Loss severity is the actual realized amount of loss of a property from the foreclosure and short sale. This number is typically taken a step further, and a loss severity rate or percentage is calculated. This information can be vital for mortgage brokers and consumers attempting to negotiate a depreciated mortgage. For mortgage brokers, a high loss severity rate can be used to negotiate preforeclosure short sales. For consumers, interest rates and principle due may be negotiated to a lower rate if the loss percentage is higher.
Loss Severity Calculation
Determine the total amount owed on the home and any associated costs with the foreclosure such as unpaid interest, judgment fees and lawyer's fees. For example, if you still owe $250,000 for your home, after foreclosure this would increase to $275,000.
Subtract the estimated amount the bank would obtain from selling the house in your current market. For example, if the current market value of your home is estimated at $100,000, the amount of loss the bank suffers is $175,000.
Next, calculate the loss severity percentage by dividing the amount suffered by the initial costs. In this case, $175,000/$275,000 for a total percentage of 64 percent.