hard · Asset-Backed Securities
A FFELP student-loan ABS (loans carrying a ~97-98% federal guarantee) and a private student-loan ABS are otherwise similar. An analyst observes that the FFELP deal's senior notes are rated AAA with strikingly THIN hard credit enhancement, yet the rating agencies' primary modeled risk for that FFELP senior bond is not default loss at all.
What is that primary modeled risk, and why is it the binding constraint?
- Basis and reset risk between the loans' SAP-formula yield and the bonds' coupon, because a mismatch can erode excess spread even though the guarantee covers principal default
- Maturity (extension) risk: borrower use of deferment, forbearance, and income-driven repayment can stretch cash flows past the bonds' legal final maturity, causing a technical default despite near-full principal recovery
- Reinvestment risk on the guarantee proceeds, because claim payments arrive in lump sums that must be reinvested at uncertain short-term rates before being passed to noteholders
- Servicer-disruption risk, because losing the federal guarantee requires perfect servicing and a single servicing error voids the guarantee on the entire pool
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