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Loan and Mortgage Terms Glossary

Valuation Allowance (Or Valuation Reserve):

Funds in an account established to cover probable loan losses. If a savings association believes a loan is uncollectible, it sets aside in the reserve account a portion of earnings equal to the difference between unpaid principal and the market value of the loan. If the loan is charged off as worthless, the institution writes down the loan portfolio and the reserve account by equal amounts. See specific valuation allowance and general valuation allowance.

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