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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
Delinquencies And Losses Are Increasing As Lending Standards Normalize Performance Is At A Turning Point Our Ratings Process Incorporates Updated Base-Case Loss Levels

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Most subprime auto finance securitizers started to report rising delinquencies in their managed portfolios at year-end 2012, following declines the two previous years. This has translated into higher losses on their managed portfolios for the nine months ended September 2013. Given the sharp rise in delinquencies at the end of the third quarter year over year, Standard & Poor's Ratings Services expects losses to rise for full years 2013 (reporting for last year is not yet complete) 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 came out of the 2001 recession and its jobless recovery. Lenders contracted their lending volumes by moving up the credit spectrum, as reflected by lower delinquencies at year end 2003. In addition, losses declined on a lagged basis in 2004 and 2005 as a result of tighter standards and an improving labor market. The continued amelioration in losses in 2006 was partly due to the strengthening economy, but also due to lenders growing their portfolios once again, which was masking true performance. In 2006, as access to capital improved and the economy strengthened, subprime lenders started to peel back the more restrictive policies they had put in place several years before and grew their loan portfolios once again. Losses then started to rise in 2007 because of looser credit standards, just as they did again in 2012 and the first nine months of 2013. Losses continued their upward trajectory and peaked in 2008 and 2009, mainly a 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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Table 1

Delinquencies (%)
(31+ days)/Net dollars receivables outstanding (as of Dec. 31 unless otherwise noted) Sept. 30, 2012 10.70 7.40 0.59 4.58 Sept. 30, 2013 15.20 8.60 3.37 6.37

2000 American Credit Acceptance LLC AmeriCredit Corp.(1) CarFinance Capital LLC(2) Consumer Portfolio Services Inc.(1) DriveTime Car Sales Inc.(3) Exeter Finance Corp.(4) First Investors Financial Services Inc.(5) Flagship Credit Acceptance LLC(6) JD Byrider(7) Prestige Financial Services Inc. Santander Consumer USA(8) Security National Automotive Acceptance Co. LLC(1) Tidewater Finance Co.(9) United Auto Credit Corp.(10) Westlake Services LLC(11) Subprime finance co. avg. NA 11.50 NA 7.76

