hard · Asset-Backed Securities asset-nuances

Why might Pool Y's severity be materially understated by the identical 62% current LTV, relative to Pool X?

1. Pool Y's 62% rests on recent HPA that is more likely to mean-revert in a downturn, so its effective LTV at the moment of default can be far higher, while Pool X's 62% was earned through amortization that does not reverse
2. Pool Y's shorter seasoning implies that its underlying pool of borrowers carries systematically lower FICO scores, which independently raises severity and is actually the true driver of the observed difference
3. Pool X faces materially higher severity than Pool Y because its longer seasoning implies substantially more accumulated deferred maintenance on the underlying properties, which depresses recovery values below the marked current LTV
4. Both pools have effectively identical expected loss severity because severity is treated as a purely deterministic function of current marked LTV alone, and the specific path by which the 62% figure itself was reached is irrelevant

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