medium · Asset-Backed Securities collateral
An analyst is evaluating an Option-Adjusted Spread (OAS) for a subprime HEL ABS.
If the model uses a 'Burnout' factor, how will the projected CPR behave after a sustained period of high interest rate incentives (i.e., rates staying well below the pool's note rate)?
- The CPR will flip to zero immediately due to the 'Lockout' provision commonly found in subprime hybrid ARM structures
- The CPR will increase steadily as previously delinquent 'cured' borrowers eventually find it easier to obtain new refinancing offers
- The CPR will gradually decline even if rates remain low, as the most credit-worthy and rate-sensitive borrowers have already refinanced.
- The CPR will remain essentially constant over time because the underlying rate incentive itself has not meaningfully changed
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