Econ 121 FCIC Glossary

a mortgage whose interest rate changes periodically over time

goals originally set by the Department of Housing and Urban Development (now by the Federal Housing Finance Agency) for Fannie Mae and Freddie Mac to allocate a specified part of their mortgage business to serve low- and moderate-income borrowers

short-term debt secured by assets

debt instrument secured by assets such as mortgages, credit card loans or auto loans

long-term bonds whose interest rate may be reset at regular short-term intervals by an auction process

company that controls a bank

a firm, often the subsidiary of an investment bank, that buys and sells securities for itself and others

assets minus liabilities; what a firm owns minus what it owes. regulators often require financial firms to hold minimum levels of this

TARP program providing financial assistance to 700-plus US financial institutions through the purchase of senior preferred shares in the corporations on standardized items

CDO that holds other CDOs

type of security often composed of the riskier portions of mortgage-backed securities

short-term unsecured corporate debt

emergency program created by the Federal Reserve in 2008 to purchase three-month unsecured and asset-backed commercial paper from eligible companies

independent federal agency that regulates trading in futures and options

a party to a contract

a type of credit derivative allowing a purchaser of the swap to transfer loan default risk to a seller of the swap. The seller agrees to pay the purchaser if a default even occurs. The purchaser does not need to own the loan covered by the swap.

insurance or other protection that may be purchased for a loan or pool of loans to offset losses in the event of default

loss from delayed payments or defaults on loans

private company that evaluates the credit quality of securities and provides ratings on those securities; the largest are Fitch Ratings, Moody's Investors Service, Standard & Poor's

risk to a lender that a borrower will fail to repay the loan

the number of loans for which borrowers fail to make timely loan payments divided by total loans

financial institution, such as a commercial bank, thrift (savings and loan), or credit union, that accepts deposits, including deposits insured by the FDIC

financial contract whose price is determined (derived) from the value of an underlying asset, rate, index, or event

nickname for the Federal National Mortgage Association (FNMA), a government-sponsored enterprise providing financing for the home mortgage market

a measure of a borrower's creditworthiness based on the borrower's credit data; developed by the Fair Isaac Corporation

legal process wherey a mortgage lender gains ownership of the real property securing a defaulted mortgage

nickname for the Federal Home Mortgage Corporation (FHLMC), a government-sponsored enterprise providing financing for the home mortgage market

nickname for the Government National Mortgage Association (GNMA), a government-sponsored enterprise; guarantees pools of VA and FHA mortgages

Banking Act of 1933 creating the FDIC to insure bank deposits; prohibited commercial banks from underwriting or dealing in most types of securities, barred banks from affiliating with securities firms, and introduced other banking reforms. In 1999, the Gramm-Leach-Bliley Act repeated the provisions of the ___ that prohibited affiliations between banks and securities firms

1999 legislation that lifted certain remaining restrictions established by the Glass-Steagall Act

the difference between the value of an asset and the amount borrowed against it

in finance, a way to reduce exposure or risk by taking on a new financial contract

a privately offered investment vehicle exempted from most regulation and oversight; generally open only to high-net-worth investors

a CDO backed by collateral found in both cash CDOs and synthetic CDOs

assets that cannot be easily or quickly sold

loan that allows borrowers to pay interest without repaying principal until the end of the loan term

a measure of how much debt is used to purchase assets; for example, a leverage ratio of 5:1 means that $5 of assets were purchased with $4 of debt and $1 of capital

London Interbank Offered Rate, an interest rate at which banks are willing to lend to each other in the London interbank market

holding cash and/or assets that can be quickly and easily converted to cash

a contract allowing one party to compel to the other to by an asset under certain circumstances. it ensures that there will be a buyer for otherwise illiquid assets

ratio of the amount of a mortgage to the value of the house, typically expressed as a pecentage. "combined" ___ includes all debt secured by the house, including second mortgages

the process by which the reported amount of an asset is adjusted to reflect the market value

insurance company, such as AMBAC and MBIA, whose single line of business is to guarantee financial products

company that acts as an agent for mortgage holders, collecting and distributing payments from borrowers and handling defaults, modifications, settlements, and foreclosure proceedings

process of evaluating the credit characteristics of a mortgage and borrower

debt instrument secured by a pool of mortgages, whether residential or commercial

loan that allows a borrower to make monthly payments that do not fully cover the interest payment, with the unpaid interest added to the principal of the loan

value of an asset minus any associated costs; for financial assets, typically changes each trading day

ratio of loan losses to total loans

mortgage-backed securities sponsored by private companies other than a government-sponsored enterprise (such as Fannie Mae o Freddie Mac); also known as private-label mortgage-backed securities

a measure of the outstanding amount of over-the-counter derivatives contracts, based on the amount of the underlying referenced assets

a process by which counterparties may transfer derivatives positions

when lenders make loans with the intention of selling them to other financial institutions or investors, as opposed to holding the loans through maturity

when lenders make loans with the intention of holding them through maturity, as opposed to selling them to other financial institutions or investors

process of making a loan, including underwriting, closing, and providing the funds

fave value of a bond

combining and packaging a group of loans to be held by a single entity

program established by the Federal Reserve in March 2008 that allowed eligible companies to borrow cash overnight to finance their securities

amount borrowed

insurance on the payment of a mortgage provided by a private firm at additional cost to the borrower to protect the lender

a method of secured lending where the borrower sells securities to the lender as collateral and agrees to repurchase them at a higher price within a short period, often within one day

process of pooling debt assets such as mortgages, car loans, and credit card debt into a separate legal entity that then issues a new financial instrument or security for sale to investors

financial institutions and activities that in some respects parallel banking activities but are subject to less regulation than commercial banks. institution include mutual funds, investment banks, and hedge funds

the sale of a home for less than the amount owed on the mortgage

to sell a borrowed security in the expectation of a decline in value

entity created to fulfill a narrow or temporary objective; typically holds a portfolio of assets such as mortgage-backed securities or other debt obligations; often used because of regulatory and bankruptcy advantages

leveraged special purpose vehicle, funded through medium-term notes and asset-backed commercial paper, that invested in highly rated securities

A CDO that holds credit default swaps that reference assets (rather than holding cash assets), allowing investors to make bets for or against those referenced assets

in financial terms, that which poses a threat to the financial system

clause in the Federal Deposit Insurance Corporation Improvement Act (FDICIA) under which the FDIC may commit its funds to rescue a financial institution

Federal Reserve program. supported by TARP funds, to aid securitization of asset-backed loans such as auto loans, student loans, and small business loans

program in which the Federal Reserve made funds available to all depository institutions at once through a regular auction

emergency program in which the Federal Reserve made up to $200 billion in Treasury securities available to banks or broker/dealers that traded directly with the Federal Reseve

from the French, meaning a slice; used to refer to the different types of mortgage-backed securities and CDO bonds that provide specified priorities and amounts of returns: "senior" tranches  have the highest priority of returns and therefore the lowest risk/interest rate; mezzanine tranches have mid levels of risk/return; and "equity" (also known as "residual" or "first loss") tranches typically receive any remaining cash flows

government program to address the financial crisis, signed into law in October 2008 to purchase or insure up to $700 billion in assets and equity from financial and other institutions

condition in which a business does not have enough capital to meet its needs, or to meet its capital requirements if it is a regulated entity

reducing the value of an asset as it is carried on a firm's balance sheet because the market value has fallen