2001 NA 13.40 NA 8.89

2002 NA 14.70 NA 5.61

2003 NA 10.90 NA 5.34

2004 NA 9.50 NA 4.68

2005 NA 9.70 NA 4.62

2006 NA 9.60 NA 5.44

2007 5.36 10.10 NA 6.29

2008 5.81 12.30 NA 8.65

2009 10.23 12.00 NA 8.80

2010 8.36 8.90 NA 9.14

2011 7.83 7.50 0.33 6.15

2012 11.60 8.50 2.32 5.47

7.80 NA 3.63

9.30 NA 2.93

NA NA 3.06

NA NA 2.46

NA NA 0.94

NA NA 0.28

NA NA 0.50

8.60 NA 0.72

9.40 8.03 2.62

7.40 8.11 2.05

9.10 7.39 1.80

11.20 8.96 2.03

18.00 10.75 1.98

12.60 8.61 2.04

14.50 9.47 2.32

NA

NA

NA

NA

NA

NA

3.32

5.79

8.20

11.28

0.00

3.00

5.71

3.67

4.29

NA NA

NA NA

NA NA

NA 3.80

NA 3.00

NA 2.40

NA 2.30

NA 4.00

4.90 5.90

3.50 6.20

3.20 5.80

3.30 3.90

4.80 3.20

2.40 NA

3.80 NA

NA

NA

7.25

9.53

20.70

16.74

17.59

22.71

23.53

22.31

13.57

13.49

13.79

13.00

13.17

NA

NA

NA

NA

NA

NA

NA

3.57

3.46

2.71

2.28

2.59

2.68

NA

NA

NA NA 4.85

NA NA 6.67

NA NA 7.01

NA NA 6.88

10.12 NA 6.37

11.51 NA 5.93

11.77 NA 6.84

14.13 1.33 10.42

18.87 2.33 7.18

12.87 6.64 5.44

6.48 2.57 4.33

5.05 6.59 4.03

4.84 8.84 5.82

NA 4.38 4.04

NA 5.13 4.81

7.11

8.24

7.53

6.49

7.90

7.31

7.17

7.75

8.66

8.54

5.92

5.73

7.22

6.17

7.59

(1)AmeriCredit, CPSI, SNAAC--Includes repo inventory that has not been charged off. (2)CarFinance--9/30/13 reflects 6/30/13, 9/30/12 reflects 6/30/12. (3)DriveTime--Effective December 2011, the servicer modified its charge-off policy; delinquency data for the previous years have not been adjusted for a change in the servicer's credit and collection policy. (4)Exeter--9/30/13 reflects 6/30/13, 9/30/12 reflects 6/30/12. (5)First Investors--FYE April 30 used for year end Dec. 31. 9/30/13 reflects 7/31/13, 9/30/12 reflects 7/31/12. (6)Flagship--Includes performance from predecessor Flagship Credit Corp. 9/30/13 reflects 8/31/13, 9/30/12 reflects 8/31/12. (7)JD Byrider--9/30/13 reflects 3/31/13, 9/30/12 reflects 3/31/12.

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Table 1

Delinquencies (%) (cont.)


(8)Santander--The servicer considers a receivable delinquent when an obligor fails to pay the required minimum portion of the scheduled payment by the due date. The required minimum is never less than 50%. However, an obligor will not be considered current if he misses two consecutive payments. (9)Tidewater--12/31/12 reflects 8/31/12. (10)UACC--In May 2010, the company sold its servicing rights. Under the former servicing policy, delinquent vehicles were repossessed and charged off at approximately 30 days. With the new policy, vehicles are repossessed closer to an average of 60 days, a more typical practice in the subprime space. (11)Westlake--Delinquencies for September reflect July 2012 and 2013. NA--Not available.

Table 2

Net Losses (%)


Net losses/Average net outstanding balance 2000 American Credit Acceptance LLC AmeriCredit Corp.(1) CarFinance Capital LLC Consumer Portfolio Services Inc. DriveTime Car Sales Inc.(2) Exeter Finance Corp.(3) First Investors Financial Services Inc.(4) Flagship Credit Acceptance LLC(5) JD Byrider(6) Prestige Financial Services Inc. Santander Consumer USA Security National Automotive Acceptance Co. LLC Tidewater Finance Co.(7) United Auto Credit Corp.(8) Westlake Services LLC(9) Subprime finance co. avg. NA 4.00 NA 11.18 2001 NA 3.60 NA 6.24 2002 NA 4.60 NA 5.01 2003 NA 6.50 NA 4.66 2004 NA 7.20 NA 5.67 2005 NA 5.70 NA 4.86 2006 NA 5.20 NA 4.61 2007 9.06 4.70 NA 5.36 2008 13.38 6.20 NA 7.85 2009 16.38 7.90 NA 11.17 2010 14.41 7.40 NA 9.11 2011 11.70 3.20 0.26 5.78 2012 13.40 2.50 2.28 3.58 2013* 13.10 2.50 3.13 4.19

NA NA 3.15

NA NA 4.10

NA NA 4.73

NA NA 5.73

NA NA 4.31

NA NA 2.36

NA NA 2.47

18.20 NA 3.04

21.40 5.51 4.70

18.20 5.87 6.45

13.50 5.19 5.29

13.10 4.37 3.30

13.90 5.01 3.11

14.80 4.46 2.85

NA

NA

NA

NA

NA

NA

1.51

4.65

7.58

8.95

0.00

2.47

1.85

2.80

NA NA NA NA

NA NA NA NA

NA NA 10.65 NA

NA 5.60 10.91 NA

NA 4.50 6.76 NA

NA 3.10 11.02 NA

NA 2.70 8.81 NA

NA 3.60 10.89 8.82

16.70 5.60 12.46 7.80

17.80 6.60 12.92 7.30

13.90 5.90 6.45 5.39

12.80 3.80 5.81 5.37

13.10 1.90 4.56 5.88

13.40 NA 4.55 NA

NA NA 8.23

NA NA 10.27

NA NA 10.19

NA NA 11.92

5.50 NA 10.12

5.92 NA 8.24

6.41 NA 11.27

7.00 6.88 16.33

9.59 8.61 17.80

11.21 12.81 11.58

6.64 9.54 5.11

4.76 3.16 6.05

3.73 9.80 7.78

NA 10.03 7.22

6.64

6.05

7.04

7.55

6.29

5.89

5.37

8.21

10.37

11.08

7.70

5.73

6.16

6.92

*Nine months ended Sept. 30.

