Financial Terms related to Mortgage

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MORTGAGE
Adjustable rate mortgage

• Is a loan which has a coupon or interest rate that is subject to change on

predetermined reset dates. These loans use interest rate indices as the benchmark
rate. Adjustable Rate Mortgages come in many variations. Typically, the reset dates
recur every 1, 3, or 5 years; but there are other periods used as well. These loans
may have cap and floor features which constrain each reset change in interest rates.
There may also be lifetime cap and floor features. Adjustable Rate Mortgages may
be strictly amortizing though some have negative amortization features.

• A mortgage whose interest rate changes periodically based on the upward or

downward movement of a specified benchmark, e.g. six month or one-year Treasury
bills.

Alternative mortgage instruments

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• Variations of mortgage instruments such as adjustable-rate and variable-rate

mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several
seldom-used variations.

Assumable mortgage

• Is a mortgage loan which can be assumed by a new buyer. Generally, the new
owner must pass a credit approval process.

Assumption of mortgage

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• Is a provision which allows a new buyer of a property to assume or use an existing
mortgage provided such buyer is approved by the lender.

Closed end mortgage

• Mortgage against which no additional debt may be issued.

Collateralized mortgage obligation

• Is a complex bond structure which reallocates interest and principal payment

streams. These tranches, which are often designated as A to Z pieces or securities,
are engineered from mortgage backed securities used as the underlying collateral.
Collateralized Mortgage Obligations come in many shapes and sizes and are often
viewed as unique constructions. Some of the more commonly named tranches are:
Interest Only, Principal Only, Floater, Inverse Floater, Planned Amortization Class,
Support, Scheduled, Sequential, Targeted Amortization Class, and Z or Accrual
Bond. Often, many of these securities contain option characteristics. Related
structures are Collateralized Bond Obligations and Collateralized Loan Obligations.

• Abbreviated CMO. A security backed by a pool of pass-throughs, structured so that

there are several classes of bondholders with varying maturities, called tranches.
The principal payments from the underlying pool of pass-through securities are used
to retire the bonds on a priority basis as specified in the prospectus. Related:
mortgage pass-through security
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• A Collateralized Mortgage Obligation (CMO) is a vehicle that repackages the

cashflows in a way that redistributes prepayment risk.

Collateralized mortgage obligations

• Abbreviated CMO. Classes of bonds that redistribute the cash flows of mortgage
securities (and whole loans) to create securities that have different levels of
prepayment risk, as compared to the underlying mortgage securities.

Conventional mortgage

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• A loan based on the credit of the borrower and on the collateral for the mortgage.

Federal home loan mortgage corporation

• Is one of the three Government Sponsored Agencies, issues mortgage pass-

throughs and provides guarantee against defaults.

Federal national mortgage association

• Abbreviated FNMA, like GNMA was chartered under the Federal National
Mortgage Association Act in 1938. FNMA is a federal corporation working under the
auspices of the Department of Housing and Urban Development (HUD). It is the
largest single provider of residential mortgage funds in the United States. Fannie
Mae, as the corporation is called, is a private stockholder-owned corporation. The
corporation's purchases include a variety of adjustable mortgages and second loans,
in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are
widely accepted. FNMA assumes and guarantees that all security holders will
receive timely payment of principal and interest.

• Federal National Mortgage Association is one of the three Government Sponsored

Agencies.

Gems growing equity mortgages

• Mortgages in which annual increases in monthly payments are used to reduce

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outstanding principal and to shorten the term of the loan.

Gmcs guaranteed mortgage certificates

• First issued by Freddie Mac in 1975, GMCs, like PCs, represent undivided interest
in specified conventional whole loans and participations previously purchased by
Freddie Mac.

Government national mortgage association gnma or ginnie mae

• Securities influencing the volume of bank credit guaranteed by GNMA and issued

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by mortgage bankers, commercial banks, savings and loan associations, and other
institutions. Security holder is protected by full faith and credit of the U.S.
Government. Ginnie Mae securities are backed by the FHA, VA or FmHA
mortgages. The term pass throughs is often used to describe Ginnie Maes.

• Government National Mortgage Association is one of the three Government

Sponsored Agencies.

• A wholly owned U.S. government corporation within the Department of Housing &
Urban Development. Ginnie Mae guarantees the timely payment of principal and
interest on securities issued by approved services that are collateralized by FHA-
issued, VA-guaranteed, or Farmers Home Administration (FmHA)-guaranteed
mortgages.

Graduated payment mortgage

• Is a mortgage which frequently has relatively low payments in its early life. These
relatively low payments are often insufficient to amortize the principal. Therefore with
the passage of time the payment schedule is stepped-up to paydown the early
negative amortization, service the interest requirement, and paydown the total
principal balance.

Graduated payment mortgages

• Abbreviated GPMs. A type of stepped-payment loan in which the borrower's

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payments are initially lower than those on a comparable level-rate mortgage. The
payments are gradually increased over a predetermined period (usually 3,5, or 7
years) and then are fixed at a level-pay schedule which will be higher than the level-
pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize
the mortgage is added to the unpaid principal balance.

Mortgage

• A loan secured by the collateral of some specified real estate property which

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obliges the borrower to make a predetermined series of payments.

• Refers to the collateral (an asset) that is pledged as security, against the loan.

• A loan made to finance the purchase of real estate, which serves as the collateral
for the loan.

• Is a pledge of real property in order to obtain a loan: It is not the note itself. The
loan instrument is a note or bond. However, these two terms are frequently used
synonymously.

