Subprime auto loans' risk is acceptable, analysts say

Do rising numbers of subprime auto loans represent a disaster waiting to happen, akin to the mountain of subprime mortgages that went bad and set off the Great Recession?

Nope, says Moody’s. Those loans are performing as expected in terms of delinquencies or defaults, while allowing more Americans to buy a car or truck.

“The critics’ concerns notwithstanding, it is difficult to view the increased availability of credit as a negative,” said Cristian deRitis, a senior director at Moody’s Analytics in West Chester, Pa.

“Vigilance is needed to protect borrowers, but expanded lending activity with some deterioration in performance may be symptoms of a lending market returning to normal rather than overheating,” he said in a written analysis on Tuesday.

S&P, too

Likewise, analysts for Standard & Poor’s Ratings Services in New York said in a report last month that asset-backed securities, including auto loans bundled for sale to investors, “remain adequately protected against increasing credit risk.”

That is, the ratings agency said expected losses on asset-backed transactions have increased but only compared with “unsustainable lows” in losses on loans that were written when approval standards were unusually strict.

Auto lenders use asset-backed securities to raise money to make new loans by selling off bundles of loans to investors. The investors get paid as the loans are repaid. Investors who buy a financial instrument backed by the payments owed on thousands of car loans know that a few of those loans may go bad and factor that into the price they’re willing to pay for the instrument.

New York Times criticism

The subprime auto asset-backed securities market dried up in 2009, shrinking to less than $1.2 billion, down from $21.6 billion in 2006, according to Standard & Poor’s data. Since then, volume has recovered to $11.4 billion in the first half of 2014 vs. $9.9 billion in the first half of 2013. For all of 2013, volume was $17.6 billion, down from a recent peak of $18.4 billion in 2012, according to S&P.

Meanwhile, The New York Times published an article last month that was sharply critical of subprime auto lending, citing several examples of customers who said they found themselves in auto loans they couldn’t afford.

The article also indirectly compared the growth in subprime auto asset-backed securities to the “bubble” in asset-backed securities backed by subprime mortgages, which helped bring on the Great Recession when it burst.

This month, the U.S. Department of Justice issued subpoenas to subprime auto lenders General Motors Financial Co. and Santander Consumer USA. GM Financial said the Justice Department asked for “certain documents relating to its and its subsidiaries’ and affiliates’ origination and securitization of subprime automobile loan contracts since 2007.”


Following up on its article, The New York Times ran an editorial last week that was even harsher in comparing subprime auto asset-backed securities to subprime mortgage asset-backed securities. It called on federal regulators to crack down on subprime auto loans just as they did subprime mortgages.

At Moody’s Analytics, deRitis said the numbers on loan performance don’t bear out “anecdotes” about big numbers of consumers taking out loans they can’t afford.

“Anecdotes suggest some consumers are overextending themselves and some lenders are aggressively stretching loan terms to accommodate them,” he said, “but volume and performance data suggest this is not the norm.”

You can reach Jim Henry at



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