hard · Asset-Backed Securities
A pool of manufactured housing (MH) ABS is being evaluated. Unlike standard residential mortgages, MH prepayments often exhibit 'default-driven acceleration.'
What does this imply for the investor's analysis of the reported CPR (Constant Prepayment Rate)?
- The investor should focus on the Z-spread, as it is the only metric that accounts for the 'title issue' associated with mobile homes.
- The CPR will likely ramp up according to the PSA benchmark, reaching 6% in month 30.
- The reported CPR may be artificially high due to repossessions, meaning the investor must distinguish between voluntary prepays and involuntary liquidations that result in high severity losses.
- The high CPR is a positive sign, as it indicates borrowers are rapidly refinancing into lower-interest conventional mortgages.
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