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What Drives Default and Prepayment on Subprime Auto Loans?
Heitfield, Erik Sabarwal, Tarun
Heitfield, Erik
Sabarwal, Tarun
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Abstract
This paper uses novel data on the performance of loan pools underlying asset backed
securities to estimate a competing risks model of default and prepayment on subprime
automobile loans. We find that prepayment rates increase rapidly with loan age but are
not affected by prevailing market interest rates. Default rates are much more sensitive
to aggregate shocks than are prepayment rates. Increases in unemployment precede
increases in default rates, suggesting that defaults on subprime automobile loans are
driven largely by shocks to household liquidity. There are significant differences in the
default and prepayment rates faced by different subprime lenders. Those lenders that
charge the highest interest rates experience the highest default rates, but also experience
somewhat lower prepayment rates. We conjecture that there is substantial heterogeneity
among subprime borrowers, and that different lenders target different segments of the
subprime market. Because of their higher default rates, loans that carry the highest
interest rates do not appear to yield the highest expected returns.
Description
This is the Author's Final Draft. The original published version is available at: http://dx.doi.org/10.1023/B:REAL.0000044023.02636.e6.
Date
2004
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Springer-Verlag
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Heitfield, Erik and Tarun Sabarwal (2004): “What Drives Default and Prepayment on Subprime Auto Loans?” The Journal
of Real Estate Finance and Economics, 29(4), 457-477. http://dx.doi.org/10.1023/B:REAL.0000044023.02636.e6.