Shifting interest
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
A structural feature in mortgage-backed and HEL transactions that allocates prepayments disproportionately to the senior bonds early in life, building subordination for later periods.
Shifting interest in plain English
When lots of homeowners in a mortgage pool pay off their loans early, that extra cash has to go somewhere. "Shifting interest" is a rule that steers most of those early prepayments to the safest investors (the senior bondholders) first, paying them down quickly. Why bother? Because the riskier investors underneath them stay in the deal longer, so their cushion of protection actually grows over time instead of shrinking. Think of a group hiking a narrow trail: you send the most cautious hikers across the shaky bridge first while it's freshest, so the ones crossing later have more people below to catch them.
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