Mortgage Markets and Long-Term Debt Flashcards

Comprehensive practice flashcards defining core vocabulary, concepts, formulas, programs, and institutions related to Mortgage Markets and Long-Term Debts.

Long-term debt

Financial obligations that mature in $2$ to $20\text{ years}$ and are usually repaid in periodic installments to acquire capital assets or repay maturing debts.

Tax shield of debt

The financial advantage where interest payments on corporate debt are tax-deductible for the issuer, unlike declared dividend distributions.

Call provision

A clause included in a bond indenture that grants the issuing firm the right to repurchase and retire the bonds prior to their stated maturity date.

Financial leverage

The use of borrowed funds to finance business operations and assets, which can raise earnings per share ($\text{EPS}$) but increases interest costs when excessive.

Publicly issued obligations

Long-term debt securities offered and sold to the general public, including corporate bonds and long-term commercial papers.

Direct or private placement

A non-public debt arrangement where funds are lent directly to a company by individuals under mutually agreed terms, evidenced by a promissory note or certificate.

Mortgage

A long-term debt obligation granted by a bank or financial institution that uses real estate or movable property as collateral.

Mortgagor

The borrower or debtor in a mortgage contract who pledges property as collateral while retaining equitable ownership.

Mortgagee

The creditor or financial institution that lends funds in a mortgage contract and holds a security lien against the pledged property.

Deed of assignment

The legal document signed by the property owner conveying title to the mortgagee to establish the property as loan collateral.

Real estate mortgage

A mortgage contract where an immovable, fixed asset—such as land, a house, or a commercial building—is pledged as collateral.

Chattel mortgage

A mortgage contract where movable personal assets—such as automobiles, machinery, or equipment—are pledged as collateral.

Foreclosure

The legal proceeding by which a mortgagee seizes and sells collateralized property at auction following the mortgagor's default on payment obligations.

Margin of protection

The protective cushion maintained by lenders by capping loan values between $70\%$ and $90\%$ of the property's appraised market value.

Closed-end provision

A mortgage covenant that bars a borrowing firm from issuing additional debt of equal legal priority against the same mortgaged collateral.

Open-ended mortgage

A mortgage provision allowing an issuing firm to issue additional first-mortgage bonds secured by the same mortgaged property.

Senior mortgage

The primary or first mortgage on a property that holds superior legal claim over the collateral during liquidation.

Junior mortgage

A secondary mortgage secured by previously collateralized property whose financial claim is subordinate to that of the senior mortgage.

Debtor (mortgage context)

An individual or institution that borrows capital on a long-term basis for purchasing real property, vehicles, or expanding business facilities.

Creditor (mortgage context)

An individual, private corporation, or government institution that advances funds in exchange for regular interest payments and collateral backing.

Foreclosure sale buyer

The winning bidder at a mortgage foreclosure auction who obtains ownership title if the defaulted borrower fails to redeem the asset within the grace period.

Prime mortgage

A mortgage extended to borrowers with high credit ratings and stable cash flows who fully satisfy institutional underwriting standards, earning lower interest rates.

Subprime mortgage

A mortgage offered to higher-risk borrowers with lower incomes, existing debts, or poor credit histories, carrying a higher interest rate to compensate for default risk.

Insured mortgage

A mortgage contract guaranteed by a government entity to protect the lending institution against losses resulting from borrower default, insolvency, or death.

Conventional mortgage

A mortgage supported by private insurance contracts that indemnify the lending institution if the borrower defaults.

Mortgage life insurance

A policy covering a mortgagor that pays off the remaining loan balance to the lender upon the borrower's death, shielding heirs from debt liabilities.

Primary mortgage market

The lending sector where mortgages are initially negotiated and created directly between borrowers and mortgage originators.

Mortgage originator

The originating financial institution—such as a bank, credit union, or mortgage broker—that underwrites and funds the initial mortgage agreement.

Home mortgage

A loan instrument specifically originated to finance the purchase of single-family residential homes and lots.

Multifamily dwelling mortgage

A mortgage facility designated to fund multi-unit residential structures including apartment complexes, townhouses, and condominiums.

Commercial mortgage

A real estate debt facility utilized to finance real estate properties intended for commercial and business enterprises.

Farm mortgage

A specialized mortgage used to acquire agricultural real estate and farms designated for commercial production.

Adjustable-rate mortgage (ARM)

A mortgage loan where the interest rate periodically fluctuates after an initial term according to a designated market benchmark index.

Interest rate cap

A contractual provision that establishes the maximum percentage ceiling by which an adjustable mortgage rate can rise per adjustment cycle or over the loan life.

Down payment (Equity)

The upfront cash contribution provided by the debtor toward an asset's total purchase price, commonly ranging between $10\%$ and $20\%$.

Private Mortgage Insurance (PMI)

Insurance required from borrowers putting down less than $20\%$ equity that covers the lender for the gap between asset value and unpaid balance upon default.

