The pool is 1,000,000 of residential real estate mortgages, of which 150,000 (15%) have defaulted. The tranche structure is a classic three-layer waterfall: junior (first-loss), mezzanine, and senior. The originator retains the junior and senior; the mezzanine is sold. The scenario focuses on how the defaulted share W elevates KA — the reference capital rate — and what that means for each tranche.

The underlying pool is a performing residential real estate portfolio securitised into three tranches. The originator retains the junior (first-loss) and senior tranches; the mezzanine is sold to investors. The defining feature of this scenario is the STS label: it sets p = 0.5, which steepens the KSSFA decay curve for tranches above KA and lowers the regulatory floor on the senior to 10%.

This dynamic reminded me of a beautiful essay by Bertrand Russell called "Useless Knowledge." In it, Russell talks about how sweet apricots were first brought to Europe from China. He explains how the word "apricot" has this fascinating, winding history: it was carried by Arab traders, derived from the Latin word praecoqua (meaning "early-ripe"), adapted into Byzantine Greek as praikokion, transformed in Arabic to al-barquq, absorbed into Spanish as albaricoque, and eventuall