medium · Asset-Backed Securities collateral
An auto ABS originator has experienced consistent lifetime losses of 1.50%. However, the rating agency uses a 'base case' of 2.00%.
Which of the following is the most likely reason for this 'haircut'?
- The agency is required by rigid internal policy to apply a minimum 2.00% base case to every prime lender.
- The pool being securitized has a higher concentration of longer-term or lower-FICO loans than the historical average.
- The originator's historical loss data only spans a benign period of economic expansion and lacks a true recession scenario.
- The agency is penalizing the lender because this deal uses a sequential-pay waterfall instead of a pro-rata one.
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