medium · Asset-Backed Securities
A Home Equity Loan (HEL) ABS structure uses a Shifting Interest mechanism. At closing, the Seniors (Class A) represent 90% of the deal and Subordinates (Class M/B) represent 10%.
During a 36-month lockout period, 100% of prepayments are directed to Class A. If the pool begins with 500,000,000 and experiences 20% CPR, what is the primary credit effect on Class A by Month 37?
- Class A's credit support increases because the Subordinates remain at their original dollar balance while the total pool shrinks.
- The shifting interest mechanism is disabled if any cumulative loss triggers are breached, returning the deal to pro-rata payments.
- The Weighted Average Life (WAL) of Class A will extend, providing more interest income to compensate for the shifting interest risk.
- The Class A percentage of the remaining pool will significantly decrease, as it amortizes faster than a pro-rata allocation would allow.
Sign up free to see the explanation and track your rank →
More Asset-Backed Securities practice
- Which vehicle was specifically created by the Tax Reform Act of 1986 for this asset class?
- What is the most likely tax structure?
- Given the real estate collateral, which tax vehicle is standard for this multi-class trans
- An originator transfers auto loans to a bankruptcy-remote in… — What is the economic purpo
- Under ASC 860, which condition must be met for a transfer of receivables from an originato
- Why does it covenant NOT to incur additional debt?
- A CLO manager is actively buying and selling senior secured… — Which phase of the transact
- An analyst observes that a Non-agency Senior RMBS bond with… — How should the credit decom