cars, sometimes stretched to as many as 84 months, have also
hurt lender recoveries by putting borrowers underwater faster,
and leaving lenders with an asset worth far less after