Secondary mortgage market

The financial market where originating institutions package, securitize, and sell existing mortgage contracts to institutional investors.

Mortgage aggregators

Intermediary entities that purchase individual mortgages from originators, bundle them into pools, and issue mortgage-backed securities ($\text{MBS}$).

Securities dealers

Market intermediaries that purchase newly formed mortgage-backed securities from aggregators and structure them for retail and institutional investors.

Secondary market investors

Entities such as pension funds, insurance firms, and mutual funds seeking predictable yields by buying securities backed by mortgage cash flows.

Government-sponsored enterprise (GSE)

A public or quasi-public entity created by the state to purchase mortgages from private lenders and issue securities to expand homebuyer access.

National Home Mortgage Finance Corporation (NHMFC)

The pioneer Philippine government corporation founded in $1977$ to develop the domestic secondary home mortgage market.

Presidential Decree 1267

The $1977$ Philippine decree that formally created the National Home Mortgage Finance Corporation ($\text{NHMFC}$).

Executive Order No. 90 (1986)

The Philippine executive directive establishing NHMFC as the primary secondary mortgage institution purchasing home loans funded by long-term programs.

Home Development Mutual Fund (HDMF)

The Philippine government housing mutual fund (Pag-IBIG) that assumed administration and payment processing of the Unified Home Lending Program in $1995$.

Unified Home Lending Program (UHLP)

A major multi-agency Philippine government home financing program supported by SSS, GSIS, and HDMF funds until its transfer to HDMF in $1995$.

Executive Order 195 (1999)

The Estrada administration order redirecting NHMFC's operations toward secondary mortgage market development and the National Shelter Program.

Social Housing Finance Corporation (SHFC)

A specialized subsidiary of NHMFC created to oversee pro-poor community initiatives including the Community Mortgage Program ($\text{CMP}$).

Community Mortgage Program (CMP)

An affordable socialized lending initiative where organized community collectives of informal settlers secure financing to legally purchase residential land.

Abot-Kaya Pabahay Fund Program (AKPFP)

A long-term government housing assistance program designed to provide low-cost housing security and development loans to low-income earners.

Bahay Bonds (BB1)

The Philippine government's inaugural $P2.06\text{ Billion}$ residential mortgage-backed security ($\text{RMBS}$) issued in $2009$, awarded Triple-A by Asset Asian Awards.

Housing Loan Receivable Purchase Program (HLRPP)

An approved NHMFC guideline mechanism allowing the purchase of mortgage receivables from originators for liquidity and subsequent securitization into bonds.

HLRPP 2 (SHELTER)

The Socialized Housing Loan Take-out of Receivables program designed to alleviate housing backlogs by purchasing receivables from NGOs, LGUs, and cooperatives.

MABUHAY program

The 'Maginhawang Buhay dahil sa baHAY' program, the first reverse mortgage initiative in the Philippines, enabling senior citizens to convert home equity into cash.

BALAI bonds

Securitized bond instruments issued under the Building Adequate Livable Affordable and Inclusive Filipino Communities initiative focused on provincial developments.

Lien

A formal legal instrument giving a lender legal authority to seize and sell property collateral if the borrower defaults on debt terms.

Mortgage standardization

The process of aligning loan documentation, sizing, and underwriting standards to make mortgages eligible for bundling and trading in secondary markets.

Mortgage illiquidity

The intrinsic quality of mortgage assets making them less easily convertible to cash compared to government bonds due to smaller trading depth.

Reinvestment problem in mortgages

The challenge where monthly amortization payments return small amounts of principal over time, yielding low reinvestment returns for small investors.

Mortgage underwriting process

The rigorous procedure involving credit analysis, title verification, legal documentation, land surveys, and property appraisal before a mortgage is granted.

15-year mortgage maturity

A mortgage term offering lower total interest costs and rapid equity accumulation at the cost of higher monthly amortization payments.

30-year mortgage maturity

A long-term mortgage structure featuring lower, more manageable monthly installments, but accumulating significantly higher cumulative interest over time.

Fixed-rate mortgage

A mortgage agreement maintaining an identical interest rate and fixed installment schedule across the entire life of the contract.

Balloon-payment mortgage

A mortgage where regular payments cover periodic interest (and minimal principal), leaving the remaining principal balance due in one lump sum at maturity.

Graduated payment mortgage (GPM)

A mortgage characterized by lower initial monthly amortizations that step up gradually over subsequent years as borrower earning capacity rises.

Shared-appreciation mortgage (SAM)

A financing arrangement where the lender grants a below-market interest rate in exchange for an agreed share in the property's future capital appreciation.

Growing-equity mortgage (GEM)

A mortgage where periodic payments start small and continually increase throughout the loan duration without leveling off, accelerating debt retirement.

Alt-A mortgage

A mortgage classification intermediate to prime and subprime loans, carrying higher risk and higher loan-to-value ratios than prime, but lower than subprime.

