Bulk REO Glossary Words

  1. Assets:
    Anything of value. Any interest in real or personal property which can be appropriated for the payment of debt.
  2. Accrual bond:
    See “Z-tranche.”
  3. Accrued interest:
    Interest deemed to be earned on a security but not yet paid to the investor.
  4. Active Tranche:
    A CMO tranche that is currently paying principal payments to investors.
  5. Amortization:
    Liquidation of a debt through installment payments.
  6. Average Life:
    On a mortgage security the average time to receipt of each dollar of principal weighted by the amount of each principal prepayment based on prepayment assumptions.
  7. Bad Debt:
    A debt that is not collectible and is therefore worthless to the creditor.
  8. Balance Sheet:
    Financial statement presenting measures of the assets liabilities and owner's equity or net worth of business firm or nonprofit organization as of a specific moment in time.
  9. Bridge Loan:
    Short-term loan to provide temporary financing until more permanent financing is available.
  10. Basis Point:
    One-one hundredth (1/100 or .01) of one percent. Yield differences among bonds are stated in basis points.
  11. Beneficial Owner:
    One who benefits from owning a security even if the security's title of ownership is in the name of a broker or bank (“street name”).
  12. Bid:
    The price at which a buyer is willing to buy a security.
  13. Bond Equivalent Yield:
    An adjustment to a CMO yield which reflects its greater present value created because CMOs pay monthly or quarterly interest as opposed to semiannual interest payments on most other types of bonds.
  14. Book-entry:
    A method of recording and transferring ownership of securities electronically thereby eliminating the need for physical certificates.
  15. Business Plan:
    A document that describes an organization's current status and plans for several years into the future. It generally projects future opportunities for the organization and maps the financial operations marketing and organizational strategies that will enable the organization to achieve its goals.
  16. Capital:
    Broadly all the money and other property of a corporation or other enterprise used in transacting its business.
  17. Call Risk:
    For a CMO the risk that declining interest rates may accelerate mortgage loan prepayment speeds causing an investor's principal to be returned sooner than expected. As a consequence investors may have to reinvest their principal at a lower rate of interest.
  18. Cap:
    The upper limit for the interest rate on an adjustable-rate loan or security.
  19. Clean CMO:
    See “Sequential-pay CMO.”
  20. CMO:
    (Collateralized Mortgage Obligation) A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. See “REMIC.”
  21. CMT:
    (Constant Maturity Treasury) A series of indexes of various maturities (one three five seven or ten years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.
  22. COFI:
    (Cost of Funds Index) A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.
  23. Collateral:
    Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans although it may also encompass letters of credit insurance policies or other credit enhancements.
  24. Companion Tranche:
    A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.
  25. Confirmation:
    A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.
  26. Conventional Mortgage Loan:
    A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.
  27. CPR:
    (Constant Prepayment Rate) The percentage of outstanding mortgage loan principal that prepays in one year based on the annualization of the Single Monthly Mortality (SMM) which reflects the outstanding mortgage loan principal that prepays in one month.
  28. Current Face:
    The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
  29. CUSIP number:
    A unique nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form the CUSIP number is printed on its face.
  30. Capitalization:
    Long-term debt preferred stock and net worth. The loan capital of a community development loan fund; includes that which has been borrowed from and is repayable to third parties as well as that which is earned or owned by the loan fund (i.e. "permanent capital").
  31. Capital Markets:
    Those financial markets including institutions and individuals that exchange securities especially long-term debt instruments.
  32. Cash Flow Financing:
    Short-term loan providing additional cash to cover cash shortfalls in anticipation of revenue such as the payment(s) of receivables.
  33. Collateral:
    Assets pledged to secure the repayment of a loan.
  34. Covenant:
    An agreement or promise to do or not to do a particular thing; to enter into a formal agreement; a promise incidental to a deed or contract. The following are functional objectives guiding most covenants:
  35. Current Asset:
    Assets that will normally be turned into cash within a year.
  36. Current Liability:
    Liability that will normally be repaid within a year.
  37. Current Ratio:
    Current assets divided by current liabilities -- a measure of liquidity. Generally the higher the ratio the greater the "cushion" between current obligations and a firm's ability to meet them.
  38. Debt:
    An amount owed for funds borrowed. The debt may be owed to an organization's own reserves individuals banks or other institutions. Generally the debt is secured by a note bond mortgage or other instrument that states repayment and interest provisions. The note in turn may be secured by a lien against property or other assets.
  39. Delivery Versus Payment:
    AKA "DVP". A manner in which the buyer's payment for securities is due at transaction the time of delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be made by bank wire check or direct credit to an account.
  40. Debt Service:
    Amount of payment due regularly to meet a debt agreement; usually a monthly quarterly or annual obligation.
  41. Debt Service Reserve:
    Term used to refer to cash reserves set aside by a borrower either by internal policy or lender covenant to repay debt in the event that cash generated by operations is insufficient.
