medium · Asset-Backed Securities
In a 'multiples' approach to AAA credit enhancement sizing, why might a subprime auto pool have a lower multiple (e.g., 2.5×) than a prime auto pool (e.g., 5.0×)?
- The 'base case' loss for subprime is already very high, and the absolute level of stress is the limiting factor.
- Prime auto loans have more prepayment risk.
- Subprime borrowers are less likely to default in a recession.
- Subprime pools always have more excess spread to offset hard CE.
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