FIN 1 CHAPTER 7

• Mortgages


  Loans to individuals or businesses to purchase a home, land, or other real property
• Securitized


  Securities packaged and sold as assets backing a publicly traded or privately held debt instrument
• Lien


  A public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults
• Down payment


  A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front
• Private Mortgage Insurance (PMI)


  Insurance contract purchased by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the mortgage
• Federally insured mortgages


  Mortgages originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FMA) or the Veterans Administration (VA)
• Conventional mortgages


  Mortgages issued by financial institutions that are not federally insured
• Amortized


  A mortgage is amortized when the fixed principal and interest payments fully pay off the mortgage by its maturity date
• Balloon payment mortgage


  Mortgage that requires a fixed monthly interest payment for a three to five year period. Full payment of the mortgage principal (the balloon payment) is then required at the end of the period
• Fixed-rate mortgage


  A mortgage that lacks in the borrower's interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change
• Adjustable-rate mortgage (ARM)


  A mortgage in which the interest rate is tied to some market interest rate. Thus the required monthly payments can change over the life of the mortgage
• Discount points


  Interest payments made when the loan is issued (at closing). One discount point paid upfront is equal to 1 percent of the principal value of the mortgage
• Application fee


  Covers the issuer's initial costs of processing the mortgage application and obtaining credit report
• Title search


  Confirms the borrower's legal ownership of the mortgaged property and ensures there are no outstanding claims against the property
• Title insurance


  Protects the lender against and error in the title search
• Appraisal fee


  Covers the cost of an independent appraisal of the value of the mortgaged property
• Loan origination fee


  Covers the remaining costs to the mortgage issuer for processing the mortgage application and completing the loan
• Closing agent and review fee

  Cover the costs of the closing agent who actually closes the mortgage
• Other costs


  Any other fees, such as VA loan guarantees, or FHA or private mortgage insurance
• Mortgage refinancing


  Occurs when a mortgage borrower takes out a new mortgage and uses the proceeds obtained to pay off the current mortgage
• Amortization schedule


  Schedule showing how the monthly mortgages payments are split between principal and interest
• Jumbo mortgages


  Mortgages that exceed its conventional mortgage conforming limits
• Subprime mortgages


  Mortgages to borrowers who have weakened credit histories
• Alt-A mortgages


  Mortgages that are considered riskier than a prime mortgage and less risky that a subprime mortgage
• Option ARMs


  Adjustable rate mortgages that offer the borrower several monthly payment options
• Second mortgages


  Loans secured by a piece of real estate already used to secure a first mortgage
• Home equity loans


  Loans that let customers borrow on a line of credit secured with a second mortgage on their homes
• Reverse-annuity mortgage (RAM)


  A mortgage for which a mortgage borrower receives regular monthly payments from a financial institution rather than making them. When the RAM matures (for the borrower dies), the borrower (or the estate of the borrower) sells the property to retire the debt
• GSEs


  Government sponsored enterprises such as Fannie Mae or Freddie Mac
• Correspondent banking


  A relationship between small bank and a large bank in which the large bank provides a number of deposit lending and other services
• Mortgage sale


  Sale of a mortgage originated by a bank with or without recourse to an outside buyer
• Recourse


  The ability of a loan buyer to sell the loan back to the originator should it go bad
• Pass through mortgage securities


  Mortgage backed securities that pass through promised payments of principal and interest on pools of mortgages created by financial institutions to secondary market participants holding interest in the pools
• Timing insurance


  A service provided by a sponsor of pass through securities such as GNMA, guaranteeing the bond holder interest and principal payments at the calendar date promised
• Collaterized mortgage obligation (CMO)


  A mortgage backed bond issued in multiple classes or tranches
• Tranche


  A bond holder class associated with a CMO
• Mortgage backed bonds (MBB)


  Bonds collateralized by a pool of assets. Also called asset-backed bond
• Asset-backed bond


  Bonds collateralized by a pool of assets. Also called mortgage-backed bonds
• Bonds


  Long term debt obligations issued by corporations and govt units. Used to raise funds to support long term debt operations of the issuer
• Bond markets


  Bonds are issued and traded