Mortgage backed securities

• The pass-throughs issued by Ginnie Mae are referred to as Mortgage Backed

Securities.

• Securities backed by a pool of mortgage loans.

• Is a broad term which encompasses both generic and pool specific securities
predicated on real property. The term also refers to private label or agency
securities, pass-throughs, or derivatives such as Collateralized Mortgage
Obligations. It can refer to the Over the-Counter options on mortgage backed
securities as well. These mortgage backed securities are viewed as either plain
vanilla or exotic. Some of the more common issues are:

 Accrual or Accretion Bond,

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 ARMs,

 Companion or Support,

 Constant Maturity Treasury (CMT),

 Floaters,

 Gnomes,

 Gold,

 Inverse Floaters or Reverse Floaters,

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 IO or Interest Only,

 IO-ette or IOette,

 Jump Bonds,

 Jump Z,

 Mega,

 PAC PO,

 Pass Throughs,

 Planned Amortization Class,

 PO or Principal Only,

 Reverse TAC,

 Scheduled Bonds,

 Stripped Mortgage Backed Securities,

 Super Floater,

 Super PAC,

 Super PO,
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 Support,

 Targeted Amortization Class,

 VADM

 Z Bond, and

 Z PAC.

There are other types and the list is growing because of the unique nature of these
instruments.

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Mortgage backed securities clearing corporation

• A wholly owned subsidiary of the Midwest Stock Exchange that operates a clearing
service for the comparison, netting, and margining of agency-guaranteed MBSs
transacted for forward delivery.

Mortgage backed securities hedge funds

• Generally focus on being long the actual mortgage backed securities and short
some proxy such as TBAs (To Be Announced), futures, Treasuries or derivatives.
These funds typically purchase highly rated agency paper, CMOs, or REMICs and
finance the positions in the repo market. This financing can often result in gross
asset, principal or market values of $10 billion for an initial cash/equity position of $1
billion dollars. In some respects it is comparable to buying a house with borrowed
money. It is the borrowing which magnifies the performance. If the market quickly
jumps 10 percent higher, then the buyer doubled his investment. Here, it would be
10 percent of $10 billion or a $1billion profit against an initial capitalization of $1
billion. However, if the market declines by 10 percent, then the original investor is
out. If the market went down 25 percent, then the original investor is gone but the
lending institution (bank or brokerage firm) is on the-hook for $1.5 billion. Effectively,
this is what has been recently occurring in the financial industry. The lenders are
becoming defacto new investors, holding losing positions, because of defaults.
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Mortgage bond

• Long-term debt financing secured by real estate, buildings, manufacturing facilities,

or other fixed assets.

• A bond in which the issuer has granted the bondholders a lien against the pledged
assets. Collateral trust bonds

• Bond secured by a lien on property, equipment, or other real assets.

Mortgage duration

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• A modification of standard duration to account for the impact on duration of MBSs
of changes in prepayment speed resulting from changes in interest rates. Two
factors are employed: one that reflects the impact of changes in prepayment speed
or price.

Mortgage pass through securities

• A securitized participation in the interest and principal cash flows from a specified
pool of mortgages. Principal and interest payments made on the mortgages are
passed through to the holder of the security.

Mortgage pass through security

• Also called a pass-through, a security created when one or more mortgage holders
form a collection (pool) of mortgages sells shares or participation certificates in the
pool. The cash flow from the collateral pool is passed through to the security holder
as monthly payments of principal, interest, and prepayments. This is the
predominant type of MBS traded in the secondary market.

Mortgage pipeline

• The period from the taking of applications from prospective mortgage borrowers to
the marketing of the loans.

Mortgage pipeline risk

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• The risk associated with taking applications from prospective mortgage borrowers
who may opt to decline to accept a quoted mortgage rate within a certain grace
period.

Mortgage rate

• The interest rate on a mortgage loan.

Mortgage tax

• Is a tax which is assessed against a new mortgage. It is usually paid by the

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borrower.

Mortgagee

• The lender of a loan secured by property.

• Is the lending party in a mortgage transaction.

Mortgager

• The borrower of a loan secured by property.

Open end mortgage

• Mortgage against which additional debts may be issued. Related: closed-end

mortgage.

Rams reverse annuity mortgages

• Mortgages in which the bank makes a loan for an amount equal to a percentage of
the appraisal value of the home. The loan is then paid to the homeowner in the form
of an annuity.

Real estate mortgage investment conduit

• Is a vehicle to minimize double taxation of income from a pooling of mortgages.

Remic real estate mortgage investment conduit

• A pass-through tax entity that can hold mortgages secured by any type of real
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property and issue multiple classes of ownership interests to investors in the form of
pass-through certificates, bonds, or other legal forms. A financing vehicle created
under the Tax Reform Act of 1986.

Reverse mortgage

• A contract with a financial institution that allows a homeowner to get retirement

income by borrowing against the equity in the home, with no repayment needed
while the individual lives in the home.

Strip mortgage participation certificate strip pc

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• Ownership interests in specified mortgages purchased by Freddie Mac from a
single seller in exchange for strip PCs representing interests in the same mortgages.

Stripped mortgage backed securities

• Are securities which are constructed from MBS pass-throughs. Essentially, these
securities strip the cash flow stream into a separate interest only (IO) and principal
only (PO) securities.

Stripped mortgage backed securities smbss

• Securities that redistribute the cash flows from the underlying generic MBS
collateral into the principal and interest components of the MBS to enhance their use
in meeting special needs of investors.

Wholesale mortgage banking

• The purchasing of loans originated by others, with the servicing rights released to
the buyer.