FIN 3353

Consumer Financial Protection Bureau

A regulatory agency charged with overseeing financial products and services that are offered to consumers. This is divided into several units, including: research, community affairs, consumer complaints, the Office of Fair Lending and the Office of Financial Opportunity. These units work together to protect and educate consumers about the various types of financial products and services that are available.

cash settlement

A settlement method used in certain future and option contracts whereby, upon expiry or exercise, the seller of the financial instrument does not deliver the actual but transfers the associated cash position.

Home Owners Protection Act

A law designed to reduce the unnecessary payment of private mortgage insurance (PMI) by homeowners who are no longer required to pay it. Also mandates that lenders disclose certain information about PMI. The law also stipulates that PMI must be automatically terminated for homeowners who accumulate the required amount of equity in their homes.

Option ARM

A monthly adjusting adjustable-rate mortgage (ARM) which allows the borrower to choose between several monthly payment options: a 30 or 40-year fully amortizing payment, a 15-year fully amortizing payment, an interest-only payment, a minimum payment or any amount greater than the minimum payment.

mortgage insurance

A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a downpayment of less than 20% of the home's purchase price.

Uniform Settlement Statement

a standard form required by HUD that stipulates the fees & charges to be paid by the buyer and seller at a loan closing

Gross Monthly Income

Income before deductions for taxes, social security, saving plans, court ordered child support, etc.

Interest Only ARM

Mortgages on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged. These loans are also called deferred amortization mortgages. After the interest-only period ends, the payment jumps to cover both the interest owned and the principal and the interest rate may adjust based on a particular index, if it is an ARM.

Hybrid ARM

Mortgages with an initial fixed rate period of 2 or 3 years (e.g. 2/28s and 3/27s) and then turn into an adjustable rate loan with an annual adjustment in rate and/or payment. Some allow an interest-only payment during the initial fixed rate period.

Front-end ratio or housing expense ratio

PITI/GMI

physical settlement

Term in an options or futures contract which requires the actual underlying asset to be delivered upon the specified delivery date, rather than being traded out with offsetting contracts.

convertible

within a given window of time the ARM can be converted to a fixed-rate mortgage

mortgage backed bonds (MBBs)

a "bond" or debt instrument which is backed by a pool (large group) of mortgages & for which the cash flow of the mortgages serves as the source of repayment

Fannie Mae

a GSE that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market; primarily buys mortgages from lenders for cash or pools them & sells them as mortgage backed securities to investors on the open market. Securities issued by them are generally sponsored, but are not direct obligations or guaranteed by the US gov't. its currently under the conservatorship of the FHFA; also known as Federal National Mortgage Association (FNMA)

HOME Program

a Rental Housing Development Program that is offered to various types of non-profit organizations for development of affordable rental housing.; **set up a trust fund to increase the supply of low-income housing**

economics of information

a branch of microeconomic theory that studies how information & information systems affect an economy & economic decisions

adjustment rate cap

a cap (usually one or two percent) on the change in the interest rate on an ARM

Home Mortgage Disclosure Act (HMDA)

a federal act passed in 1975 that requires disclosure of an institution's loans by census contract or by zip code

Federal Housing Administration (FHA)

a federal agency whose main activity is the insuring of residential mortgage loans made by private lenders. ___ is a division of HUD which sets standards for constitution & underwriting & charges a fee, generally 3.8% of loan amount

HOPE Program

a federal aid program aimed at helping homeowners who reside in neighborhoods that were hit the hardest in the subprime meltdown of 2008. Will aid homeowners who are behind on the mortgages to refinance into a fixed-rate loan charging a reasonable rate of interest. These loans are backed by FHA; **issues grants to rehab public housing**

Equal Credit Opportunity Act (ECOA)

a federal law that requires lenders to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs. Also known as Regulation B

government sponsored enterprise (GSE)

a financial services corporation created by the US Congress. their intended function is to enhance the flow of credit to targeted sectors of the economy & to make those segments of the capital market more efficient & transparent & to reduce the risk to investors & other suppliers of capital

Ginnie Mae

a government owned agency that guarantees certain mortgage backed securities backed by federally insured & guaranteed loans; does not buy/sell loans or issue mortgage backed securities. Rather, it guarantees the timely payment of interest & principal payments on qualifying securities. such payments are backed by the full faith & credit of the US gov't.; also known as Government National Mortgage Association (GNMA)

