hard · Asset-Backed Securities
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:
- 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
- Cosigner release accelerates prepayment because released borrowers refinance, shortening WAL and mechanically lowering lifetime recoveries
- Cosigner release converts the loans to non-recourse status, so the trust loses its security interest in the borrower's future wages
- Cosigner release triggers a higher servicing fee that is senior in the waterfall, diverting cash that would otherwise fund the reserve account
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