Amortization schedule - MBS


Though this is not exaclty in the CFA curriculum, but any help would be greatly appreciated. I wanted to know that while generating an amortization schedule for an underlying pool of mortgages, how is the default speed (CDR) used to estimate monthly default payments and the net loss for each month, if any?

I have been looking it up on the net but so far have been unable to come across any formula or example related to this.

I believe this is covered in the LII text, I forget it though.

No. Prepayment rate is covered but default rate is not.

CDR assumes that the time to liquidation is 12 months for residential mortgages. During this recovery period its also assumed that the servicer will advance the scheduled principal and interest payments on the defaulted loans.

With that said, you must also include a loss severity percentage into your model, which takes into account all costs associated with the foreclosure as well as the repayment of advances.

This should help you adjust your cash flows for defaults in your model. You can also do this in Bloomberg which will save you a bunch of time