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U.S. Auto Finance Sector Faces Weaker Credit Quality, Reports Fitch

February 22, 2008

The U.S. auto finance business will face some significant road work in 2008, according to Fitch Ratings in a new report.

A weakening economy, rising unemployment, geographic weaknesses, residential mortgage spillover, falling used-car prices, and a highly leveraged consumer, all pressured credit metrics of U.S. auto lenders in the second half of 2007.

In discussing the outlook for 2008, Meghan Crowe, director in Fitch's Financial Institutions group said, “The same headwinds will lead to further asset quality deterioration in 2008, and recent dislocations in the bond insurance and capital markets heighten the potential that funding costs and liquidity pressures will be greater in 2008 than we saw last year.”

In a special report released Feb. 22, Fitch examines the portfolio size, asset quality, profitability metrics and funding strategies for some of the largest captive and non-captive auto lenders in the U.S.

According to Crowe, “Asset quality deterioration, higher funding costs and uncertain ABS market conditions could result in negative rating action for non-captive lenders in 2008, although the larger lenders benefit from significant business line diversity and stable deposit funding.”

Fitch believes the domestic auto captives have endured negative rating action in recent years, due to declining demand, competition from foreign manufacturers, auto supplier struggles and rising pension obligations, among other issues, at parent manufacturers. Fitch believes captive asset quality and funding costs are a concern in 2008, but asset quality deterioration should be less severe than in non-captive portfolios, given the prime-focus of the captive business.

Fitch’s report also provides an overview of the auto finance market, including a discussion of business drivers, the role of the auction market, and the relationship between lenders and car dealerships.

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