Glossary

Agency MBS
Mortgage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac
Asset-Backed Financing

Refers generically to all forms of financing where the financier has a claim over specific assets of the borrower, whether with or without a general claim against the borrower.

Asset-Backed Securities (ABS)

A security backed by specific assets and the payments on which are tied to or derived from the cash flows produced by the underlying assets. Examples of typical collateral backing ABS include the following: auto loans, credit card receivable, home equity loans, manufactured housing loans, student loans, and equipment leases. IN the U.S., the term ABS does not include securities backed by:

  1. prime-quality first-lien mortgages,
  2. commercial mortgage loans, or
  3. pools or corporate bonds and loans.

ABS use "bankruptcy remote structures" to provide superior isolation of the underlying assets. It is common in securitization markets to distinguish between ABS and mortgage-backed securities.

Collateralized Loan Obligation (CLO)
Is similar in structure to the Collateralized Mortgage Obligation. See Collateralized Mortgage Obligation for analogous terms -the only difference here being that the securities issued on behalf of the originating bank are backed by receivables from loans, rather than bonds.
Collateralized Mortgage Obligation; CMO; REMIC

A securitization payment method where the cash inflows of the SPV are divided into several tranches, each tranche having different payback period and seniority profile. These tranches, which are often designated as A to Z pieces or securities, are normally in the form of bonds. For example, the A bonds might be the senior most in terms of security, and might off faster than other bonds. The different tranches can be structured as per the objectives of the investors as to pay back period and the risk inherent.

Sometimes the underlying collateral of a CMO is raw mortgage loans and sometimes it is previously issued mortgage pass-through securities. CMOs are classified as REMICs under U.S. tax law.

The common CMO structures are: Interest Only (IO), Principal Only (PO), Floater, Inverse Floater, Planned Amortization Class (PAC), Support, Scheduled, Sequential, Targeted Amortization Class (TAC), and Z or Accrual Bond. Often, many of these securities contain option characteristics. Related structures are Collateralized Bond Obligations, and Collateralized Loan Obligations.

Collateralized Obligation
Is the generic term for a structure that integrates cashflows from the underlying collateral to be differentiated into several distinct cashflows streams, or different securities, each having different repayment and seniority structure. Some of these securities may experience greater stability whereas others may absorb more of the risky characteristics of the underlying assets. The purpose of the reconfiguration of the cashflows from underlying assets is to either carve out securities of different maturities, or to allow some to be subordinated to the others so as to improve the rating of the latter. Specific categories of these structures are Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations.
Mortgage
Is a creation of security interest, normally over real property, in order to secure a loan or debt obligation.
Mortgage Backed Securities (MBS)
Is a broad term which encompasses securities carved out of receivables out of mortgage funding. MBS are further classified into residential mortgage-backed securities and commercial mortgage-backed securities. The generic term also includes private label and agency securities, pass-throughs, or derivatives such as Collateralized Mortgage Obligations. It can refer to the Over-the-Counter options on mortgage backed securities as well. These mortgage backed securities are viewed as either plain vanilla or exotic.
Secured Debt
Debt supported by collateral that the lender can seize and sell if the borrower fails to repay the debt. Secured debt is generally viewed as safer than unsecured debt, which lacks the benefit of collateral. In making a secured loan, a lender generally considers (1) whether the borrower has historically paid its debts on time, (2) the borrower's financial capability to repay the debt, and (3) the value of the assets seving as collateral for the debt. If the value of collateral equals or exceeds the amount of the secured obligation, the debt is said to be "fully secured."
Securitization

A modern financing tool. Securitization is closely related to traditional secured debt. In a securitization, a company raises money by issuing securities that are backed by specific assets. In most cases, the underlying assets are loans, such as mortgage loans or auto loans. The cash flow from the underlying assets usually is the source of funds for the borrower/issuer to make payments on the securities. Securitization products generally are viewed as including the following: asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations, and asset-backed commercial paper.

