Credit Loss Ratio

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DEFINITION of 'Credit Loss Ratio'

The ratio of current credit-related losses to the current par value of a mortgage-backed security (MBS), or the ratio of total credit-related losses to the original par value of an MBS. Different MBSs and different sections within an MBS have different credit-risk profiles, and are therefore likely to have different credit loss ratios.

INVESTOPEDIA EXPLAINS 'Credit Loss Ratio'

Average investors do not need to significantly worry about an agency bond's credit loss ratio. Agency MBSs - for example, bonds issued by Fannie Mae or Freddie Mac, and government MBSs issued by Ginnie Mae - do not have credit risk, or are perceived by the market to not have credit risk. This is because these agencies guarantee the payment of principal and interest to the bond holder in the event of default by the underlying borrower. However, from an internal point of view, the agency MBS issuers do need to consider their credit loss ratios, because doing so will allows them to analyze whether their holdings are overexposed in certain types of riskier properties.

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