Excess Spread

Excess spread: what happens if you slip during certain yoga poses (they call that the wishbone pose, post-pull).

Also, it describes an additional cushion built into some asset-backed securities.

You’re packaging a bunch of mortgages together to sell as a mortgage-backed security. The mortgages themselves pay an average return of about 5%. You build in some money for your costs and for other fees (insurance, etc.). The total return runs to about 6%.

But you can’t pay the full 6% to the investors in the mortgage-backed securities. What if something goes wrong and the mortgages default at a higher rate than expected? You need some cushion in case of unexpected bad luck.

So you sell them at 4%, using the two percent difference as a buffer. That amount represents the excess spread. The difference between the 6% you receive and the 4% you pay out.