US Subprime Auto Loans – Systemic Risk or Contained Weakness?

US auto loan markets have attracted recent attention due to rising delinquencies. However, we believe there is little potential for systemic risk in the structured credit and private lending markets, and we expect market weakness to be contained.

Rising delinquencies in auto lending markets has led to a number of recent headlines. Reports of loosening lending standards have drawn comparisons to the 2008 US subprime mortgage crisis. However, our analysis indicates that the asset-backed securities (ABS) market will remain largely insulated and given the relatively small size of the market, the potential for systemic concerns is remote. Diligent, skilled secured finance investors should be able to pinpoint attractive opportunities within the public and private areas of the market.

The total size of the US auto loan market is $1.1trn, and 84% of the outstanding auto-loan market is prime or near-prime. Of the $179bn subprime auto loan market, a fifth is structured into ABS instruments, with the rest existing as private loans. The market is dwarfed by the $9trn US mortgage market which saw three quarters of loans structured into ABS prior to the financial crisis. In evaluating the outlook for auto loans, an area of the public and private secured finance market in which Insight invests, we believe the sector will face some headwinds leading to some consolidation among smaller lenders, but will remain robust overall.