A charge-off is a loan that is written off as a loss by the lender. This means that the lender has given up hope of ever collecting the debt, and it will no longer be reported on the borrower's credit report.
In the context of securitisation, charge-offs can have a significant impact on the value of the securities that are issued. This is because charge-offs reduce the amount of money that is available to pay the investors.
There are a number of reasons why a loan might be charged off. These include:
- The borrower defaults on the loan.
- The borrower dies or becomes insolvent.
- The loan is fraudulent.
Charge-offs are an important part of securitisation. They help to protect investors by ensuring that the securities are not overvalued.
Here are some examples of charge-offs in securitisation:
- Mortgage charge-offs: Mortgage charge-offs are common during times of economic recession, when borrowers are more likely to default on their loans.
- Credit card charge-offs: Credit card charge-offs are also common, as they can occur when borrowers max out their credit cards and are unable to make the minimum payments.