NEW YORK — Given the state of the credit markets, it was somewhat unsurprising that subprime auto asset-backed securities' performance showed higher delinquencies and losses during the fourth quarter of 2007, according to Fitch Ratings.

"On a month-over-month basis, the indices remain relatively unchanged, moving up less than 5 percent," Fitch officials reported in a recent e-newsletter.

On the other hand, they indicated that, "The subprime delinquency index was at 3.66 percent in December, up from 3.52 percent and 3.55 percent in November and October. However, versus December 2006, delinquencies were 35 percent higher in December 2007, and in comparison to recent years, were at a six-year higher."

Moreover, the company said the annualized net loss index was higher as well on a month-over-month basis for the quarter, jumping to 7.56 percent in December, up from 6.65 percent in October and 7.35 percent in November.

"ANL were 15 percent higher in December 2007 versus the level in 2006, and losses moved off of the historically low levels exhibited in 2005 and 2006 to levels that are consistent with performance in 2004 and 2003," executives explained.

Meanwhile, on the prime side, Fitch indicated that its delinquency and annualized net loss indices jumped to their highest levels for the year, climbing above historical trends.

More specifically, the 60-day plus delinquency index came in at 0.69 percent in December, which is up from the 0.65 percent range reported in the prior two months. In fact, the December level is more than 30 percent higher than the same month in 2006, officials noted. Additionally, they said this level is actually the highest since February 2003.

As for the prime ANL index, it showed similar results, displaying higher levels during the quarter and ultimately reaching 1.34 percent in December, up from 1.16 percent in November and 0.93 percent in October.

"On a year-over-year basis, ANL in December 2007 surged 60 percent above levels in December 2006, but remained within the range of losses produced in 2003 and 2004," Fitch wrote.

"The seasonally adjusted cumulative net losses were 0.68 percent in December, compared to 0.65 percent and 0.60 percent in November and October, respectively," the company continued. "These levels represent an 8-percent year-over-year increase from the performance seen in 2006, but well below the levels experienced in 2005."

Looking ahead, executives forecasted, "As with the prime sector, the subprime sector will face increasing pressure in the coming months and performance is expected to be weaker," they added.

2008 Performance So Far

So, exactly how are these sectors fairing in the new year? Well, in January, Fitch reported that 60-day plus delinquencies in prime and subprime auto ABS ramped up, reaching the highest record in a decade.

Subprime delinquencies surpassed 4 percent for the first time since late 1997, coming in at 4.03 percent in January. This is up 10 percent from December 2007 and up 43 percent from January 2007.

Reviewing subprime ANL, the company said it came in at 8.48 percent for the month, a 12-percent jump from December 2007 and the highest level since January 2007.

As for ABS issuance, Fitch reported that a $440 million deal sold by Wachovia was the only non-prime transaction in January.

In the prime sector, officials said their 60-day plus delinquency index was 0.77 percent, climbing 11.6 percent higher than December, pushing it up to a 10-year high. From January 2007, this measurement is up 44 percent.

Meanwhile the ANL index came in at 1.28 percent in January, down 4.5 percent from December 2007, but 44 percent higher than January 2007.

The company went on to report that five prime auto loan deals were issued during the month, totaling $5.4 billion. The companies involved included USAA, CarMax, Nissan, Ford Credit and GMAC.

Despite the weakness, Fitch said that compared to 2002 results, this January's prime and subprime delinquency levels remained lower.

"Of particular concern regarding both delinquency and ANL performance, is that the average rate of monthly and yearly increases produced by the indices over the past year has been ticking-up at a faster pace each month without any slowdown," explained Hylton Heard, Fitch Ratings director.

"Besides the upcoming seasonally stronger period when consumers start to receive their tax refunds, there appears to be few positive factors present that can potentially slow the recent weakening trend in delinquency and loss performance in coming months," he added.

Now it's time to look at February results. According to seasonal trends, auto ABS performance showed slight improvement, Fitch pointed out.

Subprime 60-day plus delinquencies declined to 3.74 percent for the month, compared to January, which is a 7-percent drop. However, February's delinquency rate was 40 percent when compared to the same time frame in 2007.

Additionally, ANL delinquencies came in at 8.54 percent, which is flat compared to January's level, the company said. This rate did come in 30 percent higher when compared to February 2007, though.

On the prime side of business, the 60-day plus delinquency index actually displayed a monthly improvement, falling 2.6 percent to 0.75 percent in February as opposed to January.

Delinquencies remained 25-percent higher, however, through February when compared to the same month of last year.

The annualized net loss rate was 1.33 percent for the month, climbing almost 4 percent over January. Officials indicated that despite the slowdown in the index, ANL remained 34 percent higher when compared to 2007 levels.

Heard explained, "Despite weaker overall performance beginning in the second half of last year into 2008, auto ABS ratings have remained stable-to-positive because the loss rates have remained within Fitch's original expectations.

"Though Fitch expects the pace of auto ABS upgrades to slow, Fitch also does not anticipate a significant increase in downgrades," he added.

Overall, Fitch said its indices total about $67 billion of prime and subprime auto ABS transactions, with 64 percent, or $43 billion, making up prime transactions and $24 billion representing subprime transactions.

The company also noted that ratings of subprime auto ABS transactions were impacted by its downgrades of certain financial guarantors which provide insurance policies on the transactions. This led the company to downgrade 14 subprime and six rental-car transactions over the past six months.

"While incoming tax refunds and rebates may mute delinquency and loss rates in the short term, macroeconomic conditions impacting consumers combined with a softer used-vehicle market will continue to pressure loss frequency and severity and ultimately net-loss rates," Fitch highlighted.

Finally, the company reviewed March measurements.

"While many factors can be indicative of the state of the U.S. economy as a whole, the unemployment rate is one of the most widely acknowledged indicators of consumer health," the company reported. "Therefore, Fitch Ratings has analyzed the historical relationship between changes in the unemployment rate and changes in the U.S. consumer asset-backed securities loss rates.

"Based on this analysis, Fitch believes the typical prime credit-card and auto transactions could withstand an increase in the unemployment rate of four-to-five times the current rate at the ‘AAA' level, and roughly one-and-a-half-to-two times at the ‘BBB' level, all else being equal," Fitch indicated.

The company went on to say it is forecasting that the unemployment rate will continue to grow throughout the year, ultimately reaching the 5.5 percent range by year's end.

Executives explained that after hitting multiyear lows during the first part of 2007, the employment rate, auto-loan losses and credit-card losses are now rising.

"While they are all still considerably lower than the recent highs reported in mid-2003, ABS investors are seeking more information on the potential impact of continued increases in the unemployment rate on auto-loan and credit-card transactions," officials said.

Basically, Fitch indicated that the expected climb in the unemployment rate will cause auto-loan and credit-card loss rates to jump proportionally, with subprime assets showing the highest proportional rate.

"Typical ‘BBB' securities could withstand an increase in the unemployment rate to more than 9 percent for auto transactions and close to 11 percent for credit-card transactions," executives reported.

Kevin Duignan, managing director and ABS Group head, said, "Consumer ABS transactions rated ‘AAA' can withstand unemployment stresses to levels not seen since the Great Depression."

Although Fitch said in February that it believes collateral performance will decline steadily throughout 2008 in both credit-card receivable and auto-loan assets, the company said the credit enhancement and structural features of the transactions should be "sufficient to stave off widespread negative rating action in those sectors."