Loss Severity in Auto Loan ABS Under Pressure in 2008

Abstract

Loss severity on defaulted loans in auto-loan asset-backed securities (ABS) faces increasing pressure from several areas in 2008. This article briefly identifies and discusses the key factors and trends on which Fitch Ratings is currently most focused that will drive loss severity levels in auto ABS for the remainder of 2008 and into 2009. These include lengthening loan terms (longer than 60 months), increasing loan-to-value (LTV) ratios, transaction prices, new vehicle incentives, wholesale vehicle market conditions, and the servicing of auto loans. Additionally, significant declines in the wholesale values of gas-guzzling light trucks (trucks) and sport utility vehicles (SUVs) in 2008 are adding further pressures to recovery rates and ultimately loss severity. Fitch expects the performance of auto ABS in 2008 to be impacted by lower recovery rates and increased net loss rates.

TOPICS: Asset-backed securities (ABS), technical analysis