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Primary Article

Measuring Final Loss Severity of Defaulted RMBS

Jian Hu and Richard Cantor
The Journal of Fixed Income Winter 2004, 14 (3) 82-91; DOI: https://doi.org/10.3905/jfi.2004.461454
Jian Hu
Director of structured finance default research at Moody's Investors Service in New York City.
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  • For correspondence: jian.hu@moodys.com
Richard Cantor
A managing director at Moody's Investors Service.
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  • For correspondence: richard.cantor@moodys.com
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Abstract

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.

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The Journal of Fixed Income
Vol. 14, Issue 3
Winter 2004
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Measuring Final Loss Severity of Defaulted RMBS
Jian Hu, Richard Cantor
The Journal of Fixed Income Dec 2004, 14 (3) 82-91; DOI: 10.3905/jfi.2004.461454

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Measuring Final Loss Severity of Defaulted RMBS
Jian Hu, Richard Cantor
The Journal of Fixed Income Dec 2004, 14 (3) 82-91; DOI: 10.3905/jfi.2004.461454
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