Mortgage Glossary

Below are some common terms used in the mortgage industry and their meaning.

Adjustable Rate Mortgage (ARM):
A mortgage with an interest rate and payments that change periodically over the life of the loan

Callable debt:
A debt security whose issuer holds the right to call the debt due and redeem the security either on a specified price/price

Charge-off:
"Bad debt" - part of principal and interest on a loan that is written off because it has become uncollectible

Common stock:
A security that represents ownership in a company but gives no legal claim to a definite dividend or specific return of capital

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

Credit enhancement:
A means of reducing risk in the event of financial loss be requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements

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

Credit scoring:
A process of assessing individuals their ability to pay future debt based on recorded information about individuals and their loan requests

Debt security:
A security in which the issuing company generally agrees to repay the principal and make interest payments as agreed

Deed in Lieu of Foreclosure:
The voluntary surrender of property by an owner or borrower to a lien holder (such as a bank) that eliminates the need to continue foreclosure action by the lien holder. The lien holder can refuse to accept the Deed in Lieu and file a Notice of Non Acceptance with the County Recorder.

Default:
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 - failure to pay

Derivative:
A financial instrument which derives its value from an underlying security or notional amount

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

Earnings per share (EPS):
A method of expressing a corporation's profitability - net earnings of a corporation divided by the average number of shares of its common stock

Fixed-rate mortgage:
A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage

Forbearance:
The lender's postponement of legal action when a borrower is delinquent, usually when a borrower makes arrangements to bring payments current

Foreclosure:
The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults

Global Debt Facility:
A debt issuance facility through which U.S. dollar and foreign currency debt securities may be offered to investors worldwide with the feature of clearing and settlement through a variety of clearing systems

Intermediate-term mortgage:
A mortgage loan that matures in 20 years or less

Lender option commitments:
An agreement giving a lender the option to deliver loans or securities by a certain date at agreed-upon terms

Loan servicing:
Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts

Loan-to-value (LTV) ratio:
The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts

Loss mitigation:
Activities designed to reduce either the likelihood of the corporation suffering financial losses on a loan or the final dollar value of those losses in the event of a borrower default

Mandatory delivery commitment:
An agreement that a lender will deliver loans or securities by a certain date at agreed-upon terms

Medium-term notes:
Unsecured general obligations of Fannie Mae with maturities of one day or more and with principal and interest payable in U.S. dollars

Modification:
Any change to the original terms of a mortgage

Mortgage:
Promise to pay - A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term "mortgage" or "mortgage loan" is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note

Notice of Default:
An official notice filed and recorded by a designated trustee at the request of a lender indicating lender has commenced foreclosure action

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

Preferred stock:
Stock that takes priority over common stock with regard to dividends and liquidation rights. Preferred stockholders typically have no voting rights

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 loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently

Risk-based capital:
The amount of capital necessary to absorb losses throughout a hypothetical ten-year period marked by severely adverse circumstances

Security:
A financial instrument showing ownership of equity or potential ownership

Short Refinance:
Replacement of a mortgage with a reduced mortgage when the borrower is already in default. This is done to transition the borrower to a more affordable payment structure. The lender has to write off the difference between the old mortgage and the new mortgage, but in some cases this may be preferable to foreclosure.

Short Sale:
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure

Underwriting:
The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter