What is 'Early Amortization'
A type of credit enhancement used in certain asset backed securities (ABS). Early amortization is an accelerated payment of bond principal in an asset-backed security, usually triggered when there is a sudden increase in delinquencies in the underlying loans or when excess spread, the issuer's net profit after deducting servicing fees, charge-offs and other costs, falls below an acceptable level. Also called a payout event.
BREAKING DOWN 'Early Amortization'
Early amortization signals liquidity crisis for the originator, as funding dries up. The early payout protects investors from prolonged exposure to receivables with deteriorated credit performance. However, the investor is relying on the fixed income from the ABS - prepayment is an inherent risk for investors.