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What Drives Default and Prepayment on Subprime Auto Loans?

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  • Erik Heitfield

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  • Tarun Sabarwal

    ()

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.

Suggested Citation

  • Erik Heitfield & Tarun Sabarwal, 2004. "What Drives Default and Prepayment on Subprime Auto Loans?," The Journal of Real Estate Finance and Economics, Springer, vol. 29(4), pages 457-477, December.
  • Handle: RePEc:kap:jrefec:v:29:y:2004:i:4:p:457-477
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    References listed on IDEAS

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    1. Pavlov, Andrey D, 2001. "Competing Risks of Mortgage Termination: Who Refinances, Who Moves, and Who Defaults?," The Journal of Real Estate Finance and Economics, Springer, pages 185-211.
    2. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, pages 275-308.
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    5. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
    6. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, pages 179-196.
    7. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
    8. Calhoun, Charles A & Deng, Yongheng, 2002. "A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations," The Journal of Real Estate Finance and Economics, Springer, pages 9-33.
    9. Fred Phillips-Patrick & David Malmquist & Clifford Rossi, 1997. "The Economics of Low-Income Mortgage Lending," Journal of Financial Services Research, Springer;Western Finance Association, pages 169-188.
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    Cited by:

    1. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, pages 233-263.
    2. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, pages 233-263.
    3. repec:bap:journl:170404 is not listed on IDEAS
    4. DobromiƂ Serwa, 2013. "Measuring Non-Performing Loans During (and After) Credit Booms," Central European Journal of Economic Modelling and Econometrics, CEJEME, pages 163-183.
    5. Bruce L. Dixon, 2011. "Competing risks models of Farm Service Agency seven-year direct operating loans," Agricultural Finance Review, Emerald Group Publishing, vol. 71(1), pages 5-24, May.
    6. Bryan Stanhouse & Duane Stock, 2008. "Managing the risk of loan prepayments and the optimal structure of short term lending rates," Annals of Finance, Springer, pages 197-215.

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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