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Glossary
A
Mortgage in which the rate of interest is adjusted based on a standard rate
index. Most ARMs have caps on how much the interest rate may increase.
A standardised method of calculating the cost of a mortgage stated as a yearly
rate, which includes items such as interest, mortgage insurance, and certain
points of credit costs.
A tradable debt instrument whose coupon and principal payments derive from the
cash flow created by a specified asset of pool of assets (for example, a
mortgage loan), which has usually been removed from the balance sheet of the
institution, which originally created the asset.
B
An international set of risk weighted capital charges and capital minimums for
banks.
Insolvency procedure for individuals.
Committee set up by the Bank for International Settlements and based in Basle.
It drew up international capital adequacy standards for banks and was once known
as the Cooke Committee, after a former chairman.
An international compact to establish and implement common standards for bank
capital adequacy. These and similar capital adequacy rules have encouraged banks
to embrace disintermediation with the object of cleaning up their balance
sheets. In addition, banks have tried to replace interest rate spreads with
trading spreads and fees. There has been an overall tendency to transfer credit
risk from banks to other financial market participants.
A set of bank capital requirements to cover financial market risk. These
standards are complementary to capital requirements designed to meet credit
risk. The Basle committee would permit a bank to use its own internal risk
models once they have been thoroughly tested and provided they do not call for a
lower capital standard. The Committee's version of a value at risk (VAR) capital
requirement offers no credit for lack of correlation among markets and requires
a multiple of three times the 99th percentile VAR figure as minimum capital.
(1) A reference index or rate which serves as a basis for performance comparison
or return calculation. (2) A standard specification for a physical commodity or
financial instrument underlying a derivative. (3) A standard of best practice or
typical practice in finance, accounting, management, etc.
Traditionally, a written unconditional promise to pay a specific principal sum
at a determined future date and interest at a fixed or determinable rate on
fixed dates. Increasingly, the promise to pay has become conditional and the
principal, interest and payment dates have become contingent in real world
instruments.
Mutually-owned UK savings institution that specialises in loans for house
purchase.
C
Money a company has to invest in buildings, machinery, etc; equity capital is
that part of the capital subscribed by shareholders; loan capital is what the
company has borrowed; reserves is money that the company has retained from its
earnings.
Measure of the financial strength of a bank or securities firm, usually
expressed as a ratio of its capital to its assets. For banks, there is now a
worldwide capital adequacy standard, drawn up by the Basle Committee of the Bank
for International Settlements. This BIS ratio requires banks to have capital
equal to 8 per cent of their assets.
An agreement to require standard capital provisions for financial intermediaries
doing business in the European Union (EU). This provision may be superseded, at
least at first, by implementation of the Basle Convergence Agreement on bank
capital by the nations of EU.
Profit made on the sale of shares, commodities or land; In the UK, capital gains
tax is payable on the profit.
The markets for corporate equity and intermediate- or long-term debt securities.
Equity or subordinated debt funding of a financial intermediary required by
regulators to assure the stability and soundness of the institution. After a
long period of relaxing capital requirements, recent trends have been in the
direction of increasing capital and adjusting requirements to reflect the
relative riskiness of an institution's assets and liabilities.
The property, or other assets, that are being secured against a loan to ensure
repayment of debt.
Covered bonds are on balance sheet debt instruments secured by a cover pool of
mortgage loans (property as collateral) or public-sector debt to which investors
have a preferential claim in the event of the issuer’s default. As they remain
on the issuer’s balance sheet, the bonds benefit from the additional security of
the issuing institution’s own funds and from restrictive legal regulation of the
issuing credit institutions.
An important consideration when lending or investing. You take an important risk
when you invest money that the institution will be able to pay your interest and
return your deposit on the agreed terms. There are a number of credit rating
agencies that review an institution's credit and rate it in terms of relative
risk. Standard & Poor’s and Moody's are examples of credit rating agencies. In
very general terms, highly rated credit give investors lower risk. Higher risk
is usually reflected in higher rates - lower risk in lower rates.
D
The failure of a borrower to honour the terms of the loan agreement.
An amount owed to another.
The ratio of aggregate monthly debt to aggregate monthly income.
E
Shareholder equity is the value of shares held. A house owner's equity is the
value of the house minus any unpaid home-purchase loan. Negative equity occurs
when the house is worth less than the debt on it.
Equity Release is a mechanism to turn the cash value of a house into a stream of
income and capital payments.
