What does automobile ownership mean to consumers today? It is certainly something different, more complex, than pre-Covid.
America's relationship with the automobile has always been complicated. Even so, there has never been a shortage of bold predictions. Now, projections of the future can be downright foolish given we don't know where we are today as a starting point. And Yogi was right - if you don't know where you're going, you might wind up someplace else. The course of the pandemic and our reactions to it will either cause the automobile to sink in value to the detriment of auto loan ABS or rise to an unprecedented level of importance, becoming a boon to the market and the linchpin of an economic revival. Recent data creates more questions than it answers.
On the one hand, delinquencies remained largely stable compared with last year's levels and are arguably not as high as one would expect, given the extent of the economic disruption. Subprime 60+ day delinquencies stood at 4.29% in April 2020, compared with 4.31% the previous year. However, as S&P notes in its most recent Auto Loan ABS Tracker, this is due to high levels of extensions for unemployed and furloughed workers, which could in fact be masking the true extent of delinquencies.
On the other hand, loss and recovery rates perhaps give a more accurate indication of market woes - subprime net losses climbed to 9.32% in April 2020 - the highest April level the rating agency had ever observed. Subprime recoveries fell to 25.27% in the same month, down from 49.04% versus a year ago, representing an all-time low.
The industry was braced for a sharp decline in vehicle sales following the COVID-19 pandemic, as dealerships closed and automakers halted production. Indeed, in Q1 2020, U.S. auto sales declined by 12.7%. Reduced demand created a similar depressive effect on prices, but this is starting to rebound due to sales relying on existing supply. The influx of rental cars from Hertz in light of its recent bankruptcy may exert further downward pressure on prices in the used vehicle market. In addition, car usage patterns in the pandemic may shake things up further.
Are the Answers in Auto's Evolution?
Looking back, as the auto weaved its way through history, it conjured notions of convenience and freedom which were accompanied by prestige and luxury, each adopted for a new age. Luxury evolved over time from upscale, premium features (soft Corinthian leather!) to exclusive technology and performance. Even the green symbols and branding on electric vehicles have become as much badges of honor for EV owners as they are designations of clean air technology. (Come on, Tesla owners, admit it!)
Most recently, prior to the pandemic, we started to see a return of the importance of convenience. But this time with a twist: a new generation of potential car owners finding it more convenient to use an app to summon a ride, than own and maintain a car. In fact, it had been reported that over 20% of young adults eligible for a driver's license had declined to get one. There was also high anticipation for the prospect of autonomous vehicles (though the degree of convenience, which is dependent on who would own them, is an issue for a later day).
The Pandemic May Stop Trends in Their Tracks
It turns out reports of the death of car ownership, in favor of ride sharing, were greatly exaggerated, even before the pandemic. Now, priorities have changed. Personal space, controlled environments, and cleanliness are part of a regimen of keeping healthy. Vehicle ownership in a pandemic allows individuals to isolate safely and simultaneously gather with others. Health and safety are paramount concerns, but so is the sanity that comes with social interaction. The automobile is just the right vehicle to achieve those goals.
As we discussed in Structured Credit Investor, autos are the safe solution to engaging in social events- parades, school graduations, drive-in movies, concerts enjoyed from stadium parking lots and other gatherings made possible from the isolation of a passenger compartment. Travel predictions for summer vacations suggest that for those that do stray from home, the destinations will be regional and car-oriented. This all gives new meaning to the term "social mobility."
There are countless paths the evolution of the automobile, and its importance in American life, can take from here, and its evolution is just one of many factors that will impact the auto market, auto lending and the related ABS market.
We'll be hosting a webinar on June 24th to reveal the results of our second annual subprime auto market survey. We will share survey responses from over 100 participants - including investors, originators, servicers, and trustees - and we will compare results to our 2019 survey and reactions in 2020 before the pandemic struck. Joining us to help analyze the results will be featured speakers from DBRS Morningstar and Westlake Financial Services.
Join us by RSVPing here and take advantage of the opportunity to hear the perspectives of industry insiders on the state and future of subprime auto.
Nicole Serratore, an attorney in the Insolvency, Creditors' Rights and Financial Products Group, contributed to this post. Emily Hatchett, a paralegal in the Insolvency, Creditors' Rights & Financial Products Practice Group of Davis & Gilbert, assisted with this post.
Originally published JUN 21, 2020
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