Glossary Quiz 2

acceleration clause

a rule in a loan agreement that allows the lender to demand immediate repayment of the entire remaining loan if the borrower breaks the agreement

a condition in a mortgage note or loan contract that allows the lender to demand immediate repayment of the entire balance if the contract is breached or other repayment conditions occur.

adjustable rate mortgage (ARM)

A home loan with an interest rate that can increase or decrease over time, changing how much the borrower pays.

a mortgage loan with an adjustable interest rate. The lender periodically adjusts (or, resets) the rate based on the cost to the lender of borrowing on credit markets. The formula used to calculate an increase or decrease in the interest rate differs from mortgage to mortgage. Many ARMs reset the interest rate at predetermined (usually, 6 month) intervals, while some can fluctuate at the lender's discretion.

blockbusting

A discriminatory practice where real estate agents scare white homeowners into selling their homes cheaply by claiming Black families moving into the neighborhood will lower property values. Agents then resell the homes to Black buyers at higher prices.

the practice of inducing white homeowners living in cities undergoing racial change to sell hastily and often at a loss by appealing to fears of depressed values because of threatened Black encroachment, followed by reselling homes acquired in this manner at inflated prices to Blacks seeking more housing opportunities.

blockbusting vs steering: Blockbusting pressures homeowners to sell using racial fear; steering directs buyers toward or away from neighborhoods based on demographics.

bond

A type of loan where an investor lends money to a government or company, which promises to repay the money, usually with interest.

a long-term, interest-bearing debt (e.g. a loan or IOU) issued by a corporation or government, usually to provide for a particular financial need. The lender is the bond holder, and the debtor is the bond issuer. The bond issuer is obliged to pay the holder interest (also known as the coupon) and/or repay the principal at a later date (termed the maturity date). Bonds provide the issuer with immediate funds to finance long-term investments or, in the case of government bonds, current expenditures. In contrast to stocks, where the buyer becomes an investor in a company, bonds provide its holders with a creditor stake in a company. In the event of a bankruptcy, creditors are repaid before stockholders

Bond vs. Bond-rating agency: A bond is a debt investment; a bond-rating agency evaluates its risk.

bond-rating agency

A company that evaluates how risky a bond is and how likely the borrower is to repay the money. Higher ratings mean lower risk.

company that assesses the creditworthiness of both debt securities (bonds) and their issuers. In the US, the three primary bond rating agencies are Standard and Poor's (S&P), Moody's, and Fitch. Bonds are rated at the time they are issued, and can be periodically reevaluated and adjusted. The ratings range from AAA to D, with any bonds rated BB+ or below not considered investment grade. The rating a bond receives affects the interest rate that the bond issuer (companies, governments) pay to its holder

Bond vs. Bond-rating agency: A bond is a debt investment; a bond-rating agency evaluates its risk.

condemnation

When the government declares a property unsafe to live in or designates it for public use, potentially leading to its demolition or acquisition.

(1.) the determination and declaration that a certain property (especially, land) is assigned to public use; (2.) a declaration by a public authority that a structure is unfit for occupancy or dangerous, usually followed by the exercise of police power to restrict occupancy or require demolition of the structure.

contract-for-deed

A home-buying agreement where the buyer pays the seller directly in installments instead of getting a traditional mortgage. The seller keeps legal ownership until the buyer finishes paying, making this risky for the buyer.

A real estate transaction that takes place directly between the buyer and the seller and does not involve a mortgage issued by a bank or conventional lender. The buyer makes monthly payments on the property but receives the title only after the full purchase price is paid. The seller retains title to the property until then, during which time the buyer is legally the equivalent of a tenant and does not enjoy the protections of homeownership. This financing tool is highly risky, susceptible to abuse by sellers, and, in general, only used by those who are unable to obtain a conventional mortgage.

department of housing and urban development (HUD)

A federal government department created in 1965 that oversees housing programs, supports affordable housing, and helps maintain housing markets.

department within the executive branch of the federal government, created in 1965, with the mission to create and sustain healthy housing markets and ensure the availability of affordable housing. HUD governs the Federal Housing Administration (FHA), oversees Fannie Mae and Freddie Mac, and administers various low-income housing programs.

flipping

Buying a property cheaply and quickly reselling it for a higher price, sometimes using inflated property values or questionable lending practices.

the practice of buying real estate at low prices and reselling quickly at significant gain, typically with the aid of inflated appraisals and mortgages that require minimal documentation.

gentrification

When wealthier people and new investments move into a lower-income neighborhood, increasing property values and living costs, potentially displacing existing residents.

used to describe the process of real estate investment, commercial development, and the influx of wealthier people into poorer, undervalued areas, and its displacement effects on existing inhabitants

gentrification vs urban renewal: Gentrification involves investment and wealthier residents entering an area; urban renewal involves government-led redevelopment.

