We wanted to share and try to educate a bit more regarding what excess interest is and how it has the potential to write-back losses inside of bond structures.
The excess interest mechanisms that are unique to subprime legacy non-agency RMBS have the potential to be very powerful. Excess interest is the residual cash flow that comes after scheduled payments to the servicers and tranche holders in the bond capital structure. It is usually the greatest in subprime structures by design and enhances the internal credit deal of a structure. Excess interest serves as the first line of defense against losses from delinquencies and defaults and potential for credit repair support and write back losses.
Here is an example of how that looks:
The video will give a thorough review of the structure.
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