This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Fitch Shines Light On the Real Subprime Boom

NEW YORK ( TheStreet) - Prior to the financial crisis, ratings agencies such as Moody's Investors Service (MCO - Get Report), McGraw-Hill (MHP)-owned Standard & Poor's and Fitch Ratings looked the other way when it came to giving risky subprime mortgage securities top grades.

As subprime markets revive from a post-crisis thaw, however, Fitch has decided to take a stand against the compulsion to rubber stamp risky bundles of subprime loans with high ratings.

The battleground it has chosen is auto loans. Auto loans represent the first major thaw in the subprime market, and may be early evidence of Wall Street activity that poses risks to the wider public.

Fitch is refusing to rate debt securities issued by subprime auto lender Exeter Finance Corp., owned by private equity giant Blackstone Group (BX - Get Report), amid concerns the firm doesn't have the track record or financial health to support a top rating. [<b>Goldman Sachs</b> <span class=" TICKERFLAT">(<a href="/quote/GS.html">GS</a> - <a href=";ticker=GS">Get Report</a><a class=" arrow" href="/quote/GS.html"><span class=" tickerChange" id="story_GS"></span></a>)</span> is a minority investor in Exeter].

Investors should applaud such independence after most agencies moved lockstep in giving top ratings to risky mortgage securities during the housing boom, ultimately making AAA a seal of approval on what was the most destructive asset bubble since at least the Great Depression.

While Fitch may simply be sitting out esoteric and hard-to-rate deals, a February report combined with the more recent refusal to rate the Exeter deals suggest a broader philosophical objection to the sharply rising market for subprime auto loans.

In the February report, Fitch warned a quietly rising market for U.S. subprime auto loans could lead to an erosion of underwriting standards. Fitch's warning brought to mind the way Wall Street fueled a boom in subprime mortgage bonds and securitizations, which later collapsed with the housing market.

"Fitch believes the recent success in the U.S. subprime auto ABS market is leading to increased competition among lenders, which could result in looser underwriting practices," John H. Bella, a Fitch managing director, wrote of the market on February 12.

Subprime auto ABS refers to the pooling of auto loans by individuals with credit scores below 660. In 2012, issuance rose 18% in 2012, according to credit-reporting agency Equifax. The market continues to grow this year.

To casual securitization market observers, Fitch's three paragraph report from February sounded like an alarm bell and created the expectation of increasingly risky deals starting this year.

"We expect 2013 securitizations to include weaker collateral quality than prior years, including extended loan terms and weaker credit tier distributions. Over the longer term, this factor is viewed as a potential risk to the market," Fitch's Bella wrote in the report.

Indeed, the language is striking for the way it recalls the housing collapse.

"Should the positive performance in the market continue and attract more participants to it, the subsequent increase in competition could result in looser underwriting standards and exaggerate expectations. And if another recession or downdraft in the market coincides with this expansion, we would expect a significant challenge to many vintages," Bella wrote.

Sound familiar?
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BX $27.44 0.00%
GS $164.11 0.00%
MCO $95.72 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs