DELINQUENCY, DEFAULT, AND LOSS TERMINOLOGY

Since all credit-sensitive MBS structures rely on some form of credit enhancement, the measurement of defaults and losses is very important. The importance of these measurements stems from the fact that in addition to the relevance of these measures to assess the relative value of lower rated tranches, the issuer typically retains the unrated and residual components of securitized deals. Therefore, any differences in the actual loss and default experience from expectations at pricing may lead to significant writedowns and adversely affect firm valuation. Despite the importance of delinquencies, losses and defaults in the mortgage-related markets, the terminology is not standardized. For instance, static pool losses may be reported on a monthly or annualized basis as a percentage of either current or original balance with the metric based upon current balance being the preferred method to ensure consistency with prepayment reporting.
EXHIBIT 3.7 MHP Curves
037
Before we discuss the measurement of defaults and losses, it is instructive to briefly review the various outcomes of a loan when the obligor ceases making scheduled payments. A loan becomes delinquent when the obligor fails to make the contractual payment on the stated date. Typically, when all collection efforts have failed while the loan is in delinquent status the loan is declared ...

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