Secured (mortgage) loans taken out for consumption purposes.
This Agreement has been negotiated and adopted by European associations of
consumers and the European Credit Sector Associations offering home loans (see
below). The Agreement provides backing for a voluntary code of conduct ("Code")
to be implemented by any institution offering home loans to the consumer. The
aim of the Code is to ensure transparency of information and comparability.
F
A mortgage in which the interest rate does not change during the entire term of
the loan.
H
A "home loan" is a credit to a consumer for the purchase or transformation of
the private immovable property he owns or aims to acquire, secured either by a
mortgage on immovable property or by a surety commonly used in a Member State
for that purpose.
I
A published interest rate against which lenders measure the difference between
the current interest rate on an adjustable rate mortgage and that earned by
other investments, which is then used to adjust the interest rate on an
adjustable mortgage up or down.
Consideration in the form of money paid for the use of money, usually expressed
as an annual percentage. Also, a right, share or title in property.
The percentage of an amount of money that's paid for its use over a specified
time period.
A transaction between two parties, in which each agrees to exchange payments
tied to different interest rates or indices for a specified period of time.
L
The bank, mortgage company, or mortgage broker offering the loan. Many
institutions only "originate" loans and then resell the obligation to third
parties.
The amount of total borrowed money that is repaid with interest.
The amount of money that you intend on borrowing from a financial institution
for the purchase of your home. Subtracting the down payment from the purchase
price of the home will provide you with the loan amount.
The ratio of the mortgage loan amount to the property’s appraised value or
selling price, whichever is less. For example, if the property’s appraised value
or selling price is 100.000 Euro and the mortgage amount is 80.000 Euro, the
house has an 80% LTV.
M
The amount a lender adds to the quoted index rate for an adjustable rate loan to
determine the new interest rate.
The "Due Date" of a loan.
A lien or claim against real property which can serve as security for a loan.
The lender in a mortgage agreement.
Debt instruments collateralized by residential, commercial, or industrial real
estate mortgages.
The lender that originates that mortgage loan; the one making the loan directly
and closing the loan.
A corporate or other entity's debt security secured by a mortgage lien against
certain real property of the issuer. See definition for “covered bond”.
An individual or company that brings borrowers and lenders together for the
purpose of loan origination. Unlike a mortgage banker, brokers do not fund the
loan but work on behalf of several lenders. Brokers typically require a fee or a
commission for their services.
The borrower in a mortgage agreement.
O
The total amount of principal owed on a mortgage before any payments are made.
On a government loan the loan origination fee is one percent of the loan amount,
but additional points may be charged which are called "discount points." One
point equals one percent of the loan amount. On a conventional loan, the loan
origination fee refers to the total number of points a borrower pays.
The practice of posting more than adequate collateral to mitigate risks. A
covered bond issuer can achieve a desired ratings level by ensuring adequate
over-collateralisation, provided that it is protected and fully available to
covered bond creditors post issuer insolvency. See also: collateralisation.
A property purchase transaction in which the property seller provides all or
part of the financing.
P
Any amount paid to reduce the principal balance of a loan before the due date.
Payment in full on a mortgage that may result from a sale of the property, the
owner's decision to pay off the loan in full, or a foreclosure. In each case,
prepayment means payment occurs before the loan has been fully amortized.
A fee that may be charged to a borrower who pays off a loan before it is due.
A mortgage market in which loans are originated and consisting of lenders such
as commercial banks, savings- and loan associations and mutual savings banks.
The amount borrowed or remaining unpaid. The part of the monthly payment that
reduces the remaining balance of a mortgage.
The outstanding balance of principal on a mortgage. The principal balance does
not include interest or any other charges. See remaining balance.
S
The pooling together of similar loans (eg, mortgage loans) into standardised
bonds, or mortgage-backed bonds. These bonds use the interest paid on the
underlying loans to pay interest to the bondholders.
A market where mortgage originators may sell them, freeing up funds for
continued lending and distributes mortgage funds nationally from money-rich to
money poor areas.
A loan that is backed by collateral.
Something given, deposited, or pledged to make secure the fulfillment of an
obligation, usually the repayment of a debt.
T
The means by which the ownership of a property changes hands. Examples of such
include the purchase of a property "subject to" the mortgage, the assumption of
the mortgage debt by the property purchases, and any exchange of possession of
the property under a land sales contract or any other land trust device.
V
See Adjustable Rate Mortgage.
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