Overcollateralization - OC

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DEFINITION of 'Overcollateralization - OC'

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.

INVESTOPEDIA EXPLAINS 'Overcollateralization - OC'

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 to 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.

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  3. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  6. Overcapitalization

    When a company has issued more debt and equity than its assets ...
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