U.S. auto loan collateral performance saw positive performance in February 2023, largely due to consumers starting to receive tax refunds. This was particularly beneficial for the subprime segment, as losses not only declined month to month but fell below the pre-pandemic levels in February 2020. Prime losses also declined and remained 25% below pre-pandemic levels. After a general rise in delinquencies since October 2022, they finally retreated in February 2023. We attribute this primarily to consumers using their tax refunds to catch up on late auto payments. Another benefit could have materialized from subprime lenders tightening their underwriting standards during second-half 2022, but it's too early to be certain. Even with the decline in delinquencies, 60-plus-day delinquencies remain higher than pre-pandemic levels. Recoveries diverged, as the subprime segment posted higher levels (45% compared with 37% and 41% in January 2023 and February 2020, respectively), while the prime segment declined to 55% from approximately 58% in both January 2023 and February 2020.

Losses Take A Breather, Especially In Subprime

Prime losses fell seven basis points (bps) month over month to 0.42% from 0.49%. While this was significantly higher than the record low of 0.25% posted in February 2022, losses remained approximately 25% below the 0.56% posted pre-pandemic in February 2020.

After four consecutive months of higher net charge-offs, subprime losses took a breather and fell 17.84% to 7.42% from 9.03% in February 2023. Although subprime losses were up 41.87% from the unusually low level of 5.23% in February 2022, they were down from 8.63% in February 2020. The improvement in subprime losses was largely due to higher recoveries and the beginning of the tax refund season. Additionally, based on the Federal Reserve Bank of New York's Center of Microeconomic Data, the origination volume of subprime loans (i.e., those with an Equifax score of less than 620) declined in third- and fourth-quarter 2022 on a year-over-year basis (10.40% and 7.80%, respectively) due to tighter credit. The pullback in lending may also be contributing to improved performance, but one month doesn't make a trend.

Chart 1

A Divergence: Subprime Recoveries Increase, While Prime Decline

Prime recoveries declined slightly to 55.10% in February 2023 from 57.65% in the prior month. Prime recovery rates have now fully normalized back to pre-pandemic levels. In February 2022, prime recoveries were as high as 74.41%, which was up slightly from 70.08% in February 2021. Capital One Prime Auto Receivables Trust (Capital One), Hyundai Auto Receivables Trust (Hyundai), Carvana Auto Receivables Trust (Carvana), and Honda Auto Receivables Trust (Honda) were among the issuers hampering recoveries for February 2023 compared with the prior month. Capital One was the most prominent detractor, with recoveries of 108.64% in February 2023, which normalized to 65.44% in March. Recoveries fell to 61.99%, 45.93%, and 78.76% in March 2023 from 73.95%, 65.31%, and 87.01% in February 2023 for Hyundai, Carvana, and Honda, respectively.

Subprime recoveries were robust, with a 21.66% increase in February 2023 to 45.32% from 37.25% in January 2023. The top five issuers contributing to the strong performance were Santander Drive Auto Receivables Trust (Santander), AmeriCredit Automobile Receivables Trust, Exeter Automobile Receivables Trust (Exeter), American Credit Acceptance Receivables Trust, and Westlake Automobile Receivables Trust (Westlake). Recoveries for those issuers stood at 53.53%, 60.79%, 41.13%, 65.45%, and 41.41%, respectively, in February 2023, which was up from 40.81%, 44.43%, 29.76%, 41.87%, and 33.11%, respectively, in January 2023. In our view, part of the subprime segment's improvement in recoveries stemmed from certain lenders catching up on repossessing and liquidating vehicles on accounts for which they had already taken a charge-off. To the extent that a lender had charged-off an account prior to liquidation, the subsequent auction proceeds would count as recoveries. Also, used vehicle values improved during the first two months of 2023, as shown by the increase in the Manheim Used Vehicle Value Index (see chart 2).

Chart 2

February's Tax Refunds Bring Delinquency Relief

The prime 60-plus-day delinquency rate decreased month over month to 0.47% in February 2023 from 0.54% in January. The subprime 60-plus-day delinquency rate retreated to 5.33% in February 2023 from 5.96% a month earlier. Despite the improvements, delinquencies in the prime and subprime segment remained 17.5% and 7.0% higher than the pre-pandemic levels (February 2020) of 0.40% and 4.98%, respectively.

