Lesson 12 of 25 · 6 min
How much must be sold to cure, at a 70 percent threshold
Closing a $241,972.67 gap at seventy percent means selling $806,575.57, which is the gap divided by 0.30.
Selling pledged collateral to close a shortfall moves both sides of the ratio. Each dollar sold reduces the balance by a dollar and the market value by a dollar. At a 70 percent threshold, a dollar sold closes only 30 cents of gap, because 70 cents of permitted balance disappears with the collateral.
sale to cure = shortfall ÷ (1 − threshold)
- sale to cure
- The market value that must be sold, with the proceeds applied to the balance, to close the printed gap.
- shortfall
- Trigger minus market value. $241,972.67 on the 60 percent book.
- 1 − threshold
- 0.30 on this facility. The portion of each dollar sold that actually closes gap.
On the 60 percent book the shortfall is $241,972.67, so the sale is $241,972.67 ÷ 0.30 = $806,575.57. Check the product the other way: $806,575.57 × 0.30 = $241,972.67. The printed gap is closed by construction of the multiple.
After that sale the balance is $1,858,563.47 − $806,575.57 = $1,051,987.90 and the market value is $2,413,118.00 − $806,575.57 = $1,606,542.43. The new trigger is $1,051,987.90 ÷ 0.70 = $1,502,839.86. The leftover book sits $103,702.57 above that new trigger, because the trigger itself falls as the balance falls. The $806,575.57 figure is the sale that closes the $241,972.67 gap at 30 cents on the dollar; the leftover surplus is what the falling trigger adds on top. Selling the gap dollar-for-dollar would leave the test still failed, because the collateral in the denominator would have fallen by the same amount as the loan.
Key terms
- Sale to cure
- The dollars of pledged market value that must be sold, proceeds applied to the loan, to close a stated shortfall.
- Gap closed per dollar
- One minus the threshold. At 70 percent, each dollar sold closes 30 cents of shortfall.
- Leftover surplus
- The headroom that remains after the sale because the trigger falls with the balance. On this sale it is $103,702.57.
Worked example
A $241,972.67 gap and an $806,575.57 sale
Uniform 60 percent book. Market value $2,413,118.00. Trigger $2,655,090.67. Threshold 70 percent.
- Shortfall
- $241,972.67
- Sale to cure
- $806,575.57
- Balance after the sale
- $1,051,987.90
- Market value after the sale
- $1,606,542.43
- New trigger
- $1,502,839.86
- Leftover surplus
- $103,702.57
$2,655,090.67 − $2,413,118.00.
$241,972.67 ÷ 0.30.
$1,858,563.47 − $806,575.57.
$2,413,118.00 − $806,575.57.
$1,051,987.90 ÷ 0.70.
The gap was $241,972.67. The sale was 3.333… times that figure. The leftover surplus is the trigger falling as the loan is paid down.
Check yourself
On the 60 percent book the shortfall is $241,972.67 and the threshold is 70 percent. How much must be sold to cure, and what is the leftover market value?
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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.