  • Compared with traditional secured debt, securitizations are intended to provide a lender/investor with greater protection against the corporate credit risk of the originator of the assets. In principle, a securitization lender/investor is kind of a "super-secured creditor," with rights that exceed those of a traditional secured lender. Securitization employs the notion that the subject assets have been "sold" by the originator and, therefore, will not become entangled in bankruptcy proceedings if the originator files for protection under the bankruptcy code.
  • Accomplishing a "sale" of the securitized assets often requires the use of a SPV. A typical securitization is structured as a two-step transaction. In the fist step, the originator transfers the subject assets to an SPV in a transfer designed to constitute a legal true "sale." In the second step, the SPV issues securities backed by the assets. The SPV uses proceeds from selling the securities to pay the originator for the assets. In addition, part of the "consideration" that the originator receives for transferring the assets to the SPV is its ownership of the SPV.
  • In some securitizations, the originator does not receive the equity in the SPV. Instead, the originator may retain the subordinate or equity position in the securitized assets through other means, such as variable fee structure.
Structured Finance or Products
A generic term for financial instruments which are devised for funding on the basis of identifiable assets rather than the credit standing of the entity concerned. Includes securitization, but besides, also includes various forms of lending where the cashflows of the entity are trapped at source to pay off the lender.
Underlying security
The security that secures the receivables; e.g., in a mortgage securitization, the charge over the property is an underlying security.
Conduit
A medium, or a legal vehicle. Specific to securitizations, this means an entity formed to hold receivables transferred by the seller on behalf of the investors. In pass through structures, an SPV is a mere conduit as it merely represents the collective property and cashflows of the investors. In case of asset-backed commercial paper it means the SPV which holds the receivables transferred by different sellers, and issues commercial paper to raise money to buy the same.
Grantor trust
A US tax-transparent trust that is a passive non-business entity, normally used in pass-through securitization; it cannot issue multiple class securities having payment streams different from those of the underlying receivables, but can create senior and subordinated securities.
Investment Company
A company treated as such for regulatory purposes. Most countries' laws provide for a specific regulation applicable to such companies. For example, US Investment Company Act, 1940. An SPV is not treated as investment company under the 1940 Act if it satisfies certain conditions set out in rule 3a-7.
Limited liability company (LLC)
A US corporate structure which provides for limited liability, but with a provision that the members of company cannot transfer their shareholding without consent of 100% of their members; each member has a right to participate in management.
Owner Trust
A type of SPV that can issue pay-through securities (i.e., securities that feature time tranching). Owner trusts are used in securitizations seeking debt for tax treatment.
Real Estate Investment Trust
Is a special structure which holds real properties. These properties can be apartments, shopping malls, office buildings or other acceptable real assets. The trust must distribute 95 percent of its income to the shareholders in order to qualify for special tax treatment.
Real Estate Mortgage Investment Conduit
Is a vehicle to minimize double taxation of income from a pooling of mortgages. A certain US tax provision grants tax transparency to such conduits, even though the conduit can issue multi-class securities.
Special Purpose Entity (Vehicle); SPE (SPV)
An organization constructed with a limited purpose or life. In securitization, it means the entity which holds the legal rights to the assets transferred from the Seller. SPE(V)s facilitate securitization by enabling the use of bankruptcy remote structures.
Tax transparent entity
An entity which is not taxed either in representative capacity or in its own capacity as a tax paying entity, but the tax is levied on the participants in the entity based on their share of income in the entity. See also grantor trusts.
Assignment
In relation to receivables, it means the legal action of transfer of receivables from one person to another. In relation to a mortgage, it would mean the transfer of a mortgage by the mortgagee (borrower and occupier) to another person.
Bankruptcy remote
A key concern in securitization transactions to ensure that the transfer of assets of the seller to the investors' representative or SPV is not affected by bankruptcy or distress of the seller. This necessitates certain legal precautions in structuring the assignment of receivables, and also to constituting the SPV that it can neither be taken to liquidation by the shareholders of the seller, nor by those of the SPV itself. Further, the structure should also ensure that the SPV would not be treated as the subset of the seller by substantive consolidation. Such a structure is called bankruptcy remote structure.
Bankruptcy Remote Structure; Bankruptcy Remoteness
Refers to the techniques used for isolating assets or loans from the bankruptcy risk of the company financing or selling them. The use of bankruptcy remote structures distinguishes securitizations from traditional secured financings. For example, in the U.S., a loan originator (e.g. a consumer loan company) might finance it loans by transferring them to a SPV and causing the SPV to issue securities backed by the loans. The transfer of the loans to the SPV is designed to be a "true sale", which places the loans outside of the originator's bankruptcy estate in case it goes into bankruptcy. In addition, the SPV is established in such a way that its independence (separateness) from the originator would be respected by the bankruptcy court. The use of bankruptcy remote structures developed in response to features in the U.S. bankruptcy law, which sometimes may deny a secured lender the full benefit of its collateral.
Beneficial interest
The interest of the investors on whose behalf the trustee or the SPV holds securities/ receivables. In a securitization deal, the receivables/ cash flows are legally held by the SPV or trust, for the benefit of the investors; hence the investors are beneficiaries and their interest is beneficial interest.
Co-mingling
Where the seller in a securitization is also the servicer, the cash collected by the seller may at times co-mingle, or may deliberately be mixed up with that of the seller himself, leading to no clear identification of the cash collected on behalf of the SPV. This is called co-mingling.
Consolidation

