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Yini Yang

Yini Yang

Vice President, MSCI Research

Joy Zhang

Joy Zhang

Executive Director, MSCI Research

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US ABS: Strong Bounce Back, Uneven Performance

  • Issuance of U.S. consumer asset-backed securities bounced back in 2021, with auto ABS up 46%, student-loan ABS 69%, credit-card ABS 361% and consumer-loan ABS up 51% from 2020.
  • Used-car shortages accelerated auto-loan ABS prepayment and reduced defaults; forbearance of federal student loans was elevated, as private-loan prepayment increased; and consumers spent conservatively, affecting credit-card ABS.
  • Commercial ABS issuance was uneven across segments, as aircraft and floorplan remained depressed and equipment and insurance-linked securities moved forward, keeping pace with the economic recovery.

As the U.S. job market has begun to recover, so have consumer credit levels. The issuance of U.S. consumer asset-backed securities (ABS) had a strong bounce back in 2021, with auto ABS up 46%, student-loan ABS 69%, credit-card ABS 361% and consumer-loan ABS up 51% from 2020. What drove this surge across ABS markets?

 

Auto-loan ABS

2021 was a dramatic year for the U.S. auto market: Annualized vehicle sales peaked at 18.78 million units in April and then decreased to two-thirds of the peak value, due, in large part, to supply shortages. The auto inventory/sales ratio dropped from 1.959 as of year-end 2020 to 0.359 as of year-end 2021. As a result, the used-vehicle transaction amount rose 44%, and the used-car consumer price index (CPI) jumped from 153.1 as of December 2020 to 210.2 as of December 2021, according to data from the Federal Reserve Bank of St. Louis. Auto ABS’s booming year saw historically high issuance in all four subcategories.

 

Strong bounce back in issuance of auto ABS

Source: INTEX, MSCI


The MSCI Auto Loan ABS Collateral Model takes used-car prices as an important driver. A strong secondary-market vehicle price has historically promoted prepayments, while suppressing defaults and severity. The exhibit below shows that as used-car prices started to jump in April 2021 and remained elevated since June, subprime auto loans’ prepayment speed followed closely, and their defaults and severity fell further. On the other hand, the net percentage of domestic banks tightening standards for auto loans turned negative in 2021, indicating a loosening credit environment, which might have negatively affected the quality of auto loans. Whether the performance can continue may depend on when the supply-demand imbalance can be relieved and the auto market heads toward normal.

 

Faster prepayment and slower defaults for subprime auto loans, as used-car prices increased

Source: INTEX, FRED, Federal Reserve Bank of St. Louis, MSCI

 

Student-loan ABS

The market for student-loan ABS experienced its highest-issuance year since 2008, as the distribution gradually moved from federal to private loans. In March 2020, the U.S. Department of Education (DOE) announced a payment pause with zero-interest accrual for federal student loans held by the DOE. This relief program has been extended to May 2022. As a result, the federal-student-loan ABS pool’s forbearance level remained elevated — 2% to 3% above the pre-pandemic level, and defaults were suppressed through mid-2021. But, as a majority of the paused loans shifted back to repayment status and enhanced unemployment benefits ended in September 2021, defaults gradually rose back to pre-pandemic levels.

With less-lenient policy (shorter forbearance terms, interest accruing or capitalizing, etc.), private student loans moved out of forbearance status much faster, although the deferment level slightly increased. The default rate for private loans was also inhibited, but these loans were prepaid much faster than before the pandemic, possibly due to refinance behavior during the low-rate market. On the other hand, those with federal student loans historically have had less incentive to refinance, due to typically lower interest rates and the DOE’s forbearance protection, especially during the COVID-19 period — any optional payment is applied to principal, which helps borrowers pay down the loan sooner.

 

Issuance of student-loan ABS

Source: INTEX, MSCI

 

Student-loan ABS pools’ performance

Source: INTEX, MSCI

 

Credit-card and consumer-loan ABS

Credit-card ABS played catchup on issuance in 2021, but did not return to pre-pandemic levels, while consumer-loan ABS issuance gained momentum. Although banks loosened their standards and lowered interest rates for credit cards, consumers remained conservative in their spending, with low transaction amounts despite a strong job market and higher compensation levels. Credit-card and personal loans performed well, with historically low delinquency and charge-off rates, according to data from the St. Louis Fed. The principal-payment rate for credit cards was also elevated to nearly 40% for general-purpose cards and 20% for private-label cards. Credit cards remain a convenient financial tool, but with lower rates and innovative lenders, consumer loans became a favorable funding source, especially for marketplace personal loans.

 

Issuance of credit-card and consumer-loan ABS


 

Source: INTEX, MSCI

 

Credit-card ABS pools’ principal-payment and charge-off rates

Source: INTEX, MSCI

 

Commercial ABS

Issuance of U.S. commercial ABS was uneven over the period: COVID-19-impacted segments such as aircraft and floorplan remained as depressed as they were in 2020; whole business, business loans and receivables recovered well, surpassing 2019 levels; and equipment and insurance-linked securities strode forward, keeping pace with the economic recovery and booming real estate market.

 

Uneven issuance of commercial ABS

Source: INTEX, MSCI

 

Looking into the future

Should current trends hold, the ABS market may grow further in 2022 along with potential growth in the U.S. economy, especially for the sectors damaged most by the pandemic, such as those related to travel and leisure. The recent rates sell-off, engineered by Federal Reserve tightening, has produced a moderate credit widening in the corporate and securitization credit markets. Many will be watching whether these markets will widen further and affect lenders’ willingness to lend and consumers’ ability to borrow.

 

 

Further Reading

COVID Stimulus Helped Resilience of US ABS

Consumer ABS: Recovering from Coronavirus?

Consumer ABS Under Coronavirus in the US and China

MSCI US Auto Loan Collateral Model (client access only)

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