Auto Loans for Credit Challenged Easing

credit challengedSubprime auto lenders are enabling buyers to borrow more relative to the cost of a car in a sign that underwriting standards are deteriorating amid increased competition, according to Standard & Poor’s.

The average loan-to-value ratio, or LTV, on vehicle sales to consumers with spotty credit has risen to 114.5 percent this year from about 112 percent in 2010, S&P said in a report.

That compares with a peak of 121 percent in 2008, according to the rating company based in New York.

“We’re expecting continued weakening in credit standards as more players vie for a piece of the subprime auto loan market and others try to hold on to market share,” wrote the analysts led by Amy Martin.

The segment has boomed since 2010 as high margins and low funding costs attract private-equity firms such as Blackstone Group LP.

After drying up during the credit crisis, originations of car loans to borrowers with bad credit have almost doubled since the fourth quarter of 2009 to reach $18.4 billion during the same period in 2012, Citigroup Inc. analysts led by Mary Kane in New York said in a Sept. 6 report.

Higher LTV ratios typically lead to lower recovery values when a vehicle is repossessed in the event of default, according to S&P. Additionally, borrowers are less likely to stay current if they owe more than the car is worth, the rating firm said.

The increase in subprime originations is fueling growth in the asset-backed bond market, with sales of securities linked to the debt surging 24.4 percent to $14.7 billion through August compared with the same period in 2012, according to Deutsche Bank AG data.

While loans are becoming more aggressive, most asset-backed deals are still insulated from losses, according to S&P.

Madrid-based lender Banco Santander SA’s U.S. consumer unit and GM Financial Inc. together account for 75 percent of 2012 asset- backed issuance in the segment. These financial institutions are reporting lower losses on deals from 2010 and later, compared with offerings sold from 2007 through 2009, the report said.

Some smaller issuers are showing losses that are higher than S&P expected even as larger companies perform as projected, according to the ratings company. Blackstone’s Exeter Financial Corp. has struggled to maintain infrastructure to support growth in origination volumes, which the company is working to address, leading to higher delinquency rates, S&P said.

As of March, late payments were at 7.8 percent from 5 percent a year earlier, according to the report.

S&P doesn’t expect to cut the ratings on asset-backed bonds linked to subprime auto loans. Even when losses exceed expectations, including during the recession that ended in 2009, investor protections built into the deals have been sufficient to maintain rankings, the credit grader said.


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