  42. Default:
    A failure to discharge a duty. The term is most often used to describe the occurrence of an event that cuts short the rights or remedies of one of the parties to an agreement or legal dispute for example the failure of the mortgagor to pay a mortgage installment or to comply with mortgage covenants.
  43. Delinquent:
    In a monetary context something that has been made payable and is overdue and unpaid
  44. Due Diligence:
    Refers to the task of carefully confirming all critical assumptions and facts presented by a borrower. This includes verifying sources of income accuracy of financial statements value of assets that will serve as collateral the tax status of the borrower and any other material facts presented by the borrower.
  45. Endowment or Trust:
    A fund that contains assets whose use is restricted only to the income earned by these assets.
  46. Extension Risk:
    For a CMO the risk that rising interest rates may slow the anticipated prepayment speeds causing investors to find their principal committed longer than they expected. As a consequence they may miss the opportunity to earn a higher rate of interest on their money.
  47. Equity:
    The value of property in an organization greater than total debt held on it. Equity investments typically take the form of an owner's share in the business and often a share in the return or profits. Equity investments carry greater risk than debt but the potential for greater return should balance the risk.
  48. Equity Participation:
    An ownership position in an organization or venture taken through an investment. Returns on the investment are dependent on the profitability of the organization or venture.
  49. Fund Balance:
    Net worth in a nonprofit organization; total assets minus total liabilities. Face Value:
  50. Factor:
    A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security which changes over time in relation to its original principal value. The Bond Buyer publishes the “Monthly Factor Report ” which contains a list of factors for Ginnie Mae Fannie Mae and Freddie Mac securities. Fannie Mae Freddie Mac and trustees of private-label CMOs also publish CMO tranche factors.
  51. Floating-rate CMO:
    A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the London Interbank Offered Rate (LIBOR) the Constant Maturity Treasury (CMT) or the Cost of Funds Index (COFI). Floor:
  52. Free Delivery:
    Securities industry procedure whereby delivery of securities sold is made to the buying customer's bank without requiring immediate payment; thus a credit agreement of sorts. Antithesis of delivery vs. payment.
  53. General Recourse:
    Rights to demand payment from the general assets of the debtor without seniority in access to any specific assets.
  54. Guaranteed Loan:
    A pledge to cover the payment of debt or to perform some obligation if the person liable fails to perform. When a third party guarantees a loan it promises to pay in the event of a default by the borrower.
  55. Hedge:
    A commitment or investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices and offsetting potential losses. Inverse floater:
  56. Interim Financing:
    Short-term loan to provide temporary financing until more permanent financing is available.
  57. Intermediaries:
    Non- or for-profit institutions that have specialized lending capacities. They obtain capital in the form of equity and low interest loans from a variety of sources including foundations and other funders to form a "lending pool." They then serve as "wholesalers" who process large numbers of small loans or investments. This "economy of scale" often allows intermediaries to be more efficient than a foundation or funder could be if it considered each investment
  58. individually. Also intermediaries often develop expertise in a particular field or region that foundations or funders cannot afford to develop. In the context of this study non-financial intermediaries include community foundations and financial intermediaries include credit unions venture capital and loan funds banks etc.
  59. IO (interest-only) security:
    In the case of a CMO an IO tranche is created deliberately to pay investors only interest and not principal. IO securities are priced at a deep discount to the “notional” amount of principal used to calculate the amount of interest due. Issue date:
  60. Jump Z-tranche:
    A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a “triggering” event such as a drop in Treasury yields to a defined level or a prepayment experience that differs from assumptions by a specific margin. “Sticky” jump Z-tranches maintain their changed payment priority until they are retired. “Non-sticky” jump Z-tranches maintain their priority only temporarily for as long as the triggering event is present. Although jump Z-tranches are no longer issued some still trade in the secondary market.
  61. Leverage:
    Using long-term debt to secure funds for an organization. In the social investment world often refers to financial participation by other private public or individual sources.
  62. Liabilities Total Liabilities:
    Total value of financial claims on a firm's assets. Equals total assets minus net worth.
  63. Limited Liability:
    Limitation of shareholders' losses to the amount invested. Limited Recourse:
  64. debt.
  65. Line of Credit:
    Agreement by a bank that a company may borrow at any time up to an established limit.
  66. Linked Deposit:
    A deposit in an account with a financial institution to induce that institution's support for one or more projects. By accruing no interest or low interest on its deposit a foundation essentially subsidizes the interest rate of the project borrowers.
  67. Loan Agreement:
    A written contract between a lender and a borrower that sets out the rights and obligations of each party regarding a specified loan.
