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S&P: Nonprime & Sub-prime Loans Drive Auto Loan Losses

22 September 1997

S&P: Nonprime & Sub-prime Loans Drive Auto Loan Losses

    NEW YORK, Sept. 22 -- Despite a continuing strong economy in
the first six months of 1997, U.S. issuers report a two- to three-fold rise in
losses on auto loan asset-backed securitizations, Standard & Poor's reports
this week.
    The rise in auto loan losses, which first surfaced in the 1994
securitizations of many issuers, continued through the first six months of
1997, according to a report featured in this week's edition of Standard &
Poor's CreditWeek.  Portfolio delinquency levels also remained slightly higher
at June 30, 1997 than at June 30, 1996.
    "Since delinquencies are a leading indicator of the direction of future
losses, it appears that losses will continue their ascension throughout 1997,"
says analysts Amy Martin.  The rise in losses, which has permeated all
segments of the auto finance industry is due to a number of factors,
including:

    -- A greater number of bankruptcy filings;
    -- Increased origination volume of lower-quality loans;
    -- Lower auction recovery rates;
    -- Loss of key management and servicing personnel;
    -- Rapid, unmanageable growth; and
    -- Increased competition, leading to lower underwriting guidelines,
       including higher advance rates and longer-term contracts.

    While many companies attribute higher credit losses to the downturn in the
consumer credit cycle, analysts say the more significant factor has been the
willingness of lenders to approve riskier loans.  "Many companies are eagerly
moving down the credit spectrum in search of higher-yielding assets and volume
growth," adds Ms. Martin.
    This strategy comes with more challenges.  Since nonprime and sub-prime
loans require different underwriting, verification, and collection strategies,
Standard & Poor's believes the nonprime and sub-prime paper should be managed
separately from the prime paper.  However, many high-growth companies do not
have the resources to adequately staff separate departments.
    In addition, many companies sacrificed underwriting guidelines and
skimped on management control and oversight for the sake of growth.  While
some of the changes have been subtle, such as increasing advance rates or
number of exceptions, the results have been dramatic.
    In addition to tracking the portfolio delinquency and loss performance of
the auto finance companies for which it provides asset-backed ratings,
Standard & Poor's also analyzes static pool performance.  By reviewing the
static pool performance for its issuers, Standard & Poor's has been able to
quickly identify deterioration in the securitized pools of many companies.
    By monitoring static pool performance as well as delinquency data,
Standard & Poor's also is able to quickly revise its expected loss levels for
many issuers.  As loss estimates have risen so have credit enhancement levels.
As a result, despite the increase in losses, no downgrades in issuer credit
quality have been necessary to date, Standard & Poor's said. -- CreditWire
SOURCE  Standard & Poor's CreditWire