NEW YORK--May 9, 2012: Historically low loss rates on U.S. automobile and credit card loans reflect improved consumer financial health and previously tightened underwriting standards and explains the loosening of lending terms which is underway in the auto and credit card loan spaces. Fitch Ratings expects these dynamics to translate into increased loss and delinquency rates in coming periods, but not of a magnitude expected to affect ratings assigned to consumer lenders or ABS trusts.
“U.S. Auto Asset Quality Review 4Q11 (Solid Credit Performance Continues)”
We view current loss rates as being unsustainably low over the longer term. Losses on Fitch's Prime Auto Loan ABS Index, which tracks the performance of approximately $60.1 billion in securities from approximately 115 transactions was at 0.35% through March 2012, a new record low for the index to date. Charge-offs on Fitch's Prime Credit Card Index, which tracks approximately $115.1 billion of receivables were 5.17% in March 2012, 635 bps below the recession peak of 11.52% in September 2009, and 151 bps below the 10-year monthly average of 6.68%.
As forms of consumer debt, both auto and credit cards loans are expected to exhibit similar directional performance relative to general economic conditions such as unemployment and new jobless claims. The secured nature of auto lending, however, combined with strong recovery rates and residual levels for used cars, has served to distinguish auto loan performance from credit card performance. We also acknowledge that more clearly defined prime/subprime pools in auto lending versus blended portfolios in credit card lending may create distortions when comparing performance between the two asset classes.
The Federal Reserve reported that seasonally adjusted consumer credit outstanding totaled $2.54 trillion at the end of March, up by 10.2% year over year based on preliminary estimates, the biggest jump in more than a decade. Nonrevolving credit increased to $1.74 trillion, up an annualized rate of 11.3% year over year. We believe part of the increase can be attributed to an ease in lending standards coupled with increased demand, especially in the auto sector.
The unemployment rate has improved marginally, and we expect a rate of 8.2% year-end 2012, with improvement to 7.8% in 2013. Weekly jobless claims were below the 400,000 mark for all of 1Q12, which we believe should serve as a partial mitigant to loosened underwriting standards.
Beyond current underwriting standards, performance metrics and economic indicators looms the prospect of expanded regulatory focus on the consumer lending markets. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) has already affected credit card lenders, and both credit card lenders and auto lenders are expected to be subject to the oversight of the Consumer Financial Protection Bureau (CFPB).
For more information on consumer loan asset quality, please see the following reports:
"U.S. Auto Asset Quality Review 4Q11 (Solid Credit Performance Continues)," dated March 16, 2012 and "Credit Cards: Asset Quality Review 1Q12," dated May 8, 2012, both available at www.fitchratings.com
Additional information is available on Fitch Ratings .
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at Fitch Ratings . All opinions expressed are those of Fitch Ratings.