  68. Loss Reserves:
    That portion of a fund's earnings or permanent capital designated by the board of directors as a reserve against possible loan losses and as such unavailable for lending purposes. Generally accepted accounting principles governing for-profit and regulated financial institutions require that loan loss expense be deducted as an annual expense on an accrual basis and that the loan loss reserve be shown as a contra asset reducing loan assets. To date no accounting convention has been established to govern loan loss reserve accounting for unregulated nonprofit institutions. The technical treatment is to establish the reserve through periodic charges against earnings and actual losses when and if incurred and are charged against the reserve. For balance sheet purposes a loan loss reserve (should) be shown as a deduction from the loan portfolio to suggest that its true economic value should be reduced by the estimated loss exposure.
  69. LIBOR:
    (London Interbank Offered Rate) The interest rate banks charge each other for short-term Eurodollar loans ranging from overnight to five years in maturity.
  70. Lockout:
    The period of time before a CMO investor will begin receiving principal payments.
  71. Market Rate:
    The rate of interest a company must pay to borrow funds currently. Program-related investments generally are offered at below market rates or at no interest rate.
  72. Maturity Date:
    The date on which the principal amount of a security is due and payable.
  73. Mortgage:
    A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
  74. Mortgage loan:
    A loan secured by a mortgage. Mortgage pass-through security:
  75. Negative Covenants:
    Statements of actions or events of the borrower must prevent from occurring or existing for example additional borrowing without the lender's consent.
  76. Net Working Capital:
    Current assets minus current liabilities.
  77. Net Worth (Fund Balance in nonprofit. organizations):
    Total assets minus total liabilities. Aggregate net value of the organization.
  78. Opportunity Cost:
    The potential benefit that is foregone from not following the best (financially optimal) alternative course of action.
  79. Offer:
    The price at which a seller will sell a security.
  80. Original face:
    The face value or original principal amount of a security on its issue date
  81. Portfolio:
    A combination of assets held for its investment benefits including financial and non-financial returns. The asset mix is usually varied in kind and size to maintain an acceptable level of risk and return.
  82. PAC (planned amortization class) tranche:
    A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed from a PAC bond is transferred to a companion tranche.
  83. Par:
    A price equal to the original face amount of a security as distinct from its market value. On a debt security the par or face value is the amount the investor has been promised to receive from the issuer at maturity.
  84. Payment date:
    The date that principal and interest payments are paid to the record owner of a security. P&I (principal and interest):
  85. Plain-vanilla CMO:
    See “Sequential-pay CMO.”
  86. PO (principal-only) security:
    In the case of a CMO a PO tranche is created deliberately to pay investors principal only and not interest. PO securities are priced at a deep discount from their face value.
  87. Pool:
    A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae Fannie Mae or Freddie Mac mortgage pass-through securities pools are identified by a number assigned by the issuing agency.
  88. Prepayment:
    The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.
  89. Price:
    The dollar amount to be paid for a security which may also be stated as a percentage of its face value or par in the case of debt securities.
  90. Principal:
    With mortgage securities the amount of debt outstanding on the underlying mortgage loans.
  91. Private label:
    The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks financial institutions or home builders.
  92. Principal:
    In commercial law the principal is the amount that is received in the case of a loan or the amount from which flows the interest.
  93. Program-Related Enterprise:
    A business or enterprise designed to promote the social purpose goals of an organization as well as generate revenue. Among nonprofits products and services are usually but not exclusively identified with the purpose of the organization. Activities can range from fee-for-service charges to full-scale commercial ventures.
  94. Program-Related Investment:
    Broad functional definition:
  95. Promissory Note:
    Promise to pay. Written contract between a borrower and a lender that is signed by the borrower and provides evidence of the borrower's indebtedness to the lender.
  96. Receivables:
    Accounts receivable; an amount that is owed the business usually by one of its customers as a result of the ordinary extension of credit
  97. Recourse:
    Refers to the right in an agreement to demand payment from the person who is taking on an obligation. A full recourse loan refers to the right of the lender to take any assets of the borrower if repayment is not made. A limited recourse loan only allows the lender to take assets named in the loan agreement. A non-recourse loan limits the lender's rights to the particular asset being financed -- an approach that is common in home mortgages and other real estate loans.
  98. Ratings:
    Designations used by investors' services to give relative indications of credit quality.
  99. Record date:
    The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.
  100. REMIC:
    Real Estate Mortgage Investment Conduit. As a result of a change in the 1986 Tax Reform Act most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms “REMIC” and “CMO” are now used interchangeably.
  101. Residual:
    In a CMO the residual is that tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.
  102. Recoverable Grants:
    Funds provided by a philanthropist to fulfill a role similar to equity. A recoverable grant may include an agreement to treat the investment as a grant if the enterprise is not successful but to repay the investor if the enterprise meets with success.
  103. Restructure:
    A revision of a financial agreement that alters the conditions or covenants of the original agreement. For example parties may agree to restructure a loan agreement easing the payment schedule when a borrower is delinquent or otherwise faces default on a loan.
