Subprime Auto Lenders to Ease Standards Further: Moody's; Low Interest Rates Keep Profit Margins Fat
Subprime auto lenders will likely ease underwriting standards further in 2014 as low interest rates keep profit margins fat enough to offset rising defaults, Moody's Investors Service said in a report.</br></br>Auto lending has soared since the recession, buoying the U.S. auto industry, as lenders capitalized on low interest rates. But the increased volume has come at a cost of weaker loans, Moody's said, especially in subprime loans to borrowers with credit scores below 660, on a Fair Isaac Corp. scale from 300 to 850.</br></br>Originations of subprime loans have increased to their highest levels since the financial crisis, with quarterly volume reaching $40.3 billion in the second quarter of last year, up from a recent low of $14.9 billion in late 2009 and the most since the second quarter of 2007, according to Equifax. Subprime auto loan volume was $39.8 billion in the third quarter.</br></br>The low interest rate environment is giving auto lenders a boost because they can get low-cost financing themselves, Moody's said.</br></br>The warning from Moody's comes as Federal Reserve officials have been focused on financial bubbles that may be lurking in the economy due to the central bank's efforts since the financial crisis to suppress rates to historic lows.