Asset Backed Securities - Backed By Subprime Automobile Loans

Open Access
Pan, Jay
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • James Alan Miles, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
  • subprime
  • auto-backed securities
  • auto loans
  • ABS
Securities backed by the subprime mortgage loan and its related derivatives had a detrimental effect on the financial industry and global economy for many years following the 2008 financial meltdown. As the U.S and rest of the world on its recovering path from the financial crisis, subprime automobile lending is growing at an alarming rate. An article by Reuters titled "How the Fed fueled explosion in subprime loan" attributes the growth of subprime auto loan in recent years to Federal government’s bond buying programs arguing the record-low interest rate is driving investors’ demand for subprime securities products. This research exams subprime auto securities originated from 2008 to 2014 and applies the simple linear regression model to show the correlation between various variables effecting the default rate on subprime auto loans. The data indicates that despite the credit quality continued to deteriorate, auto-backed securities' performance remain stable. The result shows default rate is positively correlated with the interest rate on the loan. Decreasing interest rate and stronger credit enhancement on the securities are the reasons that many of the securities remains trip A rated under both S&P and Fitch rating . Despite the heated discussion regarding the credit bubble , the research result indicates that the current state of auto credit market remains healthy.