Glossary
Constant Default Rate (CDR)
The constant default rate (CDR), also called the conditional default rate, is the annualized percentage of a loan pool's outstanding balance that is expected to default during a year. It is derived from the monthly default rate and is used with loss severity to project credit losses on mortgage pools, asset-backed securities and loan portfolios.
Formula
Example
A $200,000,000 loan pool is underwritten at a 3% CDR and 40% loss severity. Ignoring amortization and prepayments for simplicity, about $200,000,000 x 3% = $6,000,000 of loans default in the first year. With 40% severity, losses are $6,000,000 x 40% = $2,400,000, or 1.2% of the pool. Doubling CDR to 6% doubles projected losses to $4,800,000.
How it is used in underwriting
CDR is a core assumption in pricing and structuring loan pools, asset-backed securities and specialty finance facilities. Investors and lenders build CDR curves from historical performance of similar collateral, then run base and stress cases to see how losses flow through the structure. In a securitization or warehouse facility, cumulative losses determine whether subordinate tranches or the equity cushion absorb losses before senior lenders are affected. Underwriters combine CDR with loss severity (one minus the recovery rate) and CPR to project net cash flows and to size credit enhancement.
A constant rate is a simplification. Defaults typically follow a curve, rising after origination as loans season and then declining, and they spike in recessions. Analysts often apply a vector of monthly default rates rather than a single CDR. Another nuance is timing: losses on defaulted loans are realized after a workout or liquidation period, which can delay recoveries. CDR measures defaults by balance, not by count, so a few large defaults can dominate. Cumulative default rate over the life of a pool differs from annualized CDR and should not be confused with it.
Frequently asked questions
What is the difference between CDR and loss severity?
CDR measures how much of the pool defaults, while loss severity measures how much is lost on the defaulted loans after recoveries. Expected loss combines both: default rate multiplied by severity. A high CDR with low severity can produce smaller losses than a moderate CDR with high severity.
How is CDR used in securitization?
Analysts apply CDR assumptions, along with prepayment speeds and severity, to project collateral cash flows and losses. Those projections determine how much credit enhancement each tranche needs, how payments are allocated, and whether senior notes are protected under stress scenarios used by investors and rating agencies.
What is cumulative default rate?
Cumulative default rate is the total percentage of a pool's original balance that has defaulted since origination. CDR is an annualized rate applied to the current balance. A pool with a steady 2% CDR over several years will accumulate a cumulative default rate well above 2% over that time.
Related terms
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