Forbearance is a legal term that refers to the temporary suspension of the enforcement of a legal obligation. In the context of securitization, forbearance can refer to the temporary suspension of payments on a loan or other obligation that is securitized.
Forbearance can be used by securitization issuers to help borrowers who are struggling to make their payments. This can help to prevent defaults and to protect the value of the securitization securities.
There are a few different types of forbearance that can be used in securitizations, including:
- Interest-only forbearance: This type of forbearance allows borrowers to make interest payments on their loans but not principal payments.
- Principal-only forbearance: This type of forbearance allows borrowers to make principal payments on their loans but not interest payments.
- Modification: This type of forbearance allows borrowers to modify their loans, such as by extending the term of the loan or by reducing the interest rate.
The decision of whether or not to grant forbearance is typically made by the securitization issuer, in consultation with the loan servicer. The decision will be based on a number of factors, including the borrower's financial situation, the value of the underlying assets, and the risk of default.
Here are some applications of forbearance in securitization:
- Helping borrowers: Forbearance can help borrowers who are struggling to make their payments. This can help to prevent defaults and to protect the value of the securitization securities.
- Managing risk: Forbearance can help to manage risk in a securitization. By allowing borrowers to make reduced payments, the securitization issuer can reduce the risk of default.
- Providing liquidity: Forbearance can provide liquidity to the securitization market. This is because it can help to prevent defaults, which can lead to the sale of securitization securities at a discount.