Strong Auto Financing Supports Sales Recovery

Auto-credit availability will remain strong and support a continued recovery of vehicle sales, a financial analyst says.

Much of that greater loan availability is in the subprime market, recovering from a bad case of frostbite suffered during the credit freeze of 2008 and 2009.

“We’re seeing a normalizing of the subprime market,” John McElravey, head of consumer asset-backed security research at Wells Fargo Securities, says in a conference call.

But it’s still not a full recovery for lower-level lending.

“While auto-credit availability has improved, lenders generally seem to be concentrating on borrowers with higher bureau scores,” McElravey says.

Lending scores range from 740 and above for superprime to 550 and below for deep subprime.

The subprime category ranges from 620 to 550. The overall auto-loan market was $663 billion as of the first quarter, up 4.1% year-over-year. Subprime comprised 35% of that.

Although the subprime mortgage market was rife with defaults during the recession, existing subprime auto loans performed reasonably well then, even though loan originations in that category were almost nonexistent.

With only a reservation or two, McElravey is optimistic about the credit market, including the subprime lending levels.

“So far, we view market conditions in a positive light,” he says. “In our opinion, the subprime auto market is regaining some of its pre-crisis vigor.”

But, he notes, “Some observers have pointed to increasing subprime auto-lending volume with some concern, mainly about underwriting standards.” On the other hand, “There are good loans not being made that could be.”

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