An encumbrance in securitisation is a right or interest in an asset that is held by a third party. Encumbrances can include mortgages, liens, and security interests.
Encumbrances can affect the value of an asset and the rights of the securitisation issuer. For example, if an asset is encumbered by a mortgage, the securitisation issuer may not be able to sell the asset without the permission of the mortgagee.
Encumbrances are important for investors in securitisations to understand. Investors should carefully review the securitisation's documentation to understand the nature and extent of any encumbrances on the underlying assets.
Here are some of the types of encumbrances that can affect securitisations:
- Mortgages: A mortgage is a loan secured by real property. The mortgagee has the right to foreclose on the property if the borrower defaults on the loan.
- Liens: A lien is a legal right to hold property as security for a debt. The lienholder has the right to sell the property to satisfy the debt if the borrower defaults.
- Security interests: A security interest is a legal right to take possession of property if the borrower defaults on a loan. The security interest holder has the right to sell the property to satisfy the debt if the borrower defaults.
Encumbrances can have a significant impact on the value of an asset and the rights of the securitisation issuer. It is important for investors in securitisations to carefully review the securitisation's documentation to understand the nature and extent of any encumbrances on the underlying assets.