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Seasonality Results in Higher Losses for Prime Auto ABS

March 05, 2010

NEW YORK — Seasonal weakness drove U.S. prime auto loan ABS losses slightly higher in January versus prior months, according to Fitch Ratings.

Despite high unemployment and pressure on loss frequency, losses in January were over 20 percent lower on an annual basis for the third consecutive month. “Tax refunds and credits will support performance for the remainder of this quarter,” said Fitch Ratings Director Benjamin Tano.

One of the biggest factors supporting performance continues to be the mitigating effects of stronger used-vehicle values resulting in higher recovery rates on repossessed vehicles, and lower loss severity.

Tighter underwriting, including improved credit quality of the 2009 securitization vintage, is also resulting in loss levels that are lower than both 2007 and 2008 vintages.

Fitch's prime 60+ days delinquency index crept up to 0.77 percent in January, up 8.5 percent over December. On an annual basis, January marked the third consecutive double digit drop at 11.5 percent lower than the same period in 2009. Annualized net losses (ANL) were 1.61 percent in January, a 5.9 percent monthly increase, but were almost 28 percent below the level in 2009. In January last year the ANL index hit a record high of 2.23 percent.

Wholesale-vehicle values remained strong through January as measured by the Manheim Used Vehicle Value Index, posting a modest gain in January to 117.6. The index remains within the 118.5 point record-high reached in September last year. As a result, loss severity has not been such a strong driver of losses, aiding the moderation in Fitch's index.

Despite this, Fitch remains focused on the loss frequency level due to its strong correlation to unemployment. Despite a January drop in unemployment, “the poor state of the job market will continue to pressure frequency and overall loss rates this year,” said Bella.

Fitch's auto loan ABS indices track the performance of approximately $55.3 billion transactions issued from over 100 transactions currently. Of this amount, prime auto loan ABS totals $45.7 billion or 83 percent of the total amount issued from 77 transactions.

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