Bonds backed by automobile loans may be hurt by rising subprime mortgage defaults, as people with poor credit struggle with their household debt, according to Standard & Poor's Corp.
Capital One Financial Corp., Wachovia Corp., Wells Fargo & Co., and other lenders have lent more funds to people with bad credit scores in the past few years to sustain growth, S&P said Monday in a report by analysts led by Mark Risi. The loans are also for longer terms, increasing the probability of default, the analysts said.
About 68% of last year's subprime auto loans were due in five years or more, Mr. Risi said in an interview.
"There could be some fallout from subprime in auto loans," he said.
"We don't have much data yet. We're still in collection mode. It's probably going to be hard to say for a while."
Subprime auto borrowers who are also homeowners may have "exposure to affordability products and the related payment shock," Mr. Risi said.
"But the good news is initial data indicates that the majority of subprime auto borrowers are renters and are therefore not subject to the vagaries of the mortgage market."
Subprime auto bonds are showing a wide disparity in performance depending on the issuer, the analyst said.
With some subprime issuers moving further down the credit spectrum and some resisting that trend, "we are seeing some interesting results from this divergence."
Bondholders cannot tell which subprime auto borrowers are also homeowners, he said.
Given a choice between making a car payment or paying the mortgage, consumers react in different ways, Mr. Risi said.
"Without much thought, you'd say people wouldn't want to lose their home, so they'd first make the house payment," he said. "But with a lot of the borrowers struggling to make their house payments, to get any cash, they have to get to work. And that's what they need their car for."
