Subprime auto delinquencies fell in April - but it isn't all good news

By Joy Wiltermuth

This year's seasonal improvement appears worse than in previous years

Subprime auto-loan delinquencies fell in April, but it isn't all good news, according to Fitch Ratings.

Delinquencies on auto loans to borrowers with blemished credit fell to 5.25% from a record high of 6.39% in February, when looking at a subset of loans in bond deals tracked by Fitch's Subprime Auto Index.

The monthly decline followed a familiar seasonal pattern, where the rate of past-due subprime auto loans improves as borrowers use tax refunds to catch up on bills. As such, the reprieve looks to be only temporary.

"Historical seasonal changes in delinquencies, losses and recoveries point to deterioration in the second half of the year as the positive effect of tax returns boosting borrower disposable income fades," according to the Fitch report.

Fitch said this year's seasonal improvement in delinquencies "has not been a strong as in previous years due to continued economic pressures on borrowers," while recoveries and losses also have been muted.

The report also pointed to FICO credit scores that were "inflated due to pandemic-era stimulus and excess savings," which along with record-high used-car prices have weighed on the performance of auto loans originated in late 2021 and 2022.

See: Credit scores got 'artificially higher' during COVID. Now many borrowers can't pay their debts.

Yet bond structures have been bolstered in the wake of the 2008 subprime-mortgage crisis. That means investors in subprime auto bonds should be insulated from losses, Fitch said.

Also read: Mortgage rates fall below 7% for the first time in more than a month

Stocks were mixed Thursday, with the Dow Jones Industrial Average DJIA down about 0.6%, while the S&P 500 SPX and Nasdaq Composite COMP were 0.3% and 0.9% higher, respectively, according to FactSet.

-Joy Wiltermuth

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05-23-24 1253ET

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