Loss severity is loss-given-default expressed as a percentage: the total loss realized on a resolved loan — principal write-down plus servicing advances, legal and property expenses, and interest shortfalls — divided by the loan balance, typically the unpaid principal balance at default or liquidation. A $10 million loan resolved with a $3.5 million all-in loss carries a 35% severity; severity together with default frequency determines expected credit loss.
Severity compounds with time: carrying costs, legal expense, and property deterioration accrue while a credit sits in resolution, which is why loans liquidated after long workouts show materially higher severities than those resolved early. A note sale fixes severity at a known number today — the discount to UPB — rather than an estimate that drifts with the resolution.
Why credits like this reach a workout desk: bank noncurrent commercial real-estate loans have risen while reserve coverage slips at community banks (FDIC Quarterly Banking Profile), and roughly $957 billion of commercial and multifamily mortgage debt was scheduled to mature in 2025 — against a total market of about $4.8–5.0 trillion, ~38% of it held by banks and thrifts (Mortgage Bankers Association). See the CRE distress statistics hub for the full figures and sources.
Primary sources: FDIC Quarterly Banking Profile, Mortgage Bankers Association, and interagency (FDIC / OCC / Federal Reserve) guidance on CRE loan accommodations and workouts. Figures are directional and updated periodically; confirm the latest release before relying on a specific number.
It varies by property type, market, and cycle: liquidated CMBS conduit loans have historically averaged severities of roughly 30 to 40 percent, with extended resolutions and weaker asset classes running well higher, while loans that cure or pay off produce none.
Time in resolution is the largest controllable factor — advances, legal fees, taxes, insurance, and receiver or management costs accrue monthly — alongside market value decline and property condition. Interest shortfalls also count in the all-in loss.
It caps it: the sale price fixes the recovery, eliminates future carry and expense, and converts an open-ended estimate into a closed number; Standing Bid Capital provides firm pricing on commercial notes — Request a confidential review.