Subprime auto lending and securitization is rolling as few thought possible at the start of the pandemic. The catalyst for the positivity has been the strength of the underlying auto market and collateral values.
Unprecedented good times for the automobile
Despite the unemployment and economic uncertainty brought on by the COVID-19 crisis, the automobile itself has been enjoying an unprecedented level of importance in daily life. It is no longer just about freedom, sport or luxury; it now helps support the most basic human needs of health and safety and the ability to earn an income. This level of importance and ease of foreclosure translates into high priority of payment for consumers over other debt, and the asset backed securities (ABS) market related to auto loans and leases is recognizing that.
In addition, due to short supply brought about by disruptions to manufacturing and technology, the market has basically been drinking through a straw to satisfy vehicle demand. This draw on supply and pent-up demand could run on for some time even after we come out of the pandemic. Combine the factors of short supply and high priority of payment, and it all makes a bet on auto lending and ABS a good hedge against the economic crisis.
But there is a cloud over the road ahead in terms of regulatory uncertainty and expected greater enforcement activity under the Biden administration. Though the concerns may lead to higher quality pooled loans, it could also lead to additional costs in the system. Ultimately, if there are significant concerns regarding regulatory enforcement or new regulations, they could chill new originations and ABS issuances.