Matt Koppenheffer

1 Comment

ON: Fri Aug 24th 17:03 PM
Commented on:
A Take On What's Ailing The Markets

I'm no expert, but from what I understand the interest and principal that comes in from all of the loans in the entire securitization are pooled. Then the tranches get paid from top to bottom, so the top tranche gets paid first and shortfalls end up hurting the bottom tranches because they get paid last. In other words, until defaults reach a certain threshold, the top tranches aren't touched.

Securitizations are also often over-collateralized so that they have some cushion against higher than expected losses.

One of the big problems with the higher defaults is that even if the higher tranches haven't been touched, they become incrementally more risky as defaults eat away at the lower tranches. So even though you theoretically have not lost any of your principle or the interest due, you probably won't be able to get face value if you try to sell in the open market.

Hope this helps,
AvgJoe
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