Glossary of Finance and Economic Terms (G-M)

Please Note: All definitions used in this glossary were derived from the Freddie Mac Seller/Servicer Guide glossary. For specific information governing the use of material presented on this website, see our Terms & Conditions.

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General Market Risk. See Market Risk.  

Generally Accepted Accounting Principles (GAAP). Accounting standards set  by professional accounting organizations to provide uniformity in judging the  value and financial condition of companies.

Ginnie Mae. Federal government corporation that issues and guarantees  securities backed by residential mortgages insured or guaranteed primarily by  the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA). Ginnie Mae, officially known as the Government National Mortgage  Association, was created in 1968.

Gold Measure. Risk-management tool used to underwrite income-targeted  mortgages. Adopting a scorecard approach to credit assessment, the tool  weights the magnitude of default danger posed by individual risk elements and  also recognizes compensating factors that can lower the relative default risk.

Government-Backed Mortgage.  Residential loan insured or guaranteed by the federal government against borrower default through programs administered by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or Rural Housing Service (RHS) programs.

Government-Sponsored Enterprise (GSE). Entity created by Congress that  operates with private capital under a government-defined mission and charter.  Housing-related GSEs include Freddie Mac and Fannie Mae.

Grace Period.  In mortgage business vernacular, a time interval specified by the lender that begins the day after the official mortgage due date and typically runs for one or two weeks. When a borrower fails to make the scheduled payment by the conclusion of the grace period, a late fee is imposed.               

Gross Domestic Product (GDP). Measure of the output of an economy, defined  as the value of all final goods and services produced in an economy in one  year.

Guarantee.  With respect to mortgage-backed securities, a pledge to investors that the issuing company will bear the default risk on the collateral pool of loans, thereby ensuring the timely payment of principal and interest owed to investors.                 

Guarantee Fee. Compensation charged for undertaking responsibility for  another’s debt. The original debtor still is liable for payment, but the guarantor  must honor the obligation if the debtor defaults. Secondary-mortgage-market  companies charge guarantee fees--typically about one-quarter of a percentage  point of the loan amount--for bearing the default risk on loans pooled into  securities.

Haircut. Difference between the market value of a security and the amount  of money a lender will advance against it; the lender keeps the difference as  insurance against a decline in the collateral value of the instrument.

Hedge. Process by which the risk of incurring a loss on a particular asset liability is reduced by entering into one or more financial transactions that are negatively correlated with the item’s value, thereby providing an offsetting gain when the item’s value drops.

HUD Code. Name by which the Federal Manufactured Home Construction  and Safety Standards law is known because it is administered by the  Department of Housing and Urban Development (HUD). The code, first drawn up  in 1976, addresses design, construction techniques, strength and durability  issues, fire resistance and energy efficiency.

Hyper-inflation. Extremely high rate of inflation, which generally is defined as  greater than 10 percent per month.

Idiosyncratic Risk. Chance of loss due to factors specifically associated with a  particular investment, such as Management or Operations Risk. It is unrelated  to systemic economic movements or trends (Market Risk)

Immediate Transaction. Securities trade conducted privately and scheduled to  be settled in 30 days or less.

Inflation. Overall upward price movement of goods and services in an economy,  usually as measured by the growth rate in the Consumer Price Index (CPI) from  12 months earlier.

Initial-Adjustment Period. Interval of time from the origination of an adjustable-rate mortgage (ARM) to the first scheduled adjustment. Loan’s  initial interest rate is locked in place for a designated time frame, for example,  one, three, five or 10 years. At the end of that time, the rate adjusts to reflect  prevailing market interest rates.

Initial Interest Rate. Interest rate, often discounted below the fully indexed rate, that is in effect during the period before the first rate change of adjustable-rate mortgage (ARM).

 Institutional Investor. Securities buyer acting on behalf of an institution,  such as an insurance company, bank, pension fund or mutual fund.  