Several possible meanings, but in the context of securitizations, normally refers to the action of a judicial authority in treating the SPV and the seller as the same entity by applying a legal concept called lifting or piercing the corporate veil. If consolidation is done by a Court, the transfer of assets by the seller to the SPV would become unfructuous. Securitization structures aim at avoiding the possibility of a consolidation by Courts.

In accounting sense, could mean the consolidation of the accounts of the SPV with those of the seller. Again, this would mean the assets transferred by the seller would come back on the balance sheet of the seller.

Limited recourse
The right of recourse limited to a particular amount or a particular security. For example, in a securitization transaction, the right of recourse being limited to the over-collateralization or cash collateral placed by the seller is a case of a limited recourse
No petition
An undertaking obtained from the persons dealing with an SPV that said person shall not file a petition for bankruptcy of the SPV until the investors in the SPV have been paid off. A feature required to ensure that the SPV is bankruptcy remote.
Recourse
The ability of an investor/ purchaser to seek payment against an investment to the seller of the investment. For example, in a securitization transaction, the right of the investor to seek payment from the seller, or in case of a negotiable instrument, the right to seek payment from the endorser of the instrument. See also limited recourse.
Rule 3a-7
A rule of the SEC in USA granting exemption to SPV from being regulated under the Investment Company Act, 1940.
Securities Act of 1933
Is the US Law which covers new issues of securities. It requires full-disclosure of material information related to the offering. Some securities such as U.S. Treasuries are exempt from the provisions.
True sale
The transfer of assets from one entity to another that places the assets beyond the reach of the first entity's creditors, even if the first entity becomes the subject of a bankruptcy or similar proceeding. In a typical securitization, the originator of the underlying assets transfers the assets to a SPV in a transaction designed to be a true sale. An example of a transfer that is not a true sale is a pledge of collateral to secure a debt. In securitizations, achieving a true sale is an important aspect of bankruptcy remoteness.
"Debt" Treatment
A securitization transaction may be structured in such a manner that it is treated as a financing of the underlying mortgage loans.
Sale for Tax
Transaction done using a REMIC Structure automatically is treated as a sale transaction for tax purposes.
FASB 77
The earliest US accounting standard on securitization which was superseded by FASB 125 on January 1, 1997.
FASB 125
The second Accounting Standard issued by the US Financial Accounting Standards Board on securitization accounting, which was superceded by FASB 140 on January 1, 2000.
FASB 140
Is the Accounting Standard issued by the US Financial Accounting Standards Board on securitization accounting.
Financing treatment
A securitization transaction is said to have been given a financing treatment when it is treated as a financial transaction either for legal, tax or accounting purposes. Compare with true sale treatment.
GAAP
Generally Accepted Accounting Principles.
Mark-to-Market
Is the valuation process which provides an indication of reasonable prices for positions on a daily basis or some other proscribed time frame. In accounting parlance, it would mean valuing securities/loans at their market values.
Off balance sheet
A debt or asset which does not show up on the balance sheet of the entity that originated the asset or debt. In a securitization transaction, if the transaction qualifies for a sale treatment, the assets transferred by the seller are off the balance sheet of the seller, and so is the amount received on account of such transfer.
Qualifying SPV
A term under FASB 140 setting conditions for an SPV to qualify under the standard - transfers of assets to qualifying entities will qualify for sale treatment.
Re-characterization
Generally refers to the action of a judiciary in ignoring the legal form of a transaction and treating it as what the Court regards is the true nature of the agreement. In the context of securitization, it refers to the treatment of a securitization not as true sale but as financing transaction.
Re-purchase option
An option with the seller to buy back the receivables transferred by it. A re-purchase option will mostly re-characterize the securitization transaction as a financing transaction.
Sale treatment
In accounting standards for securitization, recognition of a securitization transaction as a sale of receivables would lead to recognition of upfront income (or losses) on the assignment, de-recognition of the assets and the corresponding liability. Compare with financing treatment.
Excess Inclusion Income

