Overcollateralization

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Overcollateralization

The practice or process of placing an asset as collateral on a loan where the value of the asset exceeds the value of the loan. For example, a person could pledge a farm (worth $10 million) on a loan for $5 million. Usually, however, the value of the asset only exceeds the value of the loan by 10-20%. Overcollateralization reduces the risk for the lender and improves the borrower's creditworthiness. It is used most commonly when a bond issuer wishes to improve its credit rating.
References in periodicals archive ?
Prepayment penalties are pledged to overcollateralize Ocwen's securities to reduce the impact of runoff.
On an annualized basis, such surplus loan repayments overcollateralize bond debt service by a minimum of 1.
On an annual basis, as calculated by Fitch, aggregate pledged cash flows excluding carry-forward surpluses overcollateralize bond debt service by a minimum of 2.