PT - JOURNAL ARTICLE AU - Lakhbir S. Hayre AU - Manish Saraf TI - A Loss Severity Model for Residential Mortgages AID - 10.3905/jfi.2008.712347 DP - 2008 Sep 30 TA - The Journal of Fixed Income PG - 5--31 VI - 18 IP - 2 4099 - https://pm-research.com/content/18/2/5.short 4100 - https://pm-research.com/content/18/2/5.full AB - The loss severity model, combined with prepayment and default models, can be used to project loss-adjusted cash flows for mortgage pools and deals. In addition, the loss model can be used for identifying potentially risky loans in a portfolio of subprime loans. In this article we analyze loss severities on mortgage loans with varying borrower and loan characteristics, and we develop a predictive model for projecting losses. We also show that simplistic models that rely heavily on loan-to-value ratio produce unreliable loss severity projections and that a more comprehensive approach, such as the one described in this article, is required for accurately estimating credit risk.TOPICS: MBS and residential mortgage loans, big data/machine learning, legal and regulatory issues for structured finance