medium · Asset-Backed Securities asset-nuances
How does the 'Servicer Advance' mechanism impact the cash flow of a senior ABS tranche during a period of rising delinquencies?
- It ensures the timely payment of bond interest by having the servicer 'bridge' missed borrower payments.
- It permanently offsets collateral losses, acting as an insurance policy for the whole trust.
- It automatically forces 'Early Amortization' of the trust once delinquencies pass a fixed 5% threshold.
- It increases the senior bond's effective yield by tacking additional 'advance fees' onto the monthly coupon.
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