Excess spread vs excess servicing (from Fabozzi)

Discussion in 'P2.T5. Market Risk (25%)' started by shanlane, May 16, 2012.

  1. shanlane

    shanlane Active Member


    Do these two terms mean the same thing?

    If not what is the difference?

    Also, what does it mean when it says base servicing is money the "must be held by the servicer of the loan"? I thought this was at least in part considered a payment to the servicer for his services. Is this not correct?

  2. ibrahim-1987

    ibrahim-1987 Active Member

    hi shanon,
    1. no they r not the same:
    ES: is the difference between pool's WAC and coupon paid on the securities issuied ( WAC - coupon ). " more general term "
    E Ser: is the residual from pool's WAC after deducting ( WAC- Guarantee + base servicing + coupon).

    2. " servicing money must be held by the servicer of the loan " :
    servicing money: is the payments collected from borrowers, which is distributed through:
    1. tax & insurance payments.
    2. servicing fee.
    3. the residual is paid to SPE to be paid later to invetors.
  3. sl

    sl Active Member

    Shouldn't it be, (WAC- Guarantee - base servicing - coupon)?
  4. ibrahim-1987

    ibrahim-1987 Active Member

    Yes y r right, I'm sorry I forgot the parenthesis
    I meant WAC - ( g+s+c )
    Thank y
  5. shanlane

    shanlane Active Member

    That is just net excess spread, isnt it?

    Also, one is for private label and thother for agency.

    Net excess spread is just WAC - deal coup - senior expenses.

    Excess servicing is WAC - deal coup - g fees - base servicing, so its kind of like base servicing + excess servicing is equal mathematically to excess spread.
  6. ibrahim-1987

    ibrahim-1987 Active Member

  7. shanlane

    shanlane Active Member

    I guess what I really meant was: what does excess servicing do? Excess spread is credit enhancement, since the agency MBS are already guaranteed, BUT what doe the Excess servicing do?

  8. ibrahim-1987

    ibrahim-1987 Active Member

    Excess servicing is only with fixed securities, so the nature of coupons in the pool play this role in the creation of excess servicing existence.

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