hard · Asset-Backed Securities
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 due to the 'Lockout' provision found in subprime hybrid ARMs.
- The CPR will increase as 'cured' borrowers eventually find it easier to obtain new financing.
- 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 constant because the rate incentive has not changed.
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