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Subprime Auto Loan Performance:The Best Is Behind Us
Primary Credit Analyst:
Amy S Martin, New York (1) 212-438-2538; amy.martin@standardandpoors.com
Research Contributor:
Naveen C George, Mumbai (91) 22-4254-2841; naveen.george@standardandpoors.com
Table Of Contents
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Subprime Auto Loan Performance: The Best IsBehind Us
Most subprime auto finance securitizers started to report rising delinquencies in their managed portfolios at year-end2012, following declines the two previous years. This has translated into higher losses on their managed portfolios forthe nine months ended September 2013. Given the sharp rise in delinquencies at the end of the third quarter year overyear, Standard & Poor's Ratings Services expects losses to rise for full years 2013 (reporting for last year is not yetcomplete) and 2014. (See charts.)
Chart 1
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Chart 2
Delinquencies And Losses Are Increasing As Lending Standards Normalize
Looking back over the past 12 years, we view the trend of higher delinquencies and losses as a normalization of lending standards, and part of the normal ebb and flow of consumer lending. The same pattern emerged as we cameout of the 2001 recession and its jobless recovery. Lenders contracted their lending volumes by moving up the creditspectrum, as reflected by lower delinquencies at year end 2003. In addition, losses declined on a lagged basis in 2004and 2005 as a result of tighter standards and an improving labor market. The continued amelioration in losses in 2006was partly due to the strengthening economy, but also due to lenders growing their portfolios once again, which wasmasking true performance. In 2006, as access to capital improved and the economy strengthened, subprime lendersstarted to peel back the more restrictive policies they had put in place several years before and grew their loanportfolios once again. Losses then started to rise in 2007 because of looser credit standards, just as they did again in2012 and the first nine months of 2013. Losses continued their upward trajectory and peaked in 2008 and 2009, mainlya result of the recession and the precipitous drop in used vehicle values stemming from the bankruptcy of two U.S.auto makers (and the threat of a third) and a sharp rise in gas prices. (See tables.)
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Subprime Auto Loan Performance: The Best Is Behind Us

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