medium · Asset-Backed Securities
An auto ABS originator has experienced consistent lifetime losses of 1.50%. However, the rating agency uses a 'base case' of 2.00%.
Which of the following is the most likely reason for this 'haircut'?
- The agency is required to use a minimum 2.00% base case for all prime auto lenders regardless of history.
- The pool being securitized has a higher concentration of longer-term or lower-FICO loans than the historical average.
- The originator's data only covers a period of economic expansion (benign environment).
- The agency is penalizing the lender for using a sequential pay waterfall instead of a pro-rata one.
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