Financial Institutions Reform, Recovery, & Enforcement Act of 1989 (FIRREA)

a law enacted to ensure that real estate appraisals are performed up to standard. This includes regulation on the competency of appraisers, supervisory standards & accurate & full documentation; helped bail out the failing savings and loan industries. it established the Resolution Trust Corporation (RTC) and changed the regulatory structure of financial institutions

negative amortization

a loan payment schedule in which the outstanding principal balance goes up, rather than down, because the payments do not cover the full amount of interest due. The unpaid interest is added to the principal

secondary mortgage market

a market where existing mortgages are bought and sold; it contrasts with the primary mortgage market, where mortgages are originated

PITI

a mortgage payment that is the sum of the principal, interest, taxes and insurance;

interest rate cap

a provision in an ARM that limits the increase in the rate of interest at each anniversary date of the rate change

index

a rate of interest, such as a T-bill rate, used to measure periodic interest rate adjustments for an ARM

Regulation Z (Truth-In Lending)

a regulation issued by the Federal Reserve System to implement the Truth-In Lending Act >disclosure to the borrower that must contain the major financial terms of the loan

graduated-payment mortgage (GPM)

a residential mortgage designed to overcome the "tilt" effect. The monthly mortgage payments that start at a level below that on a FRM & increase at a pre-determined rate with later payments above that on a FRM. They may level off at some predetermined point.

Intent approach

a rule by the Federal Reserve System that attempts to measure potential discrimination in mortgage lending by the "intent" of the lender

mortgage backed security (MBS)

a security purchased by investors that are secured by mortgages. such securities are also known as pass-through securities since the debt service paid by the borrower is passed through to the purchaser of the security.

HUD-1 Settlement Statement

a standard form in use in the US which is used to itemize services & fees charged to the borrower by the lender or broker when applying for a loan for the purposes of purchasing or refinancing real estate

Uniform Residential Loan Application (URLA)

a standard mortgage application that your lender will ask you to complete. The form requests your income, assets, liabilities & a description of the property you plan to buy, among other things.

subsidy

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

Real Estate Mortgage Investment Conduits (REMICs)

a type of mortgage backed security that allows for income to be taxed only to the holders of the bond and not to the entity holding the mortgages

adjustable-rate mortgage (ARM)

a type of mortgage in which the interest rate adjusts periodically according to a preselected index, such as T-bill rates, & a margin. This adjustment results in the mortgage payment either increasing or decreasing. limits can be set on the amount by which interest rates or payments can change

reasonable accommodations

accommodations that would be considered reasonable to the typical renter

Fair Housing Act

addresses the discrimination in the sale of houses; prohibits discrimination in the sale or rental of residential dwellings (or vacant land intended to be used as such) on the basis of race, color, religion, or national origin

Interstate Land Sales Full Disclosure Act

an act passed by Congress in 1968 to facilitate regulation of interstate land sales, to protect consumers from fraud and abuse in the sale or lease of land

Community Reinvestment Act (CRA)

an act passed by Congress in 1978 that requires federally insured thrifts to adopt a community reinvestment statement that defines the community in which the institution makes loans & maintains a file of loans for public inspection

London Inter-Bank Offered Rate (LIBOR)

an average of daily lending rates from several major London banks, used as a common international interest rate index

good faith estimate (GFE)

an estimate required by RESPA of the fees due at closing for a mortgage loan that must be provided by a lender taking a borrower's loan application

initial-period discount

an initial contract rate on the loan that is less than the index plus the margin at that time

credit default swap

an instrument that insures a bondholder against a loss in the value of those bonds

Section 8 housing

authorizes the payment of rental housing assistance to provide landlords on behalf of approximately 3.1 million low-income households in the U.S. managed by HUD & operates through several programs

Freddie Mac

cousin of Fannie Mae created in 1970; does the same as them; also known as Federal Home Loan Mortgage Corporation (FHLMC)

effects method

discrimination is said to exist if members of minority groups are underrepresented in the class of credit recipients

Housing for Older Persons Act (HOPA)

eliminated the requirement that the housing had to meet the "significant facilities & services" designed for the elderly

Community Development Block Grants

grants from the Department of Housing & Urban Development to allow communities to carry out a wide range of community development projects

Practices approach

holds that discriminatory behavior exists when a lender fails to adhere to a set of guidelines governing the do's and don'ts of the lending procedure

frequency of rate change

how often the rate of interest on an ARM can change

constant maturity treasury (CMT) indexes

if the index is the yield on a Treasury obligation, the rate will be selected on a Treasury with a maturity corresponding to the frequency of adjustment on the ARM. i.e. if the rate on the ARM changes only every 3 years, then the index will be a 3-year Treasury note yield.

cost of funds index

index for an ARM based on the average interest rates paid by thrifts to their depositors (their cost of funds)

Private Mortgage Insurance (PMI)

insurance written by a private (non-government) company protecting the mortgage lender against loss caused by a mortgage default or foreclosure

loan processing

involves several steps, including property appraisal, analysis of application (borrower information collection & verification), submission for credit approval, & closing the loan.

