medium · Asset-Backed Securities
If an ABS transaction is structured to 'build' overcollateralization (OC) over time, how is the excess spread utilized in the monthly waterfall?
- Excess spread is used to pay down the principal of the most senior outstanding bonds in an amount greater than the principal collected from the pool.
- Excess spread is paid immediately to the residual holder, who then pledges a portion of it back to the trust as a capital contribution.
- Excess spread is used to purchase additional loans from the originator at a premium to increase the total asset balance of the pool.
- Excess spread is deposited into a non-interest-bearing account until the total matches the target OC dollar amount.
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