Underwriting is the process of evaluating the creditworthiness of the underlying assets and determining the amount of credit enhancement that is required. In Australian English, underwriting is sometimes referred to as "credit analysis" or "credit underwriting".
Underwriting is an important part of securitisation because it helps to ensure that the securitisation is structured in a way that minimizes the risk to investors. The underwriter will typically review the following factors when underwriting a securitisation:
- The quality of the underlying assets
- The credit history of the borrowers
- The interest rate environment
- The prepayment risk
- The liquidity of the underlying assets
The underwriter will then determine the amount of credit enhancement that is required to protect the investors from losses if the underlying assets default. The amount of credit enhancement will depend on the risk of the underlying assets and the creditworthiness of the borrowers.
Here are some of the applications of underwriting in securitisation:
- To assess the risk of the securitisation: The underwriter's assessment of the risk of the securitisation will help investors to determine whether or not to invest in the securitisation.
- To determine the amount of credit enhancement: The underwriter's determination of the amount of credit enhancement will help to protect investors from losses if the underlying assets default.
- To improve the liquidity of the securitisation: The underwriter's work can help to improve the liquidity of the securitisation by making it more attractive to investors.
Underwriting is a valuable tool for securitisation. It helps to ensure that the securitisation is structured in a way that minimizes the risk to investors and improves the liquidity of the securitisation.
Underwriting is sometimes referred to as "credit analysis" or "credit underwriting".