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Fitch: Underwriting Looser, But Reasonable

May 08, 2012

NEW YORK — In a note to bondholders, Fitch Ratings believes the move toward slightly riskier borrowers in prime auto ABS pools is unlikely to present a near-term risk, but said a prolonged softness in unemployment rates and jobless claims could have a bigger impact.

“Throughout the recovery, auto ABS has performed well,” Fitch said in its note. “In the past month, it has set records. Delinquencies declined 24 percent and annualized net losses (ANL) fell 11 percent month over month. Prime 60-plau day delinquencies are at a 10-year low of just 0.35 percent.”

This overall strength is attributable to a consistent increase in used-car values and a decrease in unemployment figures and jobless claims, as well an improvement in collateral pools featuring higher FICO scores, lower loan-to-value ratios (LTVs), and shorter terms. The Manheim Used Vehicle Value index rose in all five months from November 2011 to March 2012. This reduced the loss severity in ABS pools.

Over the same period, the U.S. seasonally adjusted unemployment rate dropped from 9.9 percent to 8.2 percent. And initial jobless claims hit a low of 364,000 in mid-March, down from 391,000 in mid-November. These factors help reduce the frequency of default in ABS pools.

“Since the beginning of 2012, some issuers have subtly loosened their underwriting standards,” Fitch stated. “In our view, this practice is unlikely to present risk to the bondholder because the loosening in standards, thus far, has been incremental, the pools are diversified, and the collateral mix is solid."

One potential risk in the recent numbers is an uptick in jobless claims in late April to 388,000. “We do not expect this to affect auto ABS at this time,” Fitch state. “However, a prolonged softness in these and other employment measures could have an impact. We will continue to monitor this situation and report on it promptly should our view change.

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