Table 3

Chart 3

Based on historical performance, we would expect to see continued improvement in late payments for at least another month. However, industry sources point to average refunds of approximately $3,000, which is about 11% lower year over year. This, coupled with lower-income consumers increasing their outstanding credit card balances, could lead to a weaker-than-anticipated tax refund season.

Extensions Fare Well Due To Tax Rebate Season

Prime and subprime issuers saw lower extension rates month over month in February 2023. However, despite this decline, extensions increased both year over year and relative to pre-pandemic levels in February 2020. Although prime extensions declined to 0.36% in February 2023 from 0.43% in January 2023, it is higher than in February 2022 (0.30%) and February 2020 (0.32%). The fall was sharper for subprime public and 144a transactions in aggregate, which declined to 2.92% in February 2023 from 3.61% in January 2023, but exceeded that of February 2022 (2.62%) and February 2020 (2.35%) (see chart 4).

Chart 4

Prime extension rates

All 15 of the prime ABS auto issuers that have transactions outstanding reported lower month-over-month extensions (see table 4a).

• Ford Credit Auto Owner Trust, Harley-Davidson Motorcycle Trust, and Hyundai Auto Receivables Trust saw declines of more than 10 bps or more over the last month (18 bps, 11 bps, and 10 bps, respectively).
• Ford Credit Auto Owner Trust and CarMax Auto Owner Trust continued to report the highest extension levels of 0.81% and 0.72%, respectively.
• Capital One reported the lowest extensions, with a reduction of one basis point to 0.04% in February 2023 from 0.05% last month.

Table 4a

Subprime extension rates

Weighted-average extensions for 144a subprime issuers declined to 3.91% in February 2023 from 4.97% the prior month, but increased from February 2022 (3.51%) and from pre-pandemic February 2020 (3.18%).

Similarly, weighted-average extension rates for subprime public issuers decreased to 2.15% in February 2023 from 2.60% the previous month, but increased from February 2022 (1.87%) and from February 2020 (1.53%).

Of the 17 prime ABS auto issuers that have transactions outstanding, only one reported higher month-over-month extensions (see table 4b).

Other noteworthy changes in February include the following:

• Avid Automobile Receivables Trust was the only issuer to report an increase in extensions month over month (59 bps to 3.93% from 3.34%).
• The top four issuers to report month-over-month declines were Westlake (fell 167 bps to 5.23% from 6.90%), United Auto Credit Securitization Trust (140 bps to 4.85% from 6.25%), Flagship Credit Auto Trust (133 bps to 3.71% from 5.04%), and DriveTime Automotive Group Inc. (101 bps to 2.34% from 3.35%).
• The Westlake and CPS Auto Receivables Trust transactions had the highest extensions, at 5.23% and 5.00%, respectively. Although Westlake continues to have relatively high extensions, their average 60-plus-day delinquencies were 1.31% compared to the subprime composite average of 5.33%. However, CPS Auto Receivables Trust's average 60-plus-day delinquencies of 6.42% were above the subprime composite average.

Table 4b

Auto Loan ABS Rating Activity/Revised Loss Expectations

In March 2023, we revised our loss expectations and took the following rating actions:

• We raised four ratings and affirmed 19 ratings on six Ford Credit Auto Owner Trust transactions (see "Ratings Raised On Four Classes And Affirmed On 19 Classes From Six Ford Credit Auto Owner Trust Transactions," published March 10, 2023).
• We raised eight ratings and affirmed five ratings on four Prestige Auto Receivables Trust transaction (see "Eight Ratings Raised And Five Affirmed On Four Prestige Auto Receivables Trust Transactions," published March 21, 2023).
• We lowered our ratings on four classes and removed the CreditWatch negative placement, raised our rating on one class, and affirmed our ratings on three classes from four Exeter transactions (see "Various Rating Actions Taken On Exeter Automobile Receivables Trust 2022-1, 2022-2, 2022-3, And 2022-4," published March 30, 2023).
• We placed one class on CreditWatch negative from Exeter Automobile Receivables Trust 2022-5 (see "Exeter Automobile Receivables Trust 2022-5 Class E Ratings Placed On CreditWatch Negative," published March 31, 2023).

These rating actions resulted in 13 upgrades, four downgrades, and 27 affirmations, bringing the total number of upgrades and downgrades on publicly rated U.S. auto loan ABS transactions to 20 and four, respectively, as of March 31, 2023 (see tables 5 and 6).