Interest-Only (IO) Strip. Type of security that generates its cash flow only  from interest payments of the underlying instrument.  

Interest-Rate Cap. Limit on the amount an interest rate may increase and/or decrease during an adjustment period or over the life of an adjustable-rate mortgage (ARM).

Interest-Rate Ceiling. Option that protects the purchaser from a rise in a  particular interest rate above a certain level.  

Interest-Rate Floor. Option that protects the purchaser from a decline in a  particular interest rate below a certain level.  

Interest-Rate Option. Right, but not the obligation, to pay or receive a  specific interest rate on a predetermined principal for a set interval.

Interest-Rate Risk. Chance of loss due to fluctuations in interest rates that  cause a value change in a mortgage or other fixed-income instrument.  Generally, a rise in rates causes a decline in the price of an existing mortgage,  while a decline in rates causes a rise in its market value.

Interest-Rate Swap. Arrangement wherein two parties agree to exchange  interest payments based on a principal amount (referred to as the notional  amount) without exchanging the underlying notional amount. Typically, one party pays a fixed interest rate and the counterparty pays a variable interest rate.

 Internal Models. Method of determining a firm’s capital adequacy for regulatory  purposes that relies on the technical evaluation by the regulated company of  its own risks and capital needs. This approach was utilized for the first time in  the recent Market-Risk Rule adopted by bank regulators.

International Swaps and Derivatives Association (ISDA). Principal trade organization for the privately negotiated derivatives industry. ISDA develops and publishes master agreements for swaps and other over-the-counter derivative contracts. ISDA agreements serve as standard industry documentation for a variety of financial instruments. 

Inverse Floater. Derivative whose value changes inversely to the movement  of interest rates, stock indexes and the like. Conversely, a floater operates in  the same direction as the underlying trigger.  

Joint-Probability Distribution. Statistical function describing the likelihood that  two events will occur at the same time.  

Joint-Probability Ellipse. Graphical representation of all the Joint-Probability-Distribution outcomes that are likely to occur a certain portion  of the time, for example in 99 percent of the cases. Characteristically, the  outcomes that lie on the ellipse boundary are all equally likely to occur. Points  that fall along concentric elliptical rings within the ellipse boundary are  increasingly likely to occur. Points occurring outside the ellipse boundary are  lower-probability events, which, in the case of an ellipse drawn to a 99-percent  probability, would happen 1 percent of the time.

Jumbo Mortgage. Loan that exceeds the conforming mortgage limit and  therefore is ineligible for sale to Freddie Mac or Fannie Mae. In 2000, for  example, original mortgage amounts above $252,000 generally are considered  jumbo mortgages.  

Junk Bonds. Noninvestment-grade debt obligations bearing a high degree of  default risk. Also known as "high-yield" bonds.

Kitchen Sink Bonds. Relatively new but risky breed of bond structure that  uses a combination of tranches (the various cash flows generated by the  underlying instruments) from previous deals as collateral. Kitchen-sink  instruments are sometimes created to camouflage highly risky bonds. The  complex combination at the collateral level affects the entire bond. The  behavior of even a simple bond backed by a combination of collateral may  prove very erratic. The extra yield offered in the primary market does not usually  justify the excess risk hidden in such deals.

Late-Fee Assessment Date. Point at which the grace period ends and the borrower must pay a late charge for failing to pay a regular installment payment when due. Generally, the fee is calculated as a percentage--typically in the range of 1 percent to 5 percent--of the monthly payment. For example, if a monthly payment is due on the first of the month, and a borrower is given a 15-day grace period, the late-fee assessment date would fall on the 16th of the month. 

Leading Economic Indicators. Economic measure that combines a number of  expectation-driven indicators--such as stock markets and consumer  confidence--with indicators derived from real economic activity--such as  manufacturers’ new orders and the length of the average work week. The index  is calculated and published by the Conference Board, a nonprofit research organization.  

