Collateral deterioration

Propagating thrombosis proximal or distal to a thrombotic, embolic or any other type of occlusion, or within collateral vessels, is often assumed to explain neurological deterioration if other causes have been excluded. However direct evidence is almost impossible to obtain, except perhaps with transcranial Doppler. 

Collateral cover is now calculated with reference to market value as well as nominal value, enabling greater transparency and precision in the calculation of cover. Both these amendments benefit the Pfandbrief investor in the event of the insolvency of a mortgage bank, there would be no netting of derivatives, which would therefore continue to protect the cover pools and allow the banks to hedge against adverse market conditions that could cause their paper to suffer credit deterioration. 

As the spread account traps excess spread over a period of deteriorating collateral performance, a driving factor in the effectiveness of the spread account is the rate at which the excess spread decreases. If the collateral performance deteriorates slowly, the spread trapping mechanism will most likely be able to trap the maximum amount of spread allowed. However, if there is a rapid deterioration in the collateral performance, the spread trapping mechanism may not be able to trap the maximum allowable amount of spread before the excess spread in the transaction turns negative. Exhibit 13.11 shows a scenario in which excess spread deteriorates from an initial level of 9% to zero over a 36-month period. After 12 months, 3-month average excess spread falls to 5% and excess spread is getting trapped. 

In this example, the dynamic spread account builds up only to approximately 1.6% of the transaction size, which is well below the target level of 5%. These two examples highlight the importance of the originator s ability to service the receivables pool effectively and, as such, avoid a rapid deterioration in the performance of the collateral. An originator that follows strict credit underwriting procedures and has experienced staff servicing accounts that enter a state of delinquency... 

Declines in equity market values tend to place upward pressure on swap spreads. A decline in equity market values deteriorates the overall credit health of the banking sector, because it reduces collateral value in the entire system. 

---