Federal Housing Finance Agency

is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the...absorbing the powers & regulatory authority of both entities, with expanded legal & regulatory authority, including the ability to place GSEs into receivorship or conservatorship

reference entity

is essentially the party upon which the two counterparties in the transaction are speculating. The seller of the transaction is selling protection against the default of the reference entity.

moral hazard

lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance/the risk that a party to a transaction has not entered into the contract in good faith or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles

Alt-A loans

loans to prime-credit borrowers that have some combination of nontraditional documentation, non-standard product structure, or more liberal underwriting. Alt A pools generally have higher proportions of investor loans and lower average credit scores (690 to 715) than conventional conforming or prime jumbo pools.

Preference for Discrimination

means that firms or individuals may derive psychological, but not monetary, satisfaction from discrimination

mortgage pay-through bonds

mortgage-backed bond collateralized by a pool of mortgages. Also called a cash flow bond. These securities are fully amortizing bonds resembling modified pass-through securities, paying interest at scheduled intervals, monthly or quarterly. The scheduled amortization of the bonds is met by collateral cash flow representing loan payments by mortgage borrowers. Early loan prepayments accelerate bond redemptions. An example of one is a Collateralized Mortgage Obligation.

Uniform Residential Appraisal Report (URAR)

most common form used in real estate appraisal which was created to allow for standard reporting & analysis of single-family dwellings or single-family dwellings with an "accessory unit"

collateralized mortgage obligations (CMOs)

multiple-class, pay-through bonds, first issued by the FHLMC in June 1983. They are secured by a pool of mortgages or a portfolio of pass-through securities. The ___ provides a type of call protection and pays principal and interest semiannually rather than monthly, as a pass-through security does.

periodic adjustment rate cap

places a limit on how much the contract rate can change at each date of adjustment (anniversary date)

Full Doc loan

refers to a loan where all income & assets are documented

Stated Income loan

refers to a loan where the lender does not verify the borrower's income by looking at their pay stubs, W-2 forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, & are taken at their word.

reverse mortgage

refers to a mortgage with falling equity, rising debt, in which the lender makes payments to the borrower for a stipulated time

No Doc loan

refers to loans that do not require borrowers to provide documentation of their income to lenders or do not require much documentation

teaser rate

the below market rate of interest for an initial period of time only on an ARM

Mortgage Insurance Premium (MIP)

the charge paid by a mortgagor for mortgage insurance either to FHA or to a private mortgage insurance (PMI) company. On an FHA loan, the payment is 3.8% of loan balance

tilt effect

the effect of a rise in interest rates whereby the real payments on a standard FRM are much greater at the beginning of the loan than at the end---presents challenges for borrowers from an affordability perspective

blockbusting

the illegal practice of inducing panic selling in a neighborhood for financial gain

life-of-loan rate cap

the maximum rate of interest allowed under the terms of an ARM

Margin

the number of basis points a lender adds to an index to determine the interest rate on an ARM

mortgage banking

the packaging of mortgage loans to be sold to a permanent investor or to be packaged into mortgage-backed securities with servicing retained for the life of the loan for a fee. ________ includes the origination, sale and servicing of mortgage loans by a firm or individual. The investor-correspondent system is the foundation of the mortgage banking industry.

FHAing

the practice by lenders of making only FHA loans in certain risky or transaction neighborhoods. Lenders suffer no loss with FHA insurance as they may with private mortgage insurance

redlining

the practice by lenders of refusing to make loans in certain risky or transitional neighborhoods

Securitization

the process of creating new securities backed (collateralized) by a package of other securities or assets

credit enhancement

the process whereby the issuer of a mortgage related security adds support to the underlying assets by contributing capital or overcollaterizing the assets

Right of Rescission

the right to rescind (undo) a contract if certain legal requirements are not fulfilled

counterparty risk

the risk that either party to a contract may default on the agreement

interest rate risk

the risk that, subsequent to the purchase of a debt security, interest rates will change, thereby affecting the value of the security; presents challenges to lenders from a market value perspective

Back-end ratio or Debt to Income ratio

total debt/DMI