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ABS Spotlight Summary - March 20, 2018

Core Content

This issue of ABS Spotlight provides an overview of recent developments in the asset-backed securities (ABS) and structured finance markets in the US and Canada. It includes insights from the SFIG Vegas conference, an analysis of the impact of the 2017 US tax law on credit performance, and updates on the credit impact of the 2017 hurricanes on securitizations. Additionally, it discusses market trends in consumer and commercial lending, including credit card and auto ABS performance, and the potential implications of the Dodd-Frank rollback on PACE ABS.

Main Points

SFIG Vegas Conference Highlights

• Market Sentiment: Conference attendees expect continued strong demand for securitized products and do not foresee significant concerns over collateral quality or structural features affecting investment decisions.
• Securitization Activity: Strong economic conditions are expected to support ongoing issuance of various securitized products.
• CLOs: Issuance is expected to remain robust despite narrowing spreads. Structural flexibility is increasing, which could lead to both opportunities and risks.
• RMBS: US residential mortgage-backed securities (RMBS) are poised for significant growth, particularly from new collateral types like home equity lines of credit (HELOCs) and closed-end second mortgages.
• Auto and Equipment ABS: Auto lenders have tightened credit slightly, while equipment lease ABS are expected to benefit from increased demand. Some concerns exist over mid-life aircraft collateral in auto ABS.
• Non-traditional Collateral: Opportunities for more transactions backed by non-traditional assets are emerging.

Tax Law Impact on Credit Performance

• Credit Neutrality for Mortgages: The 2017 US tax law is largely credit neutral for residential mortgage loans. Home price appreciation will slow, but after-tax incomes will increase, keeping credit performance stable.
• Positive Impact on Non-Mortgage Consumer Credit: The tax law provides a modest credit boost for non-mortgage consumer loans such as credit cards and auto loans due to increased disposable income for renters.
• Weakening Performance: Despite the positive effect, non-mortgage consumer credit performance is expected to continue weakening due to weakened underwriting standards.

Credit Impact of 2017 Hurricanes

• Minimal Impact on Securitizations: The credit impact of the 2017 hurricanes on structured finance transactions remains limited due to servicer relief efforts, insurance coverage, structural features, and small exposures.
• Delinquency Increases: Delinquency rates increased most notably in Credit-Linked Notes (CRT) deals, while the impact on Commercial Mortgage-Backed Securities (CMBS) was limited to Puerto Rico loans.
• Auto and Student Loan ABS: Auto and student loan ABS were unaffected after a brief spike in extensions and forbearance, with delinquency rates quickly returning to normal levels.

Canadian Consumer Lending Trends

• Vulnerability Increases: Canadian consumer lending faces increased vulnerability due to rising interest rates, higher debt-servicing costs, and an increase in uninsured mortgages.
• Credit Card ABS Performance: Credit card ABS performance in Canada remained strong in January, with a net charge-off rate of 3.06% and a delinquency rate of 2.37%.
• Auto Loan Quality: Auto loan delinquency rates in Canada are strong at 1.5%, but longer loan terms are a growing risk.

PACE ABS and Legal Uncertainty

• Dodd-Frank Rollback: The proposed amendment to the Truth in Lending Act (TILA) to include underwriting requirements for PACE financing programs would reduce legal uncertainty for future PACE ABS transactions.
• Legal Risks: The current legal status of PACE assessments as "consumer credit transactions" is unclear, leading to potential risks for PACE ABS.
• Consumer Protections: The inclusion of ability-to-repay provisions could reduce the number of homeowners taking on unaffordable obligations and lower the likelihood of default.

Key Information

• SFIG Vegas: Market participants remain optimistic about the future of securitization, with a focus on maintaining credit quality and structural features.
• Tax Reform: The 2017 tax law is expected to have a modestly positive effect on non-mortgage consumer credit but may lead to weaker performance in the long term.
• Hurricanes Impact: Although there was a spike in delinquencies, the overall credit impact of the hurricanes on securitizations is limited.
• Canadian Banks: Vulnerability in consumer lending is increasing, particularly in unsecured credit card portfolios and longer auto loan terms.
• PACE ABS: Legal uncertainty around PACE assessments is expected to decrease with the proposed TILA amendment, improving the credit profile of related ABS.

Performance Updates

• Prime Auto ABS: Performance remains stable, with some tightening of credit standards.
• Credit Card ABS: Performance in Canada improved in January, with a lower net charge-off rate and higher payment rates.
• Private Student Loan ABS: Some performance issues were noted, with delinquency rates increasing.

Outlooks

• Consumer ABS - US: Expected to remain strong, with continued focus on credit quality and structural features.
• Equipment ABS - US: Expected to see robust issuance due to improved fundamentals.
• Structured Finance - Canada: Expected to face challenges due to increased vulnerability in consumer lending.

Sector Updates

• Auto ABS - US: Continued growth and stability, with some concerns over mid-life aircraft collateral.
• Credit Card ABS - Canada: Strong performance with a slight increase in delinquencies.
• Student Loan ABS: Mixed performance, with some upgrades and downgrades noted.

Rating Actions

• Upgrades: USAA, GM Financial, RV and Marine ABS, Ford Credit, and others.
• Downgrades: Patrons' Legacy 2003-IV certificates and Lehman Brothers small balance commercial loan ABS.

Key Links

• ABS Quick Check
• Structured Finance

Conclusion

The March 2018 issue of ABS Spotlight highlights the resilience of the securitization market despite various challenges, including the impact of the 2017 hurricanes and the ongoing effects of the 2017 tax law. The market remains optimistic about continued issuance and performance, with a focus on improving structural features and addressing legal uncertainties.