Recognition of Paydown Loss/Recovery Examples

For Asset Backed Securities (ABS) paydowns that have proceeds and principal loss factors in the same coupon cycle, the system applies principal loss factors first followed by the paydown cash received. The system also applies loss factor quantity as a straight par reduction to the extent that there is sufficient unamortized discount to absorb the quantity without reducing any deferred market discount or original cost.

Unamortized discount = Par – Original Cost – Deferred Amortization

If the loss quantity is greater than the unamortized discount then the system applies the remaining quantity as a reduction to the deferred market discount. This amount is stored on the open lot (Prior Deferred Amort Reduction Local/Base).

If the loss quantity is greater than the total unamortized discount and total deferred market discount, the lot will be at par before applying the remaining par quantity. The system applies the remaining quantity to cost and Short Term Loss. This amount is stored on the open lot (Prior Cost Reduction Local/Base).

Once the system applies the principal loss factor and reduces the appropriate quantity (and deferred market discount and cost when applicable), the system applies the cash portion of the paydown to the position in the manner described in the Recognition of Income Examples section.

Unamortized Market Discount (Mkt Dis) is not a stored value in the Eagle system but is displayed as a balance in the example below for illustrative purposes.

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1 Loss Factor is Less Than the Amount of Unamortized Discount
2 Loss Factor is Greater than the Amount of Unamortized Discount but Less than the Total of Unamortized Discount and Deferred Market Discount
3 Loss Factor is Greater Than the Total Unamortized Discount and Deferred Market Discount
4 Loss Recovery - Continuation of Previous Example

Loss Factor is Less Than the Amount of Unamortized Discount

In this scenario, the system applies full unit reduction as a decrease in quantity and there is no impact to the remaining amount of deferred market discount.

No ledger entries are required for the principal loss component as there is no impact on cost.

Pre Paydown Totals

Units	Cost	Def Market Discount	Mkt Dis
1,000,000	950,000	10,000	40,000

Paydown Units	Cash Proceeds	Loss Factor
10,000	8,000	2,000

The loss factor of 2,000 is processed as a quantity reduction with no impact on deferred market discount or cost as there is sufficient unamortized discount (For example, 40,000) to absorb the full loss factor.

Totals after Applying Loss Factor

Units	Cost	Def Market Discount	Mkt Dis
998,000	950,000	10,000	38,000

Next, the system applies the proceed quantity of 8,000 as recognition of deferred market discount. There are no remaining proceeds so no impact on cost or realized gain.

Ledger Postings

	Debit	Credit
Amortization Income		8,000
Investment Receivable	8,000

Post Paydown Totals

Units	Cost	Def Market Discount	Mkt Dis
990,000	950,000	2,000	38,000

Prior Cost Reduction	Prior Def Mkt Discount Reduction
0	0

Loss Factor is Greater than the Amount of Unamortized Discount but Less than the Total of Unamortized Discount and Deferred Market Discount

In this scenario, the system applies loss factor as a reduction of quantity and reduces deferred market discount for the amount of loss factor that is greater than the unamortized discount.

Pre Paydown Totals

Units	Cost	Def Market Discount	Mkt Dis
1,000,000	980,000	15,000	5,000

Paydown Units	Cash Proceeds	Loss Factor
25,000	8,000	17,000

As there is sufficient unamortized discount and deferred market discount to absorb the loss factor, there is no impact on cost and no ledger entries for the loss factor amounts. The amount of deferred market discount has been reduced, but because the amount has not been posted to income, there is no adjustment from an accounting perspective other than to reduce the amount of deferred available for realization as the proceeds portion of the paydown is processed.

The system applies loss factor reducing the unamortized discount by 5,000 to zero and then reduces the deferred market discount by the remaining 12,000 leaving 3,000 available as deferred market discount.

Totals after Processing Loss Factor

Units	Cost	Def Market Discount	Mkt Dis
983,000	980,000	3,000	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
0	12,000

The system then applies the paydown with proceeds (8,000) to the remaining deferred market discount 3,000 and then cost.

Ledger Postings

	Debit	Credit
Amortization Income		3,000
Investment Receivable	8,000
Cost		5,000

Totals After Applying Loss Factor and Proceeds

Units	Cost	Def Market Discount	Mkt Dis
975,000	975,000	0	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
0	12,000

Loss Factor is Greater Than the Total Unamortized Discount and Deferred Market Discount

In this scenario, the system applies loss factor as a reduction of quantity and reduces deferred market discount to zero. The remaining loss factor results in a realized capital loss.

Pre Paydown Totals

Units	Cost	Def Market Discount	Mkt Dis
1,000,000	980,000	15,000	5,000

Paydown Units	Cash Proceeds	Loss Factor
33,000	8,000	25,000

The loss factor of 25,000 reduces the market discount by 5,000 to zero, reduces the deferred market discount by 15,000 to zero, and reduces cost and creates a realized loss for the remaining 5,000.

Ledger Postings

	Debit	Credit
Loss	5,000
Cost		5,000

Totals After Processing Loss Factor but Prior to Applying Proceeds

Units	Cost	Def Market Discount	Mkt Dis
975,000	975,000	0	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
5,000	15,000

As the lot is now at par, the proceed amount of 8,000 is at reduced cost and produces no recognition of income.

Ledger Postings

	Debit	Credit
Investment Receivable	8,000
Cost		8,000

Totals After Applying Loss Factor and Proceeds

Units	Cost	Def Market Discount	Mkt Dis
967,000	967,000	0	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
5,000	15,000

Loss Recovery - Continuation of Previous Example

Recovery factor reverses prior losses, then increases the deferred market discount by the remaining recovery amount.

Pre Paydown Totals

Units	Cost	Def Market Discount	Mkt Dis
967,000	967,000	0	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
5,000	15,000

Net Paydown Units	Cash Proceeds	Recovery Factor
15,000	25,000	10,000

There is a 25,000 principal paydown and a 10,000 non cash increase in quantity for the recovery factor which equates to a 15,000 net decrease in quantity. The loss recovery quantity increases the total quantity by 10,000 prior to processing the cash based paydown of 25,000.

Loss factor is processed first which increases the quantity by 10,000 and reverses the total prior loss of 5,000. The system then increases the deferred market discount by the remaining 5,000 of the recovery amount, reducing the amount of deferred market discount available for future recoveries to 10,000.

If there are no remaining losses to reverse or prior reductions of deferred market discount to reverse, recoveries should produce an increase to par which re-establishes an unamortized discount.

Ledger Postings

	Debit	Credit
Loss		5,000
Cost	5,000

Totals After Processing Recovery Factor but Prior to Applying Proceeds

Units	Cost	Def Market Discount	Mkt Dis
977,000	972,000	5,000	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
0	10,000

The system then process the proceeds payment of 25,000 which now record the 5,000 deferred market discount which was just restored from the loss recovery and then reduce the remaining 20,000 at par.

Ledger Postings

	Debit	Credit
Investment Receivable	25,000
Cost		20,000
Amortization Income		5,000

Totals After Applying Recovery Factor and Proceeds

Units	Cost	Def Market Discount	Mkt Dis
952,000	952,000	0	0

Prior Cost Reduction	Prior Def Mkt Discount Reduction
0	10,000