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Credit Loss Ratio

Definition - What does Credit Loss Ratio mean?

Credit loss ratio refers to a system that is used in the mortgage and lending industry that is supposed to help determine whether a specific lender is carrying too much risk. More specifically, a credit loss ratio compares the amount of credit losses that the lender has experienced to the par value of the mortgage-backed securities that the company possesses.

Justipedia explains Credit Loss Ratio

Credit loss ratio has always been important to lending and mortgage companies; however, credit loss ratio became exceptionally important after the financial crisis of 2008, which included the underwater mortgage crisis. Trying to keep a positive credit loss ratio became increasingly difficult during the time of the underwater mortgage. This is turn caused many of the lending and mortgage companies to spend a hefty amount of money to try and statistically determine how to create the highest credit loss ratio possible.

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