Auto Loan Losses: Navigating the Noise

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Through Sage Council

In recent quarters, numerous headlines have reported on the increase in delinquencies on auto loans. The headlines only tell part of the story, however, as many of the losses can be attributed to subprime auto loans, which account for around 40% of the auto loan market.

Over the past decade, losses on auto asset-backed securities (ABS) had actually trended downward to historic lows. This is in part due to the strong financial situation of the American consumer. A decade of historically low rates combined with very low unemployment has helped keep consumers in a stable environment and car loan defaults relatively low. While it is true that defaults and losses have increased, this is mainly due to losses in the subprime portion of the auto loan market, which accounts for $ 55 billion of the market’s $ 140 billion. Specifically, defaults and losses have increased for risky issuers with poor underwriting and risk management records.

While current losses on prime auto loans are higher than their all-time low (0.56% vs. 0.30%), they remain very low and well below expectations.

Over the past five years, smaller scale (non-benchmark) subprime issuers have seen their losses increase from 7.60% to 9.90%, a much larger increase weighing on the industry as a whole.

Non-benchmark subprime default index

Despite the weakness of auto subprime mortgages, Sage believes that blue chip auto borrowers are in a healthy position and do not pose systemic risk. Given the strength of the labor market, consumer ABS remains a healthy sector with compelling risk / reward value. The sector is widely rated AAA and is a great alternative to other high quality, low yielding assets.

This article was written by the team of Sage Council, a participant in ETF strategist chain.

Disclosures: This is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based on, sources that Sage believes to be reliable, we do not warrant their accuracy, and information, data, figures and underlying information The accuracy or completeness of the information available has not been verified or audited by Sage. Further, we do not represent that the information, data, analysis and graphics are accurate or complete and, as such, should not be construed as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial situation. All investments involve risk and may lose value. Past performance is no guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment advisor providing investment management services to a variety of institutions and high net worth individuals. For more information about Sage and its investment management services, please visit our website at www.sageadvisory.com or view our Form ADV, which is available on request by calling 512.327.5530.

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