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Moody's: Hot US subprime auto lending market has parallels to the 1990s

Global Credit Research - 28 Jun 2012

New York, June 28, 2012 -- The subprime auto lending market in the US is developing a resemblance to its condition in the early- and mid-1990s, when overheated competition among lenders led to poor underwriting that drove up losses, says Moody's Investors Service in a new report. As in that earlier period, capital is pouring into the sector and the issuance of subprime auto asset-backed securities (ABS) is booming.

"It is too early to predict whether today's subprime lending market will deteriorate as it did in the 1990s, but the early similarities between then and now suggest that losses will climb if competition intensifies," says Moody's Vice President Peter McNally, author of the report "US Subprime Auto Lending Market Harkens Back to 1990s."

Over the last two years, because of the sector's profitability, a large amount of private equity investment has gone into the subprime auto lenders, many of which are relatively small, specialty finance companies, says Moody's.

Moody's says the interest of investors from outside the subprime auto market niche and the potential for increased competition carry the risk that losses could increase if a race for profits and market share lowers underwriting standards. The growth in the market can lead to capacity issues, says Moody's McNally. "When losses rise quickly, inexperienced lenders have trouble servicing a loan portfolio that requires more attention."

In the 1990s, the number of small lenders boomed, leading to intense competition for loans that in turn led to weak underwriting and high losses on securitized loans. Net losses in subprime auto ABS, according to Moody's, jumped from under 3% in early 1995 to over 10% in December 1997.

For the past several years subprime auto loan performance has been strong, with the net loss rate currently below 4%. However, the credit quality of pools securitized in 2011 and 2012 indicate that credit has loosened since 2010, says Moody's.

Issuance of subprime auto ABS is on pace this year to exceed the robust issuance of 2011, which comprised 24 deals, totaling $14.3 billion.

Moody's notes several differences between today' s market and the overheated market of the 1990s.

One credit positive for today's market is that most lenders no longer practice gain on sale accounting, whereby lenders capitalized securitization gains and credited them to equity, which made their balance sheets look stronger than they were.

Another is that the market is not yet overcrowded with new lenders. Moody's counts 13 active securitizers at the moment, compared with 34 issuers in 1997.

An important credit negative is that transactions are no longer backed by monoline guarantors. These bond insurers absorbed losses on transactions that would have otherwise defaulted in the 1990s and took over transaction servicing from failing lenders.

The report is available at at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF290230.

***

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, S?o Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Peter McNally
Vice President - Senior Analyst
Structure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

J?(Mack) McGinnis?Caldwell
Senior Vice President
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Hot US subprime auto lending market has parallels to the 1990s
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