Sound the Credit Quality Alarm

It’s time to sound the alarm.

Weakness has taken hold of the credit quality within securitized subprime auto assets. Deutsche Bank reported today that year-over-year delinquencies and net loss rates for subprime are up noticeably. Specifically, on a year-over-year basis subprime 60-plus day delinquencies climbing 65 basis points, and the annualized net loss rate rising 114 basis points through April.

This weakening is coupled with lower ABS volumes: down 7% to $17.5 billion for prime auto ABS and 15% to $11.6 billion for subprime auto ABS issuance.

Overall, auto ABS issuance reached $46.8 billion through April, down 4%.

These are isolated numbers, for sure, but a 114 bps climb in the subprime net loss rate is notable — I tend to see 100 bps as a threshold for “noteworthy.” This does not mean significant collapse or deterioration for auto finance. The decline in overall issuance is in line with YTD overall car sales performance. But we are officially in the receding portion of the credit cycle, and lenders should adopt suitable strategies.

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