RT Journal Article
SR Electronic
T1 Measuring Final Loss Severity of Defaulted RMBS
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 82
OP 91
DO 10.3905/jfi.2004.461454
VO 14
IS 3
A1 Jian Hu
A1 Richard Cantor
YR 2004
UL https://pm-research.com/content/14/3/82.abstract
AB Investigation of three approaches to estimating final loss, given default, for residential mortgage-based securities recommends a blended approach that combines both static factors such as tranche size and dynamic factors such as cumulative loss as a share of principal balance reduced to date in a model to predict the remaining losses on non-matured defaulted securities. There is a survival bias in the current LGD data sample, in that defaulters that have not matured would sustain significantly smaller ultimate losses than defaulters that have matured. On average, a defaulted RMBS security is estimated to lose about 51% of its default date balance or 34% of its original balance. Empirical findings like this are essential to the calculation of expected loss rates and risk-based capital for structured products.