Subprime Finance Turbulence is Spreading

A press release from rating agency Fitch hints at the possibility that increasing turbulence in the subprime finance sector --which caters to borrowers with less-than-pristine credit histories -- may not be limited to housing-related lending.

Subprime delinquencies for US auto loans rose 4.1% in January versus December 2006, while the annualized net loss [ANL] index spiked 31.4%, according to Fitch Rating's 'In the Auto ABS Driver's Seat' newsletter.

'Approximately 70% of the transactions in the subprime ANL index recorded higher loss levels in January as the index hit its highest level in nearly three years,' indicated Hylton Heard, a Director in Fitch's Auto ABS group.

The subprime ANL jumped to 8.67% in January from 6.60% in December 2006, and on a year-over-year basis, the index was 24.2% higher versus January 2006. However, the spike in ANL may have been exaggerated slightly by one subprime issuer included in the index. This issuer implemented a change in their servicing policy resulting in a spike in their ANL. The large increase in this issuer's ANL was a product of a change in a servicing policy combined with weaker performance. Therefore, in coming months, Fitch expects ANL to come down somewhat once the change is fully implemented. The subprime delinquency index was at 2.82% in January, slightly higher than the 2.71% recorded in December 2006.

On its face, the explanation sounds reassuring. Still, it would be interesting to know which firm introduced "a change in their servicing policy" and what the change actually was.

And, of course, why the issuer is doing it now.