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Moody’s: Subprime Auto Risk Factors on the Rise

April 24, 2014

NEW YORK — Risk factors such as weakening loan credit, stiff competition among originators and readily available funding for asset-backed securities (ABS) all portend higher credit losses for subprime auto lending, according to a new report from Moody's Investors Service.

The report, "Risk Factors Still on Rise for US Subprime Auto ABS," cites a number of factors affecting the rise in subprime auto credit risk, including more private equity money entering the market that will further intensify increasing competition from banks and credit unions.

"The increased competition among subprime lenders is resulting in more loans to borrowers of weaker credit quality," said Peter McNally, Moody's vice president and co-author of the report. "The credit weakening has been gradual so far, so losses won't spike immediately. But more borrowers are going to default eventually, as originations continue to grow."

Subprime lending volumes, which bottomed out in 2009 in the wake of the financial crisis, have more than doubled since then.

The ABS market's strength also increases competition among lenders because it facilitates lenders' desire to grow and increase market share. Investor appetite for subprime auto ABS has allowed issuers to offer increasingly lower spreads on senior bonds and back a growing number of transactions with prefunded loan pools, a trend that will weaken credit in securitizations because these loans are unseasoned.

"A more precipitous weakening in credit quality will drive losses up more quickly to levels that will stress lenders' servicing ability and may eventually threaten their solvency," McNally added. "If that happens, originator failures can cascade quickly because their funding sources will pull back when they lose confidence in the market."

To read the full report, click here.

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