Auto ABS: Auto Asset Backed Security

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Securitization of automobile loans and issuance of auto Asset Backed Security (auto ABS) was initiated in the US in1985. Until then, mortgage backed loans were the only asset backed securities issued by banks and financing companies. Auto loans emerged as an attractive option for securitization in view of their shorter maturities. Investor interest in auto ABS is largely driven by the predictable timing of cash flows from the automobile loans backing it.[br] 

Types of Auto ABS: Auto Asset Backed Security

Auto loans are the second biggest asset class in the ABS segment. The US auto ABS market encompasses a broad range of securities with widely varying asset credit quality, types of originators and structural features. Retail loans continue to be the largest and the most consistent offerings of asset classes securitized. In addition, retail leases, rental vehicles and floor plan-based assets are also securitized. The collateral that support asset-backed securitizations includes assets carrying various levels of credit risks and those related to various types of vehicles. The largest of auto ABS offerings are done by captive auto finance companies but third party sub prime auto loans backed securities also constitute a significant portion of the auto ABS market.

Auto ABS can be classified into three categories – prime, nonprime, and subprime:

  • Prime auto ABS are collateralized by loans made to borrowers with strong credit histories.

  • Nonprime auto ABS comprises loans made to consumers with poor credit score which may have higher cumulative losses.

  • Subprime borrowers will typically have lower incomes and tainted credit histories, or both.

The most common structure used to issue auto ABS is the owner structure. It allows investors to receive interest and principal payment on a sequential basis. Some offerings are also structured to allow pro rata payments.


Trends in Auto ABS segment: Auto Asset Backed Security[br]

The US auto ABS market witnessed decline in activity following the subprime crisis and the consequent financial collapse (2008). In an effort to re-erect the securitization segment and lending markets, the US Federal Reserve launched in November 2008, the Term Asset Backed Securities Loan Facility (TALF) to support the issuance of loans, credit card loans, equipment loans, floor plan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans. The program has been dominated by auto loans backed securities. In addition to TALF backed deals, several independent auto ABS issues have also been launched.


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