Loss severity
Asset-Backed Securities glossary · Collateral & Cash Flow Modeling
Definition
The percentage of defaulted balance that is not recovered.
Loss severity in plain English
When a borrower stops paying back a loan (they "default"), the lender usually still gets some money back — by seizing and selling the house or car behind the loan. Loss severity is the slice they DON'T get back, written as a percentage of what was owed. If someone owed $100,000 and the lender recovers $60,000, the loss severity is 40% — because 40% of the balance vanished. It matters because two loans can both go bad, but the one with high loss severity hurts investors far more.
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