medium · Asset-Backed Securities waterfalls
In a conduit CMBS deal, a 100 million mortgage defaults and the servicing agreement produces a 30 million Appraisal Reduction Amount (ARA).
Under the stated deal mechanics, how does the ARA affect monthly interest distributions?
- The full $30 million ARA is immediately written off against the outstanding balance of the senior-most certificate class.
- Required servicer interest advances are reduced under the ARA calculation, creating shortfalls allocated first to subordinate certificates under the waterfall.
- The special servicer contributes its own capital reserve so certificate interest remains unchanged despite the appraisal decline.
- Exactly $30 million is transferred from the interest waterfall to principal solely to accelerate senior certificate paydown.
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