Heightened competition in the subprime automobile-lending market may result in large investor losses if growing demand weakens underwriting standards, according to Moody’s Investors Service.
The market has grown over the past two years as private equity firms, including Blackstone Group LP (BX:US) and Perella Weinberg Partners LP, are drawn to the sector’s profitability, Moody’s analysts including Peter McNally wrote today in a report. That recent influx of capital echoes trends that led to a lending bubble and heavy losses in the 1990s, signaling a similar downturn may be repeated if competition for attractive returns deteriorates the credit quality of portfolios.
“Loan performance has been strong over the past several years, but the investor interest from outside the subprime auto market niche and the potential for increasing competition imply that losses could increase if a race for profits and market share results in weaker underwriting standards,” the analysts wrote.
While today’s market is not yet as “overheated” as that of the 1990s and benefits from more centralized servicing centers and stricter accounting standards, the credit quality of auto loans securitized in 2011 and 2012 has loosened since 2010, the New York-based ratings firm said. The average annual percentage rate on loans for used cars fell to 8.61 percent in the fourth quarter of 2011, the lowest level since 2008, Moody’s said in the report, citing data provider Experian.
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