Prepayment Update - Dec. '07

A Look at Sub-Prime Prepayment Speeds
by Sanjeeban Chatterjee

In this article we look at prepayment speeds for sub-prime loans by quarter of origination starting from 2005Q1. It is common knowledge that prepayment speeds for sub-prime loans have slowed down. This article shows the magnitude of the slowdown and some interesting trends.

We obtained data for this study from Intex. The prepayment speeds indicate total terminations, which include voluntary and involuntary prepayments. Prepayments are recorded whenever the balance becomes zero regardless of the reason.

In Chart 1 we see that speeds have slowed down considerably as we go from 2005Q1 to 2007Q3 originations. Not only have the peak reset speeds gone down but so has the 12-month hump, the time when some of the credit-curing typically happens. For example, after 12 months the 2005Q1 vintage prepaid at 50 CPR while the 2006Q3 vintage prepaid at only 20 CPR. This is a 60% slowdown in speeds. Also, the 2005Q1 vintage had peak reset speeds over 90 CPR while the 2005Q3 vintage prepaid at 70 CPR (a 20 CPR drop). This indicates that in 2007 sub-prime ARM borrowers  could not refinance efficiently when their rates reset after 2 years. And after making timely payments for a year borrowers were probably having a harder time getting better terms on their loans.