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