medium · Asset-Backed Securities waterfalls
A CMBS Special Servicer determines an Appraisal Reduction Amount (ARA) of $5.44M on a defaulted loan.
What is the immediate mechanical impact on the bond waterfall?
- The defaulted loan is immediately and permanently removed from the securitized trust pool at its newly determined lower appraised value.
- The controlling class designation automatically shifts to the senior-most AAA tranche to protect that class's interests.
- The IO strip coupon rate automatically increases to compensate holders for the higher perceived default and credit risk.
- The master servicer's obligation to advance interest is reduced, potentially causing interest shortfalls for subordinate tranches.
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