medium · Asset-Backed Securities waterfalls

In the later years of a shifting interest deal (e.g., year 7+), the senior prepayment percentage often bottoms out at around 20%. Why not 0%?

1. Regulators cap subordinate bond payouts at 80% of any single prepayment received.
2. The deal's residual equity holder absorbs the remaining 80% share once shifting begins.
3. To ensure that senior bonds continue to receive some portion of prepayments and eventually retire completely.
4. To prevent the senior bonds' weighted average life from stretching past the legal final maturity date set at closing.

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