negative equity: a highly undesirable (and recently more common) situation in which the property value is lower than the outstanding portion of the loan

non-conforming (or ‘non-standard’) loan: usually higher risk borrowers with higher DTIs (subprime); the loan itself is harder to sell

origination: the process of securing a mortgage loan

originator: the lender who packages and sells the loan

partial amortization: a loan type that includes both regular (monthly) payments and a lump sum at the end (a “balloon payment”)

pre-approval: a borrower’s credit & income is verified by a lender before they shop for a home

predatory lending: unfair lending practices, usually deceptive, fraudulent, and targeted to less educated and/or elderly borrowers

prepayment: early repayment of a loan (sometimes discouraged via penalties by the lender)

pre-qualification: evaluating borrower risk towards loan approval (tentative decision, no verification)

prime rate: the reference for interest rates, based on the federal funds rate (plus about 3%)

principal (a.k.a. capital): the full original amount of the loan
outstanding: the amount of the loan that has not yet been repaid

private mortgage insurance (PMI): guarantees for conventional (non-government-insured) loans

rate: the percentage of the principal used to calculate the amount of interest per payment

reset/ recast: a change in a variable rate, usually a fixed intervals (between ‘periods’)

reverse mortgage (a.k.a. “equity release” or “lifetime mortgage”): available almost exclusively to seniors, you ‘sell’ the home back to the bank, who takes possession only after your death

risk: the chance that an investment’s return may not be as expected. When evaluating a borrower’s ability to repay the loan, credit checks and income or asset verification is often requested.

• FD: Full Documentation (all income and assets verified)
• SIVA: Stated Income, Verified assets (proof of income not necessary, proof of assets required)
• NIVA: no income, verified assets (proof of employment not necessary, only proof of assets)
• SISA: stated income, stated assets (no verification needed)
• NR: no ratio (income not needed, assets verified)
• NINA: no income, no assets (a.k.a. NINJA, no income no job/ assets, a.k.a. ND or “No Doc” i.e., no documentation) – credit check is only major requirement

securitization: mortgages (or any asset) are sold to investors to create new securities (financial assets) in a much more liquid and sizable market. Thought to be a major element of the ‘subprime meltdown’. See Mortgage-Backed Securities (MBS).

stipulations: additional requirements that the borrow must fulfill to be approved (requested after the initial loan documents have been evaluated)

subprime: the riskiest group of borrowers (or loans geared to those borrowers), associated with higher default rates; subprime lenders allow 50% DTI

term: the time it takes to repay the loan (most commonly 10, 15, or 30 years)

tie-in: the period during which a borrower will be penalized for refinancing

recourse loan: in case of foreclosure, lender may sue for any debt not recovered from the sale of the property (versus non-recourse, where the lender can only seize the property)

underwriter: the bank (or mortgage broker) that assesses the borrower’s eligibility for the loan

value: basically, what the property is worthvalue determines the size of the loan; purchase price, estimated, or appraisal

VA: Veterans Administration, actually Department of Veterans’ Affairs; VA insured loans are designed to assist veterans & surviving (but not re-married) spouses

yield spread premium (YSP): money paid to a mortgage broker for giving the borrower a higher-than-market interest rate (e.g., in return for lower upfront costs). Controversial; most of the people who defend YSP also benefit from it.