Lesson 6 of 25 · 7 min
The cure window, and whether it exists at all
Time to fix a shortfall is time for the shortfall to grow; the window is not free.
A cure window is usually read as a grace period, which imports a promise that is not in the words. What the clause typically grants is a period during which the lender does not intend to sell, alongside a separate clause preserving its right to sell immediately, as Track 1 lesson 8 set out.
Where a window exists it is measured in business days from the notice, not from the breach. A notice generated Thursday at 07:40 with a three-business-day window counts Friday, Monday and Tuesday: three business days, five calendar days, and one of them a day on which no market opens.
The window has a cost, and the cost is arithmetic. Begin with a collateral value of $466,000, a threshold of 69 percent and a balance of $337,500. The permitted balance is $321,540 and the shortfall is $15,960; curing it by sale requires $15,960 ÷ 0.31 = $51,483.87. Now let the five calendar days pass with the collateral falling a further 6.2 percent, to $466,000 × 0.938 = $437,108, while interest accrues at an illustrative 7.68 percent: $337,500 × 0.0768 ÷ 360 = $72.00 a day, so $360 over five days, taking the balance to $337,860.
The permitted balance is now $437,108 × 0.69 = $301,604.52 and the shortfall is $36,255.48 — 2.27 times what it was when the notice was written. The sale that cures it is $36,255.48 ÷ 0.31 = $116,953.16, against $51,483.87 five days earlier. The window did not hold the problem still while it ran.
A cure window is a period in which the shortfall keeps moving. Where the collateral falls during it, the deadline arrives against a larger number than the one in the notice.
Key terms
- Cure window
- A stated period before the lender intends to sell. Commonly drafted as what the lender may allow rather than what it must.
- Business day
- A day the lender counts. Weekends and holidays are skipped in the count while prices and interest are not skipped in reality.
- Window drift
- The growth of a shortfall during the period granted to cure it, from further price movement and from continued accrual.
Worked example
What five days did to a $15,960 gap
Collateral value $466,000, threshold 69 percent, balance $337,500, three business days from a Thursday notice. Collateral falls 6.2 percent over the window; rate 7.68 percent, Act/360.
- Shortfall at the notice
- $15,960
- Sale required at the notice
- $51,483.87
- Collateral at the deadline
- $437,108
- Balance at the deadline
- $337,860
- Shortfall at the deadline
- $36,255.48
- Sale required at the deadline
- $116,953.16
$337,500 − ($466,000 × 0.69).
$15,960 ÷ 0.31.
$466,000 × 0.938.
$337,500 + 5 × $72.00.
$337,860 − ($437,108 × 0.69).
$36,255.48 ÷ 0.31.
Three business days multiplied the gap by 2.27 and the sale by the same factor. The window was granted in days and priced in dollars.
Check yourself
A notice is generated on a Thursday morning and grants three business days to cure. On what day does the window end, and how many calendar days is that?
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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.