Tax season is typically not a popular time for many, but the coming months may bring a smile to the faces of those in the auto industry, according to Fitch Ratings. Analysis from the financial information services firm indicates that tax season will bring improvements in the credit performance of subprime and prime auto asset-backed securities, mainly due to a fresh flow of tax refunds. Fitch’s analysts explained that the distribution of tax refunds will enhance consumer cash flow, providing more stability in the auto asset-backed securities market.

How Long Will the Boost Last?

Whether the temporary increase from tax refund spending will trigger a lasting trend remains to be seen, and it will also depend on the degree of consumer confidence throughout April and the subsequent months. Even if the improvement in credit performance is temporary, the news will still be welcome to the auto financing world, as Reuters reports that “asset performance has softened somewhat over the past six months.”

Despite the generally disappointing performance of auto asset-backed securities over the past half-year, there have been some signs of encouragement in the auto financing market as of late, particularly when compared to recent years.

Auto Finance Market Trends: Now vs. Then

In addition to providing insight into what the future holds, Fitch Ratings took a brief look back, noting that subprime delinquencies have been on the decline, dropping one percent month on month over the course of February, and that 60+ days delinquencies have also been trending downward compared to previous months. However, subprime annualized net losses increased during February, with those losses twenty-five percent higher in February 2014 than at the same point during 2013.

One potential area of optimism is the used car sector. Both demand for, and sales of, used cars increased over the past month, possibly due both to receipt of tax refunds and increased consumer confidence spurring participation in cash for clunker cars programs to get extra cash toward a car purchase.

Seasonal Changes in Sales and Demand

Another potential factor boosting consumer spending and, potentially, credit performance is warmer weather. As consumers no longer have to brave winter storms to reach dealerships and navigate test drives, they may be more inclined to spend winter savings than they would be with weather-related obstacles standing in the way. Although perhaps not the most obvious factor, weather and seasonal changes impact demand and sales in the auto industry more than in many other industries.

Reuters reports that while auto values have remained fairly consistent, consumers have not been sufficiently motivated to visit the sales floor throughout the past few months. A combination of tax refunds, warmer weather, and perhaps dealer incentives and price cuts could help spur additional sales for dealers who have seen a cold winter in terms of selling.

Another reason for optimism for the auto industry, particularly on the financing side, is that Fitch Ratings upgraded 12 classes of notes regarding prime auto loan asset-backed securities transactions and six classes of notes on subprime transactions.


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