NEW YORK--()--Link to Fitch Ratings' Report: Fitch Voice: Structured Finance
Competitive industry pressures, particularly in the subprime sector, are leading to looser underwriting which may in turn push losses modestly higher in U.S. auto ABS, according to Fitch Ratings. In its latest 'Fitch Voice: Structured Finance', however, Fitch says that low actual losses, strong average credit quality and stable or increasing credit enhancement levels will help steer auto ABS performance away from any significant deterioration.
FICO and credit tier distributions are providing one of the clearest indications of loosening underwriting standards. Since the middle of last year, Fitch has seen more originations geared towards more inclusion of the bottom most tier FICO scores. 'With the lowest tier FICOs beginning to make up a larger percentage of an overall ABS pool, losses have the potential to accelerate over time,' said Managing Director John Bella.
Competitive pressures are likely to be most acute in the subprime sector where Fitch notes that over 20 subprime issuers have come to market with ABS transactions since 2008.
Some experts are also predicting the wholesale markets to weaken somewhat. This along with used car prices are areas that Fitch will be watching closely since any softening outside these current expectations might worsen the outlook for losses.
Another trend worth noting is the increasing amount of 'innovation' beginning to show up in auto ABS structures. The sector has long been known for sticking with traditional features like simple sequential pay structures and relatively short average lives that have kept losses very low. However, 'innovations not seen since 2007 are beginning to show up again in new auto ABS deals, making them potentially more volatile if the broader economy deteriorates,' said Bella.
'Fitch Voice: Structured Finance' provides a series of topical articles on developments in the global structured finance sector. The latest piece, 'KEYS to Cars in 2013: Will Auto ABS Avoid the Potholes?' is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.