Why is the senior-subordinated structure a form of credit enhancement?

What will be an ideal response?

Credit enhancement is the process of reducing credit risk by requiring collateral, insurance, or other agreements to provide the lender with reassurance that it will be compensated if the borrower defaulted. A senior-subordinated structure is a form of credit enhancement because it serves to control credit risk in a manner that is satisfactory to the lender. A senior-subordinated structure creates credit enhancement for bond classes that are provided for by other bond classes within the structure. For example, the senior bond class is being protected against losses by the subordinated bond class.
We can compare what is being done to distribute credit risk in a nonagency MBS with what is done in an agency CMO. In an agency CMO, there is no credit risk for Ginnie Mae-issued structures and the credit risk of the loan pool for Fannie Mae and Freddie Mac issued structure is viewed until recent years as small. What is being done in creating the different bond classes in an agency CMO is the redistribution of prepayment risk. In contrast, in a nonagency MBS, there is both credit risk and prepayment risk. By creating the senior-subordinated bond classes, credit risk is being redistributed among the bond classes in the structure. Hence, what is being done is credit tranching. Can prepayment risk also be redistributed? This is typically done in nonagency MBS but only at the senior bond class level. That is, the senior bond classes in a nonagency CMO structure can be carved up to create senior bond classes with different exposure to prepayment risk.