Automobile Loan Portfolio Model (ABS)

Firsts let me state that I personally have never been involved in buying or selling pools of auto loans. This workbook represents how I might approach the analysis of a pool of auto loans, but it is not meant to be compliant with any industry standard methods. Because this program has not been used in actual practice, there may be errors in real world situations.

The purpose of the model is to calculate an internal rate of return (IRR), given prepayments and defaults. Increases or decreases in prepayments alone will not increase or decrease the IRR. That is why I included and average life calculation in the output. A lower average life will require higher amounts of reinvestments.

Increases in defaults and loss severity will lower IRR and required higher amounts of reinvestments.

The model can also be used to value the pool, for the purpose of purchase or sale. Enter a “Market Value Rate”, to value the pool.

(ABS aka APS) = Absolute Prepayment Speed

It is my understanding that the analysis of prepayments on auto loans is typically based on an Absolute Prepayment Speed. This method is referred to as either ABS or APS (I will use ABS in this workbook). Unlike CPR used in mortgage pool analysis, ABS is based on the age of the auto loan. Both CPR and ABS can be converted to an SMM (acronym for Single Monthly Mortality rate). The formula I used to convert ABS to SMM is below:

Converting ABS to SMM:

SMM = ABS/(1-ABS*(p-1))

Where: p = Payment Number

If you are analyzing an older pool of autos, you will enter the original term (months), and the remaining months.  Be sure to in this case, to enter the ABS prepayment that would have been, if the pool were new. For example, if the original term of the pool were 75 months, and the current term is 50 months, you will enter the ABS as if the pool were new (75 months).

If the pool is new, the original and remaining months will be the same.

Servicing

Servicing assumes there is an outside servicer. If the servicing is left out (zero entered) and will be serviced by the lender, the loss severity should reflect assumed extra servicing costs.

 

Defaults

Although I used ABS for prepayments, I chose to use SMM converted from CDR as default rates. I called the default rate CDR (Constant Default Rate). Defaults are made up of two factors, the default rate and loss severity.

Defaults are the dollar amount of loans that will default each month, while the severity is the percent of those defaults that will result in an actual loss. The remainder of the default is treated as cash flow returned, the same as prepayments. For example, if you expected a total loss, the loss severity would be 100%. You would loss 100% of the defaults. Your experience will determine the loss severity you will use.

Remember to include in the severity the estimated time it will take to repossess and sell (time is money), repairs, and other costs.

The default rate (CDR) is converted to a monthly SMM with the following formula:

SMM = 1-(1-CDR) ^ (1/12)

Download: http://pistulka.com/Excel_Shared/Auto_Pool_Model.xlsx

Don Pistulka
Don Pistulka

Retired Credit Union CFO - Finance
Background: over 40 years in investments, asset/Liability management, banking, securities trader.
Worked for: California Credit Union, WesCorp, CalFed S&L, Crocker Bank, Carroll McEntee, Federal Home Loan Bank Board (D.C.), Western Asset Management, Security Pacific National Bank.

2 Comments

  1. Love, love, love this!
    I added a “purchase price” input that affects the IRR, because nobody is selling this at par these days.

    Also, thank you for your explanation of prepayment speeds. I am fairly familiar with CPR, but neither of the other 2 metrics. I saw that Loanstreet uses “ABS” for its auto pools.

    Thanks again!

    David Borsos, CPA

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