  104. Roll Over:
    Prior to or at the time of the maturity of an investment or loan the interested parties agree to continue to carry over the investment or loan for another successive period of time.
  105. Security:
    A pledge made to secure the performance of a contract or the fulfillment of an obligation. Examples of securities include real estate equipment stocks or a co-signer. Mortgages are a form of security with strong legal standing because they are publicly registered following a formal legal procedure. A mortgage gives the lender holding a mortgage security the right to reclaim the asset being financed if repayment is not made.
  106. Senior Debt:
    Debt that must be repaid before subordinated debt receives any payment in the event of default.
  107. Scenario Analysis:
    Examining the likely performance of an investment under a wide range of possible interest rate environments.
  108. Sequential-pay CMO:
    The most basic type of CMO in which all tranches receive regular interest payments but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired the principal payments are applied to the second tranche until it is fully retired and so on. Servicing Collection and pooling of principal interest and escrow payments on mortgage loans and mortgage pools as well as certain operational procedures such as accounting bookkeeping insurance tax records loan payment follow-up delinquency loan follow-up and loan analysis. The party providing the servicing receives a servicing fee.
  109. Servicing Fee:
    The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.
  110. Settlement Date:
    The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds.
  111. Sinking Fund:
    Money set aside on a regular basis sometimes from current earnings for the specific purpose of redeeming debt.
  112. SMM (Single Monthly Mortality):
    The percentage of outstanding mortgage loan principal that prepays in one month.
  113. Standard Prepayment Model of the Bond Market Association:
    A model based on historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The Association's model is based on the Constant Prepayment Rate (CPR) which annualizes the Single Monthly Mortality (SMM) or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as “percentage of PSA” (Prepayment Speed Assumptions). A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month 0.4% CPR in the second month 0.6% CPR in the third month and 0.2% increases in every month thereafter until the thirtieth month when the rate reaches 6%. From the thirtieth month until the mortgage loan reaches maturity 100% PSA equals 6% CPR. Super PO A principal-only security structured as a companion bond.
  114. Superfloater:
    A floating-rate CMO tranche whose rate is based on a formulaic relationship to a representative interest rate index.
  115. Support Tranche:
    See “Companion tranche.”
  116. Subordinated Debt (Junior Debt):
    Debt over which senior debt takes priority. In the event of bankruptcy subordinated debt-holders receive payment only after senior debt is paid in full. A subordination of security interest in property allows another creditor to have the rights to the proceeds of the sale of that property before the claim of the subordinated creditor.
  117. Term:
    Refers to the maturity or length of time until final repayment on a loan bond sale or other contractual obligation.
  118. T+3:
    The settlement date for securities transactions such as a stock sale. It refers to the obligation in the brokerage business to settle securities trades by the third day following the trade date. The settlement occurs when the seller receives the sales price (the broker's commission) and the buyer receives the shares.
  119. TAC tranche:
    Targeted amortization class tranche. A TAC tranche uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.
  120. Toggle Tranche:
    See “Jump Z-tranche.” Tranche:
  121. Transfer agent:
    A party appointed to maintain records of securities owners to cancel and issue certificates and to address issues arising from lost destroyed or stolen certificates. Trustee:
  122. User:
    A non- or for-profit entity that receives a program-related investment directly from a funder for use in its programs or ventures.
  123. Warranties:
    Statement attesting that certain statements are true. For instance the borrower may warrant that it is a corporation that it is entering into the agreement legally and that financial statements supplied to the bank are true.
  124. Weighted Average Coupon (WAC):
    The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security weighted by the size of the principal loan balances.
  125. Weighted Average Loan Age (WALA):
    The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass- through security pool issued by Freddie Mac weighted by the size of the principal loan balances.
  126. Weighted Average Maturity (WAM):
    The weighted average number of months to the final payment of each loan backing a mortgage security weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARM) and weighted average remaining term (WART).
  127. Window:
    In a CMO bond the period of time between the expected first payment of principal and the expected last payment of principal.
  128. Working Capital:
    Technically means current assets and current liabilities. The term is commonly used a synonymous with net working capital. The term often also is used to refer to all short-term funding needs for operations (excluding debt service and fixed assets). A company's investment in current assets that are used to maintain normal business operations. Net working capital which is the excess of current assets over current liabilities is also interchangeable with working capital. Both reflect the resources in circulation to meet operating needs and obligations as they come due.
  129. Write off:
    When an investment such as a loan becomes seriously delinquent or in default and is determined to be uncollectible the lender may choose to charge the outstanding investment amount as an expense or a loss.
  130. Yield:
    The annual percentage rate of return earned on a security as computed in accordance with standard industry practices. Yield is a function of a security's purchase price and interest rate.
Card Set
Bulk REO Glossary Words
Bulk REO Terms