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Table 2

Net Losses (%) (cont.)


(1)AmeriCredit--Fiscal year-end (FYE) June 30 used for 2000-2010. 2011 reflects 12/31/11. On 10/1/10, AmeriCredit Corp. became a wholly owned subsidiary of GM Holdings LLC which is a wholly owned subsidiary of General Motors Co. Subsequently, the company changed its year-end reporting from June 30 FYE to a Dec. 31 year-end. Additionally, finance receivables originated prior to the acquisition were adjusted to fair market value at 10/1/10 under the purchase method of accounting, so the total balance will not be comparable for periods prior to 10/1/10. (2)DriveTime--Data obtained for 10-K filings. September 2013 losses annualized. (3)Exeter--9/30/13 reflects 6/30/13. (4)First Investors--FYE April 30 used for year-end. 9/30/13 reflects 7/31/13. (5)Flagship--9/30/13 reflects 8/31/13. (6)JD Byrider--9/30/13 reflects 3/31/13. (7)Tidewater--2012 reflects 8/31/2012. (8)UACC--9/30/13 reflects 3/31/13. (9)Westlake--9/30/2013 reflects July 31, 2013. NA--Not available.

Performance Is At A Turning Point


In our opinion, we're at a turning point with respect to subprime auto loan performance, similar to where we were in 2006. We also identified this current inflection point in our "U.S. Auto Loan ABS Tracker: January 2014" report (published Feb. 12, 2014). Access to warehouse funding, the asset-backed securities (ABS) market, and equity capital are plentiful, making loan growth easy to sustain. As a result, competition has intensified, as it normally does during this part of the growth cycle, with the large, well-established players growing their portfolios and the newer entrants trying to gain a foothold. Consequently, a higher percentage of subprime customers are obtaining financing than in the recent past. The increased competition has led to lengthening loan terms and rising loan-to-value ratios, both of which generally result in higher losses. We are also finding that speed of loan approval has become increasingly important, and one wonders whether all of the verifications that had been completed in a more manual environment are continuing in a similar fashion in today's more automated environment. Though many lenders have told us that their performance in recent years had exceeded their own expectations, we are now hearing that they expect losses to trend upward to more normal levels this year and next. Certainly the normalization of credit standards and heightened competition will be contributing factors, but so too will lower recovery rates. We expect used vehicle values to decline this year (as of January month-end they were 0.9% lower than in January 2013, according to the Manheim Used Vehicle Value Index), owing to an increased supply of used vehicles, resulting from higher unit sales for the past three years (new sales are usually accompanied with a trade-in vehicle) and an increase in off-lease vehicle volume. Changes in customer behavior may also explain some of the expected increase in losses: Once auto credit becomes plentiful, as it is today, credit-impaired consumers see less incentive in remaining current on their contracts because they believe they can obtain financing somewhere else.

Our Ratings Process Incorporates Updated Base-Case Loss Levels


As we enter into the next chapter of subprime auto finance, which is likely to be characterized by higher delinquencies and losses, our rating process will continue to incorporate updated base-case cumulative net loss levels for each issuer.

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Our analysis takes into account, among other factors, changes in the lender's pool mix, modifications to its underwriting standards, securitization performance, and a forward view of the economy (particularly the used vehicle market). We also review the lender's managed portfolio performance--especially the trend in delinquencies, which we believe is a leading indicator of the future direction of losses. When warranted, our loss proxies change, which typically translates into credit enhancement changes in the transactions we rate. Over the past few years, subprime auto loan ABS performance has generally remained strong. In the isolated cases where losses have been higher than expected, the deals have deleveraged sufficiently such that the transactions remain adequately enhanced for the assigned ratings. During 2013, we upgraded 131 classes of subprime securities and downgraded none. This year, we've upgraded seven classes, there have been no downgrades, and none are currently on CreditWatch with negative implications.

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