Mortgage Markets – Vocabulary Flashcards

34 vocabulary flashcards covering key terms and concepts from Chapter 14 (The Mortgage Markets).

Mortgage

A long-term loan secured by real estate, repaid through scheduled principal and interest payments until the debt is fully paid at maturity.

Amortizing Mortgage

A mortgage whose regular payments are structured so that early payments are mostly interest and later payments are mostly principal, resulting in full payoff by maturity.

Balloon Mortgage

A loan requiring small (often interest-only) payments for most of its life and one large principal payment (the “balloon”) at the end.

Fixed-Rate Mortgage (FRM)

A loan with an interest rate that remains constant for the entire term, giving borrowers predictable monthly payments.

Adjustable-Rate Mortgage (ARM)

A loan with an interest rate that resets periodically to follow a market index, offering lower initial rates but shifting interest-rate risk to the borrower.

Discount Points

Up-front interest payments—each point equals 1 % of the loan amount—paid at closing to obtain a lower contract interest rate; generally worthwhile only if the loan is kept more than about five years.

Collateral (Real Estate)

Property pledged to secure a mortgage; gives the lender the right to seize and sell the home if the borrower defaults.

Down Payment

The borrower’s initial cash equity in a property; reduces default risk by ensuring the borrower has something to lose if they walk away.

Private Mortgage Insurance (PMI)

Insurance that compensates the lender if a borrower with a low down payment defaults, covering the difference between the home’s value and the outstanding loan.

Lien

Legal claim that allows a mortgage lender to sell the property if the underlying loan is not repaid.

FICO Score

Credit-scoring metric (300-850) based on payment history, outstanding debt, length of credit history, and other factors; scores below ~660 signal higher credit risk.

Subprime Mortgage

A loan made to borrowers with weak credit or insufficient income documentation who do not qualify for standard market rates.

Conventional Mortgage

A mortgage originated by private lenders without government insurance; often requires PMI if the down payment is small.

FHA Loan

Government-insured mortgage from the Federal Housing Administration that permits very low down payments for qualified borrowers.

VA Loan

Mortgage guaranteed by the Department of Veterans Affairs, allowing eligible veterans to buy with little or no down payment.

Growing-Equity Mortgage (GEM)

A loan with scheduled payment increases that accelerate principal repayment, letting borrowers retire the debt faster without refinancing.

Graduated-Payment Mortgage (GPM)

A mortgage with low initial payments that rise at a predetermined rate, useful for borrowers who expect their income to grow.

Reverse-Annuity Mortgage (RAM)

Loan that allows homeowners—often retirees—to receive periodic payments drawn against their home equity; repaid when the house is sold.

Second Mortgage

An additional loan secured by property already pledged for a first mortgage, letting homeowners tap equity (often tax-deductible interest).

Mortgage-Backed Security (MBS)

Marketable security collateralized by a pool of mortgages whose cash flows are passed through to investors.

Mortgage Pass-Through Security

The most common MBS; borrowers’ principal and interest payments “pass through” a trustee to investors pro rata.

Collateralized Mortgage Obligation (CMO)

Structured MBS that redistributes prepayment risk by dividing cash flows into tranches with different maturities and risk profiles.

Real Estate Mortgage Investment Conduit (REMIC)

Tax-advantaged entity that issues multi-class MBS similar to CMOs; created by the Tax Reform Act of 1986.

Participation Certificate (PC)

Security issued (historically) by Freddie Mac representing an undivided interest in a pool of conventional mortgages, without federal insurance.

Securitization

The process of pooling illiquid assets (like mortgages) and converting them into tradable securities sold to investors.

Secondary Mortgage Market

Marketplace where existing mortgages are bought and sold, providing liquidity to originators and funding for new loans.

Fannie Mae (Federal National Mortgage Association)

Government-sponsored enterprise that buys conforming mortgages from lenders and funds its purchases by issuing agency bonds or MBS.

Freddie Mac (Federal Home Loan Mortgage Corporation)

GSE created to expand secondary-market liquidity; packages and sells mortgage pass-through securities called PCs.

Ginnie Mae (Government National Mortgage Association)

Government agency that guarantees timely payment of principal and interest on qualifying MBS backed by federally insured or guaranteed loans.

Federal Housing Administration (FHA)

Agency providing mortgage insurance on loans made by approved lenders, encouraging low-down-payment homeownership.

Loan Origination

The initial step of mortgage lending, involving application processing, credit evaluation, and loan approval, often for an up-front fee.

Loan Servicing

Ongoing administration of a mortgage—collecting payments, managing escrow accounts, and forwarding funds to investors—for a servicing fee.

Mortgage Interest Rate

Rate borrowers pay, determined by current long-term market rates, loan term, and any discount points paid at closing.

National Banking Act of 1863 (Mortgage Provision)

19th-century legislation that discouraged national banks from heavy mortgage lending, leaving residential finance largely to thrifts until mid-20th century.