The process of posting more collateral than is needed to obtain or secure financing. Overcollateralization is often used as a method of credit enhancement by lowering the creditor's exposure to default risk.
|||Overcollateralization is often done in order to get a better debt rating from a credit rating agency. The principal underlying a pool of assets is often greater than the principal amount of the issued security by approximately 10-20%.
For example, in the case of a mortgage backed security, the principal amount of an issue may be $100 million while the principal value of the mortgages underlying the issue may be equal to $120 million.
