hard · Asset-Backed Securities asset-nuances

In a U.S. private student-loan ABS, the sponsor offers eligible borrowers a 'cosigner release' after 24 on-time payments. Holding gross defaults and CPR constant, the most defensible reason a rating analyst would still haircut expected recoveries upon widespread cosigner release is that:

1. Cosigner release removes a second source of repayment and recovery on the specific loans most likely to season into later-life default, adversely selecting the post-release pool's loss-given-default upward
2. Cosigner release accelerates prepayment because newly released borrowers immediately refinance elsewhere at cheaper rates, shortening WAL and lowering the trust's lifetime dollar recoveries
3. Cosigner release converts the underlying private loans to fully non-recourse status, so the trust permanently loses its security interest in the released borrower's wages, earnings, and future assets
4. Cosigner release automatically triggers a materially higher contractual servicing fee that sits senior in the payment waterfall, diverting cash that would otherwise fund the reserve account and build credit enhancement

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