G.I. Bill

A 1944 law that provided benefits to World War II veterans, including education assistance and access to low-interest home loans with little or no down payment.

(aka Servicemen's Readjustment Act of 1944): law that provided a range of benefits to World War II veterans, including home loans at low interest rates and with zero down payment.

home equity loan

A loan that allows homeowners to borrow money using the value of their home as collateral (something the lender can claim if the loan isn't repaid).

a personal loan that relies on a home’s value as collateral, and typically amounts to a modest portion of the property’s appraised value.

Home equity loan vs. Refinancing: A home equity loan adds a loan secured by the home's value; refinancing replaces an existing mortgage.

housing cooperative (co-op)

A housing arrangement where residents collectively own a building through shares in a corporation. Buying shares gives members the right to live in a unit.

a membership-based form of collective real estate ownership. Members purchase shares in a corporation and, in return, are granted the right to occupy one of the corporate-owned housing units. By pooling its members’ resources, co-ops are able to gain greater buying power and can lower the cost per member of services. Co-ops elect representatives to a governing board, which, among its powers, screens and selects new members when housing units become available.

interest-only loan

A loan where borrowers initially pay only the interest, not the original amount borrowed. Payments can become much higher once they must start paying back the principal.

adjustable-rate mortgage that allows the borrower to pay just the interest rate for the first few years, also known as low "teaser" rates. (see also “balloon loan”)

mortgage-backed securities (MBS)

Investments created by combining many home mortgages into one financial product that investors can buy. Investors receive money from homeowners' mortgage payments.

a type of asset-backed security that is secured by a collection of mortgages. The mortgages are sold to an investment bank or government agency, which then packages the mortgages together into a security that it can market to investors. The pool of mortgages is divided into varying levels of risk (known as tranches). Investors in the top-tier (low risk) tranches are first in line to receive payments, with holders of low-tier (high risk) tranches last.

MBS vs. Rent-backed securities: MBS are based on mortgage payments; rent-backed securities are based on rental income.

mortgage insurance

Insurance that protects the lender if a borrower fails to repay their mortgage. It is often required when a homebuyer makes a down payment of less than 20%.

policies protecting mortgage lenders against losses on defaulted mortgages, typically required when mortgage borrowers place less than 20 percent down payment.

NIMBY

When residents oppose a proposed development or land use in their own neighborhood, even if it could benefit the larger community.

(acronym for "Not In My Back Yard"): a pejorative term used to characterize instances when a community seeks to prevent the location of an undesirable land use (e.g. polluting industries, low-income housing) in their vicinity, typically because of concerns over its effect on property values and quality of life. By implication, opponents acknowledge that the proposed development is needed but want it to be located somewhere else.

predatory lending

When lenders take advantage of borrowers by offering unfair or harmful loans with extremely high interest rates, hidden fees, or difficult repayment terms.

the issuing of loans whose terms set up borrowers for default. These types of loans tend to carry excessive high interest rates, large (often hidden) up-front fees, prepayment penalties that effectively prevent the borrower from refinancing, and "balloon" payments due several years into the mortgage

predatory lending vs subprime mortgage: Predatory lending involves unfair or abusive loan practices; subprime mortgages are higher-cost loans for borrowers considered higher-risk.

refinancing

Replacing an existing mortgage with a new one, usually to get a lower interest rate, change monthly payments, or adjust other loan terms.

when a borrower who already has a mortgage obtains a new one to replace the original loan, usually in order to change the terms of the loan.

Home equity loan vs. Refinancing: A home equity loan adds a loan secured by the home's value; refinancing replaces an existing mortgage.

rent-backed securities

Investments created by combining expected rental payments from multiple properties into a financial product that investors can purchase, with mortgages on the properties serving as collateral.

a type of security that bundles together rental payments expected to be collected, with mortgages on the underlying properties as collateral.

MBS vs. Rent-backed securities: MBS are based on mortgage payments; rent-backed securities are based on rental income.

