medium · Asset-Backed Securities waterfalls
In a shifting interest structure for a Home Equity ABS, the 'Senior Prepayment Percentage' is set at 100% for the first 36 months.
If a delinquency trigger is breached at month 40—when the schedule was set to step down to 70%—what is the immediate mechanical consequence for the Class M (mezzanine) tranche?
- The Class M tranche's interest is diverted to the senior reserve account.
- The Class M tranche is locked out of all principal distributions until the trigger cures.
- The Class M tranche is immediately written down by the amount of the delinquency shortfall.
- The Class M tranche begins receiving pro-rata principal to maintain its credit enhancement ratio.
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