Lesson 1 of 25 · 6 min
A call is a test failing, not a decision being made
No one chose to call you. A threshold was crossed and a report was generated.
The word call implies a person picked up a phone and formed a judgment about you. Procedurally, nothing of the kind happened. A comparison was performed between two numbers, one of them came out larger than the other, and a row appeared on a report.
The test has exactly two inputs. On one side sits your balance, including interest accrued and not yet billed. On the other sits your collateral value multiplied by the maintenance threshold — the largest balance the agreement permits at that collateral value. If the first number exceeds the second, the test fails, and it fails in the same way for every account the process reads that night.
Take a collateral value of $604,000 against a threshold of 68 percent. The permitted balance is $604,000 × 0.68 = $410,720. A balance of $418,300 exceeds it by $7,580, and the ratio $418,300 ÷ $604,000 = 69.3 percent sits above 68. That is the entire event. There is no deliberation in it, and no assessment of you.
Things the test does not evaluate, because they are not among its inputs:
- Whether the decline looks temporary or permanent.
- Whether your income comfortably covers the interest.
- Whether the collateral recovered by lunchtime.
- How long you have held the loan without incident.
Understanding a call as a decision leads you to look for someone to reason with. Understanding it as a failed inequality tells you the only things that can change the outcome are the two numbers being compared.
Key terms
- Maintenance threshold
- The highest ratio of balance to collateral value the agreement allows. Above it, the account is in breach.
- Permitted balance
- Collateral value multiplied by the threshold. The largest balance that passes the test at today's prices.
- Shortfall
- The amount by which the balance exceeds the permitted balance. The gap the notice reports.
Worked example
The whole event, in four numbers
Collateral value $604,000 at the close. Maintenance threshold 68 percent. Balance $418,300 including accrued interest.
- Permitted balance
- $410,720
- Actual balance
- $418,300
- Result of the comparison
- Fails
- Shortfall
- $7,580
- Ratio
- 69.3%
$604,000 × 0.68.
$418,300 is greater than $410,720.
$418,300 − $410,720.
$418,300 ÷ $604,000.
Five figures, one inequality, no judgment. Everything else in this track is about what follows from that row on the report.
Check yourself
Collateral value $288,000, maintenance threshold 72 percent, balance $214,900. Does the test fail, and by how much?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.