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Glossary

Arms-Length Transaction:  A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s length transaction is to ensure that all  parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.

Borrower:  A borrower receives an amount of money, called the principal, from a lender, and is obligated to pay back an equal amount of money to the lender at a later time.  A lender will charge a borrower a rate of interest for a predetermined amount of time it takes borrower to repay the principal. 

Deed:  A legal document that grants the bearer a right or privilege, provided that he or she meets a number of conditions. In order to receive the privilege – usually ownership, the bearer must be able to do so without causing others undue hardship. A person who poses a risk to society  as a result of holding a deed may be restricted in his or her ability to use the property.

Deed-In-Lieu of Foreclosure:  A potential option taken by a mortgagor (a borrower) to avoid foreclosure under which the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in exchange for the release of all obligations under the mortgage. Both sides must enter into the agreement voluntarily and in good faith.

Fannie Mae:   A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. The Federal National Mortgage Association, or Fannie Mae, is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.

Foreclosure:   A situation in which a homeowner is unable to make principal and/or interest payments on his or her mortgage, so the lender, bank, or mortgage company, can seize and sell the property as stipulated in the terms of the mortgage contract. 

Freddie Mac:  A stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”) purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries. 

Lender:  A private, public or institutional entity which makes funds available to others to borrow.

Mortgage:  A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.  Mortgages are also known as “liens against property” or “claims on property”.

Mortgage Broker:  An intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower, and passes that paperwork along to a mortgage lender for underwriting and approval.  The mortgage funds are then lent in the name of the mortgage lender. A mortgage broker collects an origination fee and/or a yield spread premium from the lender as compensation for its services.

Mortgage Company:   A company engaged in the business of originating and/or funding mortgages for residential or commercial property. A mortgage company is often just the originator of a mortgage; they market themselves to potential borrowers and seek funding from one of several client financial institutions that provide the capital for the mortgage itself.

Mortgage Payment:  The components of a mortgage payment. Principal is the money used to pay down the balance of the loan; interest is the charge you pay to the lender for the privilege of borrowing the money; taxes refer to the property taxes you pay as a homeowner and insurance refers to both your property insurance and your private mortgage insurance.

PSA (Pooling and Servicer Agreement):

About two-thirds of the loans made since 2005 have been securitized. Securitization is a process that involves gathering hundreds of loans into one package and selling that package in the secondary market. Often the purchaser is a trust. Trusts are comprised of investors.

After the loans are pooled and sold, the trust hires a service provider to collect monthly payments and distribute that money to the investors. That securitization agreement is called a pooling and servicer agreement or PSA.

Servicer:  An organization which collects principal and interest payments from borrowers and manages their escrow accounts.

Treasury or U. S. Treasury:  Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. Mint, Bureau of the Public Debt, and the Alcohol and Tobacco Tax Bureau.
Generally speaking, the U.S. Treasury is responsible for the revenue of the U.S. government, but here are some other key functions:
– Printing of bills, postage, Federal Reserve notes, and minting of coins
– Collection of taxes and enforcement of tax laws (through the IRS)
– Management of all government accounts and debt issues
– Overseeing U.S. banks

Short Sale:  The sale of a property by a financially distressed borrower for less than the outstanding mortgage balance due where the proceeds from the sale will be used to repay the lender. The lender then accepts the less-than-full repayment of the mortgage (and the borrower is released from the mortgage obligation) in order to avoid what would amount to larger losses for the lender if it were to foreclose on the mortgage.

 

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