by: Rob Kessel, managing partner, Compass Analytics, Thomas Warrack, managing director, and Brian Vonderhorst, director, at Standard & Poor's RMBS Ratings

The use of excess spread and overcollateralization as credit enhancement has long been a staple in the subprime residential mortgage-backed securities (RMBS) marketplace. This methodology has become increasingly attractive in other RMBS collateral types, especially Alt-A mortgages. According to analysts at Standard & Poor's Ratings Services and Inside Mortgage Finance, approximately 70% of the $1.15 trillion 2006 non-agency RMBS issuance used the senior-subordinate, O/C structure.

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