In securitisation, dilution refers to the reduction in the value of an investor's interest in a securitisation due to losses on the underlying assets. Dilution can occur for a number of reasons, including:
- Defaults by borrowers: If borrowers default on their loans, the value of the underlying assets will decrease, which will lead to a decrease in the value of the securitization.
- Prepayment of loans: If borrowers prepay their loans, the securitization will receive less interest income, which will lead to a decrease in the value of the securitization.
- Changes in interest rates: If interest rates rise, the value of the securitization will decrease because the interest payments on the underlying assets will be lower.