Fitch Downgrades Certain MMCA Auto Loan Securitizations
NEW YORK--June 17, 2003--Fitch Ratings downgrades all classes of MMCA Auto Owner Trust Series 2001-3, 2001-4, 2002-1 and 2002-2 transactions and removes them from Rating Watch Negative. In addition, Fitch Ratings places all classes of MMCA Auto Owner Trust 2002-3 on Rating Watch Negative (see full list below). These actions reflect a continued deterioration in collateral performance in each of the transactions. The new ratings reflect the current deterioration as well as Fitch's revised expectations for future performance.Each of the transactions contain varying percentages of retail level pay loans, balloon payment loans and deferred payment loans. While all loan types have exhibited weak performance, the balloon and deferred payment loans have performed most outside Fitch's initial loss expectations. General economic weakness and soft wholesale prices for repossessed vehicles have exacerbated the problems causing increased default rates and higher loss severities, conditions Fitch does not believe will improve in the near term.
Many of the balloon contracts were originated to low credit quality or subprime borrowers. These have deteriorated at a faster rate than other product types leading to high delinquencies and defaults. Additionally, balloon loans generally have a lower monthly principal payment creating slower loan amortization. Therefore, balloon loan defaults lead to greater loss severity, magnifying overall net losses.
In addition to their slower amortization, balloon loans also introduce the additional risk of future residual values. For most of the balloon loans included in the downgraded transactions, borrowers have the option to return the vehicles to MMCA at the time the balloon payment is due. Due to high balloon payments relative to current residual values and low new vehicle prices, turn-in rates are expected to be very high. If turned in, the proceeds received by the trust will be determined by auction prices which are expected to remain weak through 2003. While this risk was considered during the original rating of the transaction, the combined effects of increased loss frequency and severity and future expectations under stressed conditions have exceeded available credit enhancement particularly when back-loaded risks are considered under a pro-rata structure. (The deals do contain various triggers that will change payment priorities to sequential under continued adverse conditions.)
Deferred payment loans have also deteriorated at a rate worse than initially assumed. Deferred payment loans are typically originated only to high quality borrowers but in many cases the grace period is over 300 days. A loan that defaults after the deferred period ends will inherently experience greater loss severity, since no principal payments have been made. The combination of higher than expected defaults and a weaker auction market have led to higher net losses. Deferred loans made to borrowers that are not high credit quality have been defaulting at a faster rate than was originally anticipated.
Although almost all of the associated deferred payment loans have passed their deferral periods, these loans continue to exhibit additional risk over a standard level pay loans due to the reduced amortization of the loan. An attribute of both balloon payment loans and deferred payment loans is that loan amortization is slower relative to level pay retail loans. This, combined with declining used vehicle prices, creates a situation where the vehicle is worth less than the outstanding loan amount leading to higher defaults as borrowers stop paying.
As of the June 15th reporting date, the 2001-3 transaction has experienced 7.21% cumulative net losses through 20 months, making it the worst performing MMCA deal. This deal contained nearly 45% balloon payment loans and a large percentage of 'subprime' quality loans. The 2002-2 transaction was similarly structured with a large percentage of both balloon loans and 'subprime' quality loans. Subsequently collateral performance has been poor: through month 12 the deal has experienced 4.99% cumulative net losses. Both deals contain a significant amount of balloon payment risk. Currently the balloon payment percentage for Series 2001-3 and 2002-2 is 21% and 22% respectively.
The 2001-4 and the 2002-1 transactions have experienced 5.20% and 5.04% cumulative net losses to date respectively. Both of these deals were originated with high percentages of deferred payment loans, including a significant amount of 300+ day deferment periods. Additionally, despite a cash infusion to the 2002-1 transaction, the 1% reserve trigger has been hit causing the deal to pay bond holders sequentially beginning with the A-3 notes.
MMCA has made efforts to improve the performance of these transactions, most notably by the December, 2002 transfer of approximately 85,000 subprime loans to subservicer SST. The company has also added personnel to their own servicing platform. These changes have led to noticeable improvements in delinquencies during the spring collection period, a period in which consumer credit performance historically experience seasonal improvement. However, June's servicer reports (May data) show delinquencies and defaults rising again, calling into question the longer term effectiveness of the changes implemented by MMCA.
MMCA has also added cash to three of the deals in an effort to increase credit protection. In July 2002, the company added $64.1M to Series 2001-3 and subsequently added $29.7M to Series 2001-4 in August 2002, $12.5M and $25M in September 2002 and December 2002 respectively to Series 2002-1. The actions by MMCA have delayed but not prevented the need for rating actions.
Fitch Ratings has taken the following ratings actions:
MMCA Auto Owner Trust 2001-3
| -- | Class A-3 Notes, downgraded to 'AA-' from 'AAA' Rating Watch Negative; |
| -- | Class A-4 Notes, downgraded to 'AA-' from 'AAA' Rating Watch Negative; |
| -- | Class B Notes, downgraded to 'BBB+' from 'A' Rating Watch Negative. |
MMCA Auto Owner Trust 2001-4
-- Class A-4 Notes, downgraded to 'AA-' from 'AAA' Rating Watch
Negative;
-- Class B Notes, downgraded to 'BBB+' from 'A' Rating Watch
Negative.
MMCA Auto Owner Trust 2002-1
-- Class A-3 Notes, downgraded to 'AA' from 'AAA' Rating Watch
Negative;
-- Class A-4 Notes, downgraded to 'AA' from 'AAA' Rating Watch
Negative;
-- Class B Notes, downgraded to 'BBB' from 'A' Rating Watch
Negative;
-- Class C Notes, downgraded to 'BB+' from 'BBB' Rating Watch
Negative.
MMCA Auto Owner Trust 2002-2
-- Class A-3 Notes, downgraded to 'A' from 'AAA' Rating Watch
Negative;
-- Class A-4 Notes, downgraded to 'A' from 'AAA' Rating Watch
Negative;
-- Class B Notes, downgraded to 'BBB-' from 'A' Rating Watch
Negative; --Class C Notes, downgraded to 'BB' from 'BBB'
Rating Watch Negative.
The following notes have been placed on Rating Watch Negative:
MMCA Auto Owner Trust 2002-3
-- Class A-2 Notes, rated 'AAA'.
-- Class A-3 Notes, rated 'AAA'.
-- Class A-4 Notes, rated 'AAA'.
-- Class B Notes, rated 'A'.
-- Class C Notes, rated 'BBB'.