Residual
Asset-Backed Securities glossary · Asset Specific Nuances
Definition
The most subordinate beneficial interest in a trust; absorbs first losses and receives residual cash flows.
Residual in plain English
When loans are pooled and sliced into layers of claims, the residual is the very bottom layer — the leftovers. It gets paid last, only after everyone else has been fully paid, but in exchange it's first in line to absorb losses when borrowers don't pay. So it's the riskiest piece: if the pool does badly the residual can be wiped out, but if the pool does great it can earn the extra cash nobody else was promised. It's like the owner of a food truck: the staff and suppliers get paid first no matter what, and the owner keeps whatever's left over — which could be a lot, nothing, or a loss.
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Practice Residual
If available cash is limited, which claim is paid first under that stated order?
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