Table 5

Table 6

As of March 31, 2023, a total of six classes are on CreditWatch with negative implications. These include the class E and F notes from American Credit Acceptance Receivables Trust 2022-1 and 2022-2, the class E notes from Exeter Automobile Receivables Trust 2022-5, and the class E notes from United Auto Credit Securitization Trust 2022-2. The issuers have foregone paying themselves servicing fees on these transactions, and, as of March 30, 2023, Exeter has made capital contributions to the 2022-2 and 2022-3 transactions to prevent the ratings on the class E notes from falling below BB- (sf).

Table 7

We lowered our expected cumulative net losses (ECNLs) on nine transactions and raised them on five transactions that we reviewed in March 2023 (see tables 8-10).

Table 8

Table 9

Table 10

Appendix: Auto Tracker Frequently Asked Questions

How do you define prime auto loan ABS?

We generally categorize prime auto loan ABS transactions as those backed by loan pools with initial ECNLs of 3.00% or less, average FICO scores of 700 or higher, and annual percentage rates (APRs) of 0.00%-5.00%.

How do you define subprime auto loan ABS?

We generally categorize subprime auto loan ABS transactions as those backed by loan pools with initial ECNLs of at least 7.50%, average FICO scores of less than 620, and APRs that exceed 14.00%.

How do you calculate the monthly net loss rate?

The monthly net loss rate is annualized. It equals each transaction's net loss rate weighted by the transaction's ending pool balance for the current month over the aggregate ending pool balance of all transactions included in the index.

We only allow a transaction to enter the composite starting in its fourth month outstanding. Transactions usually have zero or low losses during their first three months, which dilutes the composite figures.

How do you calculate the monthly recovery rate?

We calculate recoveries by taking the recovery amount reported (which typically includes all recoveries, including disposition proceeds, post-disposition proceeds, and any other reported recoveries) over the gross loss amount for the current month. Then we weight each transaction's recovery percentage by the transaction's ending pool balance for the current month over the aggregate ending pool balance of all transactions included in the index.

We only allow a transaction to enter the index starting in its fourth month outstanding. During a transaction's first three months, unusually high or low recoveries are reported, leading to a spike in the composite figures.

How do you calculate the monthly 60-plus-day delinquency rate?

We calculate delinquencies by taking each transaction's 60-plus-day delinquency amount over the ending pool balance for the current month. Then we weight each transaction's 60-plus-day delinquency percentage by the transaction's ending pool balance for the current month over the aggregate ending pool balance of all transactions included in the composite.

We only allow a transaction to enter the composite starting in its fourth month outstanding. During the transaction's first three months, zero or fewer delinquencies are reported, which dilutes the composite figures.

What is the Auto Loan Static Index (ALSI)?

Our ALSI monitors the credit performance of securitizations that were originated in the same year on a weighted average basis. The number of months displayed for each vintage is generally determined by the last month that all securitizations for that time period have a data point. We calculate the prime and subprime ALSI CNLs by taking the weighted average of the CNLs of the transactions that were completed in the same time period (generally a year). Each transaction's CNL is weighted by its initial pool balance over the aggregate initial pool balance of all the transactions included in the index for that period. In the subprime ALSI, transactions from Byrider Finance LLC (doing business as CarNow Acceptance Corp.), Credit Acceptance Corp., and DriveTime Automotive Group Inc. are excluded because they do not have the typical indirect auto loan business model.

Which transactions are included in the prime, subprime, and modified subprime composites and indices?

For a list of the transactions included in our prime and subprime composites and indices, see "U.S. Auto Loan ABS Tracker: June 2022 Performance," published Aug. 17, 2022. However, note that we subsequently added transactions that have since closed.

Related Research

• Exeter Automobile Receivables Trust 2022-5 Class E Ratings Placed On CreditWatch Negative, March 31, 2023
• Various Rating Actions Taken On Exeter Automobile Receivables Trust 2022-1, 2022-2, 2022-3, And 2022-4, March 30, 2023
• Credit Conditions North America Q2 2023: Coalescing Stresses, March 28, 2023
• Economic Outlook U.S. Q2 2023: Still Resilient, Downside Risks Rise, March 27, 2023
• Eight Ratings Raised And Five Affirmed On Four Prestige Auto Receivables Trust Transactions, March 21, 2023
• Ratings Raised On Four Classes And Affirmed On 19 Classes From Six Ford Credit Auto Owner Trust Transactions, March 10, 2023
• How The Next Downturn Could Affect U.S. Subprime Auto Loan ABS Ratings, Dec. 8, 2022