Reverse-annuity mortgage (RAM)

A specialized mortgage where a financial institution disburses regular monthly payments to an elderly homeowner against accumulated home equity.

Present value of an annuity formula

The standard valuation equation $\text{PV}_A = A \left[ \frac{1 - (1 + i)^{-n}}{i} \right]$ applied to compute monthly mortgage installments from principal and interest.

Discount point

An upfront fee charged at mortgage issuance equal to $1\%$ of the loan principal paid by the borrower to obtain a permanently reduced interest rate.

Zero discount points

A standard mortgage option where the borrower avoids paying upfront rate-reduction points and pays the regular base interest rate.

Benchmark index (ARM)

A standardized market interest rate reference, such as LIBOR or Treasury security rates, used to adjust ARM payments at specified reset dates.

Margin / Spread (ARM)

The predetermined percentage added to the underlying market benchmark (e.g., $0.75\%$ or 75 basis points) to calculate the effective mortgage rate.

Option to change maturity date (ARM)

A contractual feature allowing an ARM borrower to preserve fixed installment amounts during rate spikes by extending the total repayment periods.

Mortgage refinancing

The replacement of an existing mortgage debt with a new loan facility possessing different interest rates, durations, or fee structures.

Refinancing fee

The transaction expenses—such as appraisal, documentation, registration, and processing fees—charged as a percentage of the refinanced loan balance.

Equity of redemption

The common law right of a mortgagor to clear debt and reacquire full unencumbered title to property by settling outstanding obligations before foreclosure.

Right of redemption

The statutory entitlement of a defaulted mortgagor to buy back foreclosed property within a legal grace period by repaying debt, interest, and auction costs.

Mortgage sale with recourse

A secondary loan transfer where the purchasing aggregator or investor retains the legal right to pursue the originating lender if the borrower defaults.

Mortgage sale without recourse

A secondary loan sale where all default risks shift entirely to the buyer, preventing recourse against the originating financial institution.

Balance sheet derecognition

The permanent accounting removal of sold mortgage receivables from an originator's assets, eliminating credit exposure and lowering capital reserves.

Mortgage-backed securities (MBS)

Marketable debt instruments created by pooling individual residential or commercial mortgages and selling claims on the pool's cash flows to investors.

Trustee (MBS)

An independent fiduciary entity designated to hold physical custody of mortgaged assets to protect the interests and security of MBS holders.

Loan servicing fee

A percentage deduction retained by mortgage originators from incoming borrower installments to cover administrative, collection, and escrow services.

Pass-Through Security

An MBS structure where all collected mortgage principal and interest payments (minus servicing fees) are passed directly through to unit holders.

Collateralized Mortgage Obligation (CMO)

A multi-class mortgage derivative that restructures mortgage pool cash flows into sequential maturity and credit tranches to offer predictable yields.

Tranches (CMO)

The sequential risk and maturity payment classes within a CMO that receive mortgage principal and interest distributions in a strictly ordered priority.

Mortgage-Backed Bonds (MBBS)

Asset-backed debt obligations retained on the issuing financial institution's balance sheet and collateralized by a segregated pool of mortgage assets.

Overcollateralization

The protective safeguard required in MBBS where the market value of the collateral pool must exceed the aggregate face value of the issued bonds.

Fixed interest rate period

The contractual initial term (e.g., $3\text{ years}$ or $5\text{ years}$) during which a bank maintains an invariant loan interest rate prior to repricing.

Interest rate repricing

The scheduled renegotiation and adjustment of a mortgage's interest rate based on current economic conditions upon the expiry of a fixed-rate period.

Floating interest rate

A variable interest rate structure that fluctuates throughout the life of the loan according to changing money market conditions.

Credit risk (Default risk)

The probability that a mortgagor will default or fail to remit scheduled principal and interest payments on a timely basis.

Liquidity risk (Mortgage)

The danger of being unable to sell mortgage contracts or securities quickly at par value to meet unexpected liquidity requirements.

Interest rate risk (Mortgage)

The exposure where an increase in broader market interest rates leads to an immediate decline in the market value of existing fixed-rate mortgages.

Prepayment risk

The risk that falling market interest rates will drive borrowers to pay off mortgages prematurely via refinancing, forcing investors to reinvest at lower yields.

Asset-liability maturity mismatch

The institutional risk caused by funding long-term fixed assets (such as 15- to 30-year mortgages) with short-term, interest-sensitive customer deposits.

Saunders and Cornett (2019)

The authors who characterized mortgage markets as a bellwether for bond and stock markets and documented the root causes of the 2008 subprime crisis.

Periodic payment formula ($A$)

The transposed annuity formula $A = \frac{\text{PVA}}{\frac{1 - (1 + i)^{-n}}{i}}$ used to determine equal amortized mortgage installments over $n$ periods at rate $i$.