Leverage Limit. Maximum amount by which a company can leverage itself  financially, as dictated by policy or regulation.

Leverage Ratio. Measure of the extent to which a firm itself is financing an  investment, rather than its creditors. The measure is expressed as total  long-term debt divided by total shareholders’ equity. An immutable accounting  relationship exists among a firm’s capital, debt (leverage) and assets, namely  that capital plus debt equals assets. Thus, a firm’s debt-to-assets ratio  provides the same information as its capital-to-assets ratio. Nowhere among  these three factors is risk identified, except as implied by the quantity of  assets; assets that could be either risk free or extremely risky.

Liability-to-Asset Ratio (LTA). Universal-account corollary to the traditional  mortgage’s loan-to-value (LTV) ratio. Specifically, the ratio expresses all of an  account holder’s liabilities, meaning debts, as a percentage of all financial and  real property assets held in the account.

LIBOR Rate (London Interbank Offer Rate). Average of daily lending rates  from several major London banks that is used as a common international  interest-rate index.

Liquidity Risk. Chance of loss due to a firm’s inability to quickly convert  noncash assets into cash or to obtain cash to pay upcoming debts. Examples:  a firm’s inability to ac-quire funds in the capital market on short notice and at  low cost; its inability to rebalance or close out trading positions.

Loan Modification. Restructuring of a mortgage for a borrower who faces a  long-term financial problem but can demonstrate the ability to meet the  modified payment terms. The modification can include lowering the original  interest rate or extending the loan term in which the borrower has to repay the  entire amount of the loan.

Loan Officer. Employee at a loan company who works with individuals to identify  and explain the various loan products available to mortgage borrowers. The  loan officer typically conducts the initial review of the mortgage application.

Loan Processor. Loan company employee who reviews the mortgage loan  application and gathers required verifying documentation on the applicant and  the real estate property.

Loan Prospector. Freddie Mac’s automated underwriting service that tells a  lender within minutes whether Freddie Mac will purchase a particular mortgage.  This determination reflects the likelihood that the loan applicant will default,  based on an analysis of the loan application, credit and property information  provided.

Loan-Loss Reserves. Funds reserved for losses a company anticipates it will incur from bad debts that occur with ordinary frequency, such as a predictable number of mortgage defaults. The account is replenished by periodic charges against earnings to protect against distributing all of the company’s Retained Earnings. The entry for reserves appears on the asset side of a bank’s balance sheet as a deduction from total loans.

Loan-to-Value Ratio (LTV). Amount of a mortgage loan expressed as a  percentage of the collateral property’s value. This figure is related inversely to  the down payment or equity in the property. For example, an LTV of 80 percent  and a down payment of 20 percent refer to the same equity relationship. The  ratio often is used in mortgage underwriting as a measure of default deterrent,  based on how much equity a borrower personally stands to lose in the event  of default.

London InterBank Offer Rate (LIBOR). Index used to benchmark floating-rate assets. It reflects the interest rate that the most creditworthy international  banks dealing in Eurodollars would charge each other on large loans.

Loss Mitigation. Agreement reached by a lender and borrower to satisfy a delinquent mortgage obligation through a course of action that serves as an alternative to foreclosure. These efforts can range from simply bringing the delinquency to the borrower’s attention to working out an alternative repayment plan.

Loss-Probability Distribution. Statistical frequency of losses likely to be  suffered by a firm given the composition of its portfolio and the relative risks of  its investments.

Low Income. Term, often used in the public policy arena, to designate  households earning 80 percent or less of area median income.

Lower Income. Situational term used to describe households earning 100  percent or less of area median income.

Management Risk. Chance of loss to an institution’s portfolio due to poor  decisions or ineffective actions by the firm’s managers.

Manufactured Housing. Housing structures built in accordance with the HUD  code. Unlike other forms of housing built to a state or local construction code,  manufactured-housing units must have an integral chassis and must be  transported on their own axles and wheels in one or more sections from the  factory.