Income which cannot be eliminated or reduced when filing your taxes through use of deductions or from other sources or exemptions. Excess inclusion income cannot be offset by NOL's under the REMIC tax laws. It is primarily caused by the REMIC securitization trust utilizing cash that otherwise would have been paid to the residual holder as excess cashflow, to make payments to other security holders, to create and/or maintain overcollateralization by artificially paying down the principal balance of the asset-backed securities.

If a REIT is deemed to have issued debt obligations having two or more maturities, the payments on which correspond to payments on mortgage loans owned by the REIT, such arrangement will be treated as a "taxable mortgage pool" for federal income tax purposes. If all or a portion the REIT is considered a taxable mortgage pool, REIT status generally should not be impaired; however, a portion the REIT's taxable income may be characterized as "excess inclusion income" and allocated to its stockholders. Any excess inclusion income:

  • could not be offset by unrelated net operating losses of a stockholder;
  • would be subject to tax as "unrelated business taxable income" to a tax-exempt stockholder;
  • would be subject to the application of federal income tax withholding (without reduction pursuant to any otherwise applicable income tax treaty) with respect to amounts allocable to Non-U.S. stockholders; and
  • would be taxable (at the highest corporate tax rate) to the REIT, rather than the REIT's stockholders, to the extent allocable to the REIT's stock held by disqualified organizations (generally, tax-exempt entities not subject to unrelated business income tax, including governmental organizations).
Phantom Income

Holders of equity interests in owner trusts and residual interests in REMICs are required to report taxable income calculated as the difference between the gross income from the assets of the issuer and the deductions allowed with respect to its liabilities (including, in the case of a REMIC, regular interests which are treated for tax purposes as if they were liabilities of the REMIC). This method of taxation can result in some periods in the recognition of taxable income that exceeds economic income. That excess is referred to as phantom income. The primary causes of phantom income are:

  1. the deferral of interest expense that arises when liabilities are divided into multiple classes or tranches with different maturities and yields for tax purposes versus use of a constant discount rate interest expense for accounting purposes;
  2. the recognition of losses only as realized upon liquidation for tax purposes versus through loss reserve build-ups for accounting purposes
Taxable Mortgage Pool

Mortgage-backed security pools formed or receiving significant new investment after 1991 will be treated as taxable mortgage pools unless they assume real estate mortgage investment conduit (REMIC) status under IRC 7701. A pool qualifies as taxable if:

  1. its assets are debt obligations, more than 50% of which are mortgages,
  2. it is an obligor whose debt obligations have two or more dates of maturity and
  3. its payments on those obligations are sequenced with payments on the primary assets.

If a transaction is deemed to be a taxable mortgage pool, the owner of the loans is subject to tax on the income from the loans at the corporate tax rate. This in effect subjects the income earned within the securitization to double taxation. Time-tranching of certificates not issued under a REMIC structure cause taxable mortgage pool treatment.

Back-up servicer
A servicing entity designated in advance, that, in certain predefined circumstances, takes over some or all of the servicing functions being performed by the servicer.
Information vendors
Refers to the service providers that make deal structure details, ongoing deal performance statistics, and other deal information available to investors and others. Examples include companies such as Bloomberg, ABSnet, and Intex.
Depositor
The SPV which is the shelf registrant. The Seller sells the mortgage loans to the Depositor in a True Sale transaction. The Depositor assigns the mortgages to a trust, which issues the securities.
Issuer
The SPV which issues the