Chapter 10
Credit Risk and Credit Enhancement
Institutions constrained by the ratings of their investments must understand the different types of credit enhancement provided in securitization as well as the factors in the achievement of the different ratings. When financial assets are securitized, a significant portion of the equity of the issuer that formerly supported the various risks associated with the assets must be raised from a third party or reconstructed from the assets themselves and financed via the capital markets. The function of equity is to finance unexpected losses. The losses may be temporary, when due to delinquencies, or permanent, if caused by defaults. In a securitization transaction, both the unexpected and expected losses ...
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