Margin. Fixed amount that is added to an underlying index value to establish  the fully indexed rate for an adjustable-rate mortgage (ARM).

Marked-to-Market. Accounting valuation method based on the daily market  prices of financial assets or commodities as opposed to their historical or  acquisition values. A bank must use this method for its trading book,  registering any losses or gains on a daily basis.

Market Break. Sudden, large price move, either up or down.

Market Risk. Chance of loss due to changes in interest rates, exchange rates,  commodity prices or stock prices. Both the volatility of these market prices and  the sensitivity of a firm’s portfolio value to these movements determine the  company’s market-risk exposure.

Market Value. Price at which an asset will sell in a fair market; also, the  current value of a security.

Market-Risk Rule. U.S. bank regulatory rule which took effect January 1998  that bases a bank’s capital charge for its Trading-Book risks on calculations  made by the firm’s own internal risk-analysis model. Rule applies only to banks  with significant amounts of trading activity.

Mezzanine.  In a multi-class security, the mid-range-risk tranche, typically split into several more credit layers of varying risk. This tranche bears less risk than the first-loss-position tranche but carries more risk than the senior-position tranche.  Accordingly, the return to investors taking a mezzanine position will fall somewhere between the rates earned on investments in the first-position and senior tranches.

Micro-Data Set. Data collected at the individual unit of the set surveyed. For  example, results might be recorded at the person, family, housing unit or loan  level, whereas a macro-data set might focus on aggregate housing starts for a  month.

Minimum Capital Standard. Capital-adequacy measure of the least amount of  capital required by regulators of a financial institution to offset the firm’s risk  of generating losses to the depository-insurance fund (or potentially to  taxpayers). For Freddie Mac and Fannie Mae, this level is roughly equal to 2.5  percent of aggregate on-balance-sheet assets and 0.45 percent of the unpaid  principal balance of outstanding mortgage-backed securities.

Mobile Home. Manufactured-housing unit that either was built before 1976  or does not comply with the HUD code.

Moderate Income. Term, often used in the public policy arena, to designate  households earning more than 80 percent but no more than 100 percent of  area median income.

Modular Housing. Residential structures built in sections in a factory and then  transported by trailer to home sites, where they are lifted onto foundations and  permanently anchored.

Mortgage Insurance. Insurance policy paid for by the borrower with the  lender as beneficiary, in which a third party--the insurer--takes some of the  loan-default risk. In the event of foreclosure, the insurer pays a set amount to  the lender to cover some or all of the outstanding loan balance.

Mortgage-Backed Security (MBS). Financial instrument representing an  interest in a pool of loans secured by mortgages. Principal and interest  payments on the underlying mortgages are used to pay principal and interest  on the securities. The generic term encompasses passthrough securities and  mortgage-backed bonds. Freddie Mac and Fannie Mae guarantee the timely  payment of principal and interest on the mortgage-backed securities they issue.

Mortgage Broker. Company that, for a commission, matches borrowers and  lenders. A mortgage broker typically takes the borrower application and  sometimes processes the loan but, unlike a mortgage banker, does not use its  own funds to close the loan.

Mortgage Insurance. Financial protection paid for by a borrower with the lender as beneficiary, in which a third party--the insurer--assumes some of the default risk of the loan. In the event of foreclosure, the policy pays a set amount to the lender to cover some or all of the loan balance outstanding.                  

Mortgage Underwriter. Loan company employee who reviews a loan applicant’s  credit, loan repayment ability and the value of the collateral property to assess  the amount of risk involved in making a loan. Based on the risk analysis, an  underwriter recommends whether the lender should make or reject the  mortgage and may match the risk to an appropriate rate of interest and term  structure.

Multi-Lender Platform. World Wide Web site established as a cooperative  venture between several lenders, where borrowers can review a broad  selection of mortgage products and rates and use different analytical tools to  best match a loan product with their needs.