Realized Losses in Securitization

Realized Losses in Securitization

By Daniel Edstrom
DTC Systems, Inc.

It is of interest to note that no loss is calculated in securitized transactions until the loan is liquidated.  It is also of value to note that usually the principal and interest is advanced until the loan is liquidated (as I saw in a case where it was stated by Deutsche Bank National Trust Company in an answer to discovery).  So principal and interest payments are made by the servicers and/or trustees, and no loss is actually realized until after the house is foreclosed upon and sold to a 3rd party.  So what came first, the default or the loss?  No default occurs until the loan is liquidated, which doesn’t occur until after the foreclosure sale.  This means the homes are sold while the loans are current.  I would venture to say that nearly ALL foreclosures in at least the last 10 years on homes with securitized transactions, have been fraudulent and invalid.  This is because the paperwork used to foreclose is VOID.  Not voidable, but VOID.

Take a look at these definitions from the Argent Securities Inc. 2003-W6 Trust:

State Principal Balance
As to any mortgage loan or manufactured housing contract, the principal balance of the mortgage loan or manufactured housing contract as of the cut-off date, after application of all scheduled principal payments due on or before the cut-off date, whether or not received, reduced by all amounts, including advances by the master servicer, allocable to principal that are distributed to securityholders on or before the date of determination, and as further reduced to the extent that any realized loss thereon has been, or had it not been covered by a form of credit support, would have been, allocated to one or more classes of securities on or before the determination date.

Advance
As to any Mortgage Loan or REO Property, any advance made by the Master Servicer or a successor Master Servicer in respect of any Distribution Date representing the aggregate of all payments of principal and interest, net of the Servicing Fee, that were due during the related Due Period on the Mortgage Loans and that were delinquent on the related Determination Date, plus certain amounts representing assumed payments not covered by any current net income on the Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure as determined pursuant to Section 4.03.

Determination Date
With respect to each Distribution Date, the 10th day of the calendar month in which such Distribution Date occurs or, if such 10th day is not a Business Day, the Business Day immediately preceding such 10th day.

Realized Loss
A “Realized Loss” is (a) the amount of any Bankruptcy Loss or (b) with respect to any defaulted Mortgage Loan that is finally liquidated through foreclosure sale, disposition of the related Mortgaged Property (if acquired on behalf of the certificateholders by foreclosure or deed in lieu of foreclosure) or otherwise, is the amount of loss realized, if any, equal to the portion of the unpaid principal balance remaining, if any, plus interest thereon through the last day of the month in which such Mortgage Loan was finally liquidated, after application of all amounts recovered (net of amounts reimbursable to the Master Servicer for Advances, servicing advances and other related expenses, including attorney’s fees) towards interest and principal owing on the Mortgage Loan.

Master Servicer Event of Default
“Master Servicer Event of Default,” wherever used herein, means any one of the following events:

• (i-vi): [..]
• (vii) any failure of the Master Servicer to make any Advance on any Master Servicer Remittance Date required to be made from its own funds pursuant to Section 4.03 which continues unremedied until 3:00 p.m. New York time on the Business Day immediately following the Master Servicer Remittance Date.

Now if you think that is something, wait until you see this.  You would think that it would be easy to calculate what the losses are.  But apparently it is not simple accounting.

Collateral Realized Loss Calculation Methodology
The following is from the Argent Securities Inc. 2003-W6 monthly certificateholder statements and explains how to calculate realized losses.

Monthly Default Rate (MDR): (Beg Principal Balance of Liquidated Loans)/(Total Beg Principal Balance)

Conditional Default Rate (CDR): 1-((1-MDR)^12)

SDA Standard Default Assumption: CDR/IF(WAS<61,MIN(30,WAS)*0.02%,MAX(0.03%,MIN(30,WAS)*0.02%-0.0095%*(WAS-60)))

Average MDR over period between nth month and mth month (AvgMDRn,m): [(1-MDRn)*(1-MDRn+1)*…*(1-MDRm)]^(1/months in period n,m)

Average CDR over period between the nth month and mth month (AvgCDRn,m): 1-((1-AvgMDRn,m)^12)

Average SDA Approximation over period between the nth month and mth month:
AvgCDRn,m/IF(Avg WASn,m<61,MIN(30,Avg WASn,m)*0.02%,MAX(0.03%,MIN(30,Avg WASn,m)*0.02%-0.0095%*(Avg WASn,m-60)))

Average WASn,m: (WASn + WASn+1 +…+ WASm )/(number of months in the period n,m)

Loss Severity Approximation for current period: sum(Realized Loss Amount)/sum(Beg Principal Balance of Liquidated Loans)

Average Loss Severity Approximation over period between nth month and mth month: Avg(Loss Severityn,m)

Note: Default rates are calculated since deal issue date and include realized gains and additional realized losses and gains from prior periods.

Dates correspond to distribution dates.

Charged off or Partially Charged off Loans assumed to have a minimum 100% Loss Severity Percentage.