DBRS Morningstar Releases Negative Subprime Auto Loan ABS Sector Outlook Amid Coronavirus

DBRS Morningstar released a commentary, “DBRS Morningstar’s Subprime Auto Loan ABS Sector Outlook—Negative Amid Coronavirus,” which highlights how the ongoing Coronavirus Disease (COVID-19) pandemic has adversely affected the subprime auto loan sector.

With the closure of many nonessential businesses across the U.S., jobless claims have exceeded 30 million over the last six weeks ended April 25, 2020. We expect obligor credit deterioration, particularly for weaker credit obligors, as performance on subprime auto loans is highly correlated with the unemployment rate.

Key highlights in the commentary include:

(1) Increased extension rates may result in reduced monthly cash flow as lenders provide obligors relief from delinquent payments via payment extensions, due date changes, or other modifications.

(2) We expect the Coronavirus Aid, Relief, and Economic Security Act to provide short-term relief to borrowers in this segment based on early reports of observed increases in monthly collections directly attributed to the stimulus package. Such benefits will likely be temporary, however, given the GDP and unemployment expectations in our moderate scenario, which should contribute to an increase in overall lifetime losses.

(3) We expect an increase in full-balance charge-offs and delayed recoveries to increase losses from curtailed repossession activity and closed or reduced auction activity as well as a moratorium by some states on repossessions. In addition, accumulation of used vehicle supply will likely put downward pressure on vehicle values, which will increase the severity of loss on liquidated vehicles.

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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