medium · FRM Part 2 Credit Risk
In securitization, why is 'excess spread' considered a 'flow' rather than a 'stock' of credit enhancement?
- It is only meaningfully present in covenant-lite deal structures where loss recognition is delayed.
- It is a fixed cash reserve account that the originator funds upfront and deposits at the deal's closing.
- It represents the fixed overcollateralization cushion already present at the moment the deal closes and notes are issued.
- It is earned over time from the interest margin and can be released to equity if not trapped by triggers.
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