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Mortgage Backed Securities (MBS) Glossary

Adjustable Interest Rate Mortgage (ARM): The interest rate on Adjustable Interest Rate Mortgage or ARMs adjust periodically during the year based upon an established index, it can be discount rate + some basis points, or CPI based or any other index.

Average Life: The average life of a mortgage-backed security is the weighted average time to receipt of principal payments. The formula for average life is

1(principal at time 1) + …. + T(principal at time T)

12(total principal received)

Balloon Mortgage: Generally, balloon loans have level monthly payments based upon a 30-year fully amortizing schedule, but mature earlier than 30 years.

Buy down Mortgage: This involves an initial lump sum payment made by any party (builder, seller, etc.) to reduce the interest rate actually paid and thus reduce the monthly payments on a home mortgage loan, either for the entire term or for an initial period of years.

Callable debt: A debt security whose issuer has the right to redeem the security at a specified price on or after a specified date, but prior to its stated final maturity.

CAP: To safeguard the borrower, the rate that an ARM can change is normally limited. There are three types of limits or caps that are normally applied:

Charge-off: The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.

CMO: Collateralize Mortgage Obligation

Conventional mortgage: A mortgage loan that is not insured or guaranteed by the federal government.

Convertible Adjustable Rate Mortgages: These are basically an ARM loan with an option to convert it after a fixed duration to a fixed rate mortgage.

Convertible Fixed Rate Mortgages: These mortgages have a fixed interest for 3,5,7 years etc then they are converted to ARM loan where interest rate adjusts annually.


Credit enhancement: A method to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it will be recompensed to some degree in the event of a financial loss.

Credit loss ratio: The ratio of credit-related losses to the dollar amount of MBS outstanding and total mortgages owned by the corporation.

Credit-related expenses: The sum of foreclosed property expenses plus the provision for losses.

Credit-related losses: The sum of foreclosed property expenses plus charge-offs.

Debt Ratio : It compares the Income of the borrower with the monthly expenditures

Debt security: A security in which the issuing company generally agrees to repay the principal (typically, the original amount borrowed) and make interest payments according to an agreed schedule.

Debt Services Coverage Ratio: The Debt Service Coverage Ratio indicates whether the rental income would be able to meet operating costs as well as the debt payments with the income the property generates.


Default: The failure of a borrower to comply with the terms of a note or the provisions of a mortgage.

Delinquency: A mortgage loan on which a payment has not been made by the due date.

Duration: The weighted-average life of the present value of all future cash flows, both principal and interest, of a security. It is used as a measure of the sensitivity of the value of a security to changes in interest rates.

Equity: In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

FASB: Financial Accounting Standards Board. Independent agency which establishes
GAAP.

Fixed Interest Rate Mortgage: As the name implies it is very obvious that in fixed interest rate mortgage, the interest rate will always remain the same for the whole period of the mortgage


Foreclosure: The legal process by which property that is mortgaged as security for a loan may be sold to pay a defaulting borrower’s loan.

Guaranty fee: Compensation paid by a lender to Fannie Mae for the guarantee of timely payments of principal and interest to MBS security holders.

Hybrid Loan: It offers features of both fixed-rate and adjustable mortgages. . In a hybrid loan part of the payments are fixed and the rest are adjustable.

Initial Interest Rate: As describes earlier it is normally 2-3% less than the fixed interest rate mortgage of the same period or number of years.

Index: It is the economic indicator.

Interest rate swap: A transaction between two parties in which each agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional principal amount.

Lifetime Cap: The
lifetime cap determines how much the interest can vary over the life of the mortgage.

Loan servicing: The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.


Loan to Value Ratio: The LTV ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing.


Mortgage :
A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.

Mortgage-Backed Security (MBS): A Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Nonperforming asset:
An asset such as a mortgage that is not currently accruing interest or on which interest is not being paid.

OAS: Option-adjusted spread

Payment Cap: This limits the increase in your monthly payment to a specific dollar amount

Periodic Cap: Annual caps put on the interest rates that limit the amount of interest that a person would pay per month

Pre foreclosure sale:
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower’s debt.

Purchase money loan: When the proceeds of a mortgage loan are used to buy the same property that is securing the loan

Quoted: Current market price or actively traded market prices

Repayment plan: An agreement between a lender and a borrower who is delinquent on his or her mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.


Reverse mortgage: A financial tool that provides seniors with funds from the equity in their homes. Generally, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.

Secondary mortgage market: The market in which residential mortgages or mortgage securities are bought and sold.

Two Step Mortgage: These loans are fixed for one interest rate for 5 to 7 years term and then have one adjustment where interest adjusts according to market conditions and then are fixed for the rest of the life of the mortgage. Therefore they are also known as 7/23.

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s ability and willingness to repay the debt and the value of the property.

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