Investors are gobbling up auto loans extended to the riskiest borrowers, looking past market warning signs as they reach further for returns, the Wall Street Journal reported. This year, they have been buying subprime auto securitization deals that offer slices with single-B credit ratings, well into junk territory and the lowest grade offered when such bonds are sold. Auto lenders have issued $318 million worth of single-B debt in 2018, more than all prior years combined, according to data from Finsight. Subprime auto deals, often bought by large money managers and other institutional investors, are typically backed by loans to borrowers with FICO scores below the mid-600s. Because these borrowers are at higher risk of default, the bonds tied to their loans can offer higher yields. For securities backed by subprime auto loans, the outlook is mixed. Borrowers are getting slightly more creditworthy, with average credit scores in this year’s securitization pools rising to 588 from 577 last year, according to a Fitch Ratings report from August. But more borrowers — roughly 80 percent — are taking out loans that have terms of more than five years, which are more prone to default. Delinquencies of greater than 90 days have been trending higher for all auto loans since 2012, according to the Federal Reserve Bank of New York.
