What is Conditional Default Rate (CDR)?
Conditional Default Rate (CDR) measures the annualized rate at which borrowers in a loan pool are expected to default, meaning they stop making payments and the loan enters loss mitigation or foreclosure. Like CPR, CDR is conditional on loan survival to that point. CDR follows a characteristic "bathtub curve" pattern: low in early months (borrowers are current), rising to a peak (typically 18-42 months depending on sector), then declining as the pool seasons and weaker credits have already defaulted.
Formula
CDR = 1 - (1 - MDR)^12 Where MDR (Monthly Default Rate) is the monthly default rate Expected Loss = CDR x Loss Severity x Outstanding Balance
How LoanBook Uses Conditional Default Rate
LoanBook uses the Default Model v3. Residential loans run a cause-specific competing-risks logit hazard in FICO, LTV, DTI, seasoning and a county-driven macro frailty factor, calibrated through the cycle from Fannie Mae loan-level data and NCUA and FDIC loss history. Consumer and Commercial loans use lifecycle (bathtub) curves with loan-level multipliers such as FICO, LTV, DTI and, for commercial real estate, DSCR. For government-guaranteed loans, defaults are treated as involuntary prepayments (government pays at par).
Frequently Asked Questions
How does CDR relate to CECL?
CECL (Current Expected Credit Losses) requires lifetime loss estimation. CDR projected over the loan's remaining life, combined with loss severity, produces the expected lifetime loss that feeds the CECL allowance calculation.
What happens when a government-guaranteed loan defaults?
For government-guaranteed portions (SBA, FHA, VA, USDA), a default is economically equivalent to a prepayment; the government pays the investor at par. So CDR effectively becomes additional CPR, and there is no credit loss on the guaranteed portion.
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