"Auto loan default rates continue to rise and given Fitch's expectation of unemployment levels increasing well into 2009, this trend is likely to continue," according to Managing Director John Bella. "Most prime auto loan ABS transactions, however, have sufficient credit enhancement to offset the expected rise in defaults."
As the unemployment rate sped through the 6% level during the third quarter of 2008, Fitch's prime ANL hit 1.68% in September, just below the record high of 1.73% witnessed in August.
The deteriorating performance of auto ABS has coincided with rising job losses in 2008. Job losses have totaled just over 750,000 for the year through September, posting losses in every month this year (source: Bureau of Labor Statistics). The economy last posted job growth back in December 2007. Job cuts have thus driven the unemployment rate from 5% in December last year to 6.10% in September, a 22% hike.
Despite the increase in unemployment, softer wholesale vehicle market, and a rise in ANL rates in auto ABS this year, structural features, credit enhancement levels and amortization, have contributed to limit negative ratings actions so far in 2008. In fact, Fitch has continued to issue upgrades on prime auto ABS in 2008, although at a slower pace than in 2007.
In June this year, Fitch released a report titled 'Will Consumer ABS Crack Under Unemployment Pressure', in which Fitch analyzed the historical relationship between changes in the unemployment rate and changes in default rates of consumer ABS. The analysis confirmed that auto ABS loss rates are highly correlated with changes in the unemployment rate, especially during adverse conditions, as is the case currently. The analysis exhibited a number of results including that changes in unemployment are strongly correlated with changes in auto ABS loss rates; and auto ABS loss rates are expected to increase proportionately to increases in unemployment.
