Excess spread
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
Portfolio yield minus charge-offs minus base rate minus servicing; the first line of defense against loss in consumer ABS.
Excess spread in plain English
Excess spread is the profit cushion inside a pool of consumer loans, measured as a rate: take the interest the loans earn, then subtract the loans that went bad (charge-offs), what the deal pays its investors (the base rate), and the fee for collecting payments (servicing). Whatever's left over is the "excess spread," and it's the very first thing that absorbs losses before any investor feels pain. It's like a lemonade stand: your sales minus spoiled lemons, minus what you owe your backers, minus your helper's pay — if there's still money left, small mishaps don't hurt you. The bigger this cushion, the safer the bond.
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