hard · Asset-Backed Securities waterfalls
An RMBS pays principal via a 'shifting-interest' structure: subordinate classes are locked out of prepayment principal early on, with their pro-rata share of unscheduled principal redirected to the seniors; the lockout steps down per a subordination-ratio schedule subject to delinquency and loss 'performance tests.' A senior support (AS/last-cash-flow) class absorbs the redirected subordinate prepayments. At year 6 the subordination percentage has more than doubled from closing (so the schedule would normally release subordinate prepayments), BUT the 60+ delinquency test is failing this period.
What is the most precise effect on the senior support (AS) class's WAL this period, and why?
- The AS class's WAL shortens because the failed delinquency test keeps the shifting-interest lockout in place, so subordinate prepayments continue to be redirected to the seniors, accelerating the AS class.
- The AS class's WAL lengthens because the doubled subordination forces an immediate step-down regardless of the delinquency test, releasing prepayments to subordinates and starving the AS class of cash.
- The AS class's WAL is unchanged because shifting interest only governs allocation of scheduled principal, while unscheduled prepayments are always allocated strictly pro-rata to all classes involved.
- The AS class's WAL lengthens because failing the delinquency test diverts that period's prepayments into a reserve fund instead of any bond class, effectively halving the AS class's scheduled principal receipt that period.
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