Ally’s new CEO Jeffrey Brown said during an investor conference call last week that the company was planning on making more used car loans to subprime borrowers.
Subprime loans account for about 9% of the lender’s portfolio. Brown expects that figure to rise to 12%-15% of all loans, with loans for the purchase of used cars being the biggest contributor.
Market participants have tended to view bubble talk in the subprime auto space as premature, highlighting the strong performance for subprime auto ABS through the 2008 financial crisis. Bankers on the buy and sell sides have both made the simple point that borrowers prioritise their auto loans first, because they need their cars to travel to work.
But macroeconomic factors which had bolstered the performance of securities backed by subprime used car loans have turned, Fitch Ratings noted in a recent report.
Used car prices have weakened and are expected to weaken further due to oversupply. Fitch said in its report that increased trade-ins and off-lease returns have increased used car inventories, while a pick-up in new car production and sales has diverted some used car demand.
Fitch expects recoveries and residual realisations in ABS transactions to suffer as a result of weak used car prices, but the rating agency expects auto ABS performance to remain strong.