The available funds cap was the topic of discussion by analysts at Citigroup Global Markets and Morgan Stanley last week, as it has come into focus recently as short-term rates have risen steadily and excess spread on new deals has diminished.

Citigroup evaluated the cost of the cap for both senior and subordinated home-equity ABS under several interest rate, volatility and prepayment scenarios and found that the cost is greater for seasoned deals than for recently issued securities. "Using a 12-month average of implied volatilities, the cost of the [cap] on recently issued securities is low, ranging from zero basis points on short and intermediate triple-As to four basis points on the double-Bs. In a 100 basis point parallel shift of the forward curve, the cost of the AFC increases to a range of zero to 11 basis points," according to Citigroup.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.