Savings-and-Loans (S&Ls)

Financial institutions that collect people's savings and use that money to provide home loans, especially to local residents. They were once major providers of mortgages.

local financial institutions that traditionally have accepted deposits from individuals and small businesses and lent out those funds to area homebuyers. Until the early 1980s, S&Ls made the majority of home mortgages in the U.S.

securitization

The process of combining financial assets, such as mortgages or loans, and turning them into investments that can be bought and sold.

the process of taking a non-liquid asset, or group of assets, and transforming them into a security.

security vs securitization: A security is a financial investment; securitization is the process of creating a tradable security from assets.

security

A financial asset that can be bought or sold, such as a stock, bond, or mortgage-backed investment.

a tradable financial asset. Broadly categorized into three types: debt securities (banknotes, bonds); equity securities (common stocks); and derivatives (forwards, futures, options, swaps).

security vs securitization: A security is a financial investment; securitization is the process of creating a tradable security from assets.

special assessment

An extra charge placed on certain property owners to pay for public improvements that benefit their properties, such as sidewalks, roads, or water lines.

a charge levied on selected groups of properties to defray the costs of specific public improvements such as paving, sidewalks, or water lines. These charges can be assessed according to a physical measure, such as street frontage.

steering

A discriminatory practice where real estate agents guide buyers or renters toward or away from certain neighborhoods based on race or other demographic characteristics, reinforcing segregation.

the practice by realtors of intentionally guiding homebuyers and renters to purchase or rent homes in areas that conform with existing demographic residential patterns

Blockbusting vs. Steering: Blockbusting pressures homeowners to sell using racial fear; steering directs buyers toward or away from neighborhoods based on demographics.

subprime mortgage

A home loan with higher interest rates and fees, typically offered to borrowers considered riskier because of low credit scores or financial difficulties.

a term used to describe mortgages whose interest rates and fees are much higher than conventional (prime) loans, ostensibly because the borrower has a low credit score and is deemed to be of higher risk to the lender.

predatory lending vs subprime mortgage: Predatory lending involves unfair or abusive loan practices; subprime mortgages are higher-cost loans for borrowers considered higher-risk.

tax base (property)

The total assessed value of taxable properties in an area that a local government can use to collect property taxes and fund public services.

the total assessed value of all taxable property within a taxing district, typically used to refer to the total value within a county, municipality, school district, or special district that relies on property taxes for revenue. The size of a tax base determines the tax rate set by a local government or district in order to generate the revenue it needs, with a larger tax base allowing for a lower tax rate and a smaller tax base requiring a higher tax rate in order to generate the same amount of revenue.

tax increment financing (TIF)

A method local governments use to fund redevelopment by borrowing against expected increases in property tax revenue. The extra tax money generated by development is used to repay the redevelopment costs.

a legal device used by local governments, designed to promote real estate investment and development in depressed and under-valued areas. The local government issues a bond based on the expected increase in an area’s value and property tax revenues resulting from development. It then uses the proceeds from the bond to clear the area and provide the infrastructure that lowers overhead costs for developers, thereby making it more attractive for investment. New owners subsequent pay property taxes based on its higher value, but all tax receipts above the amount collected at the time the TIF was formed go to pay off the bondholders. As far as the city’s tax base is concerned, the property is still worth what it was before it was developed until the TIF expires.

underwater mortgage

When a homeowner owes more money on their mortgage than their home is currently worth.

also known as “negative equity,” occurs when the balance on a home loan is higher than the total market value of the home. As a result, the homeowner is unable to 10 sell the home without paying the difference in cash, and banks typically refuse to renegotiate the terms of the loan.

urban renewal

Government programs designed to redevelop struggling urban areas, often by demolishing older buildings and constructing new developments. Historically, these programs frequently displaced low-income and minority communities.

term used to describe a host of federal, state, and local government programs and initiatives that sought to make chronically depressed urban areas attractive to private investment, often though the mass condemnation, demolition, and redevelopment of properties deemed to be unfit for habitation (also known as “slum clearance”). The Housing Act of 1949 gave rise to an intense period of urban renewal that continued into the late 1960s and reshaped the geography, demography, and built environments of major and mid-sized cities across the U.S. In many instances, urban renewal projects were done in conjunction with highway construction and infrastructure development projects that linked central cities to growing suburbs.

Gentrification vs. Urban renewal: Gentrification involves investment and wealthier residents entering an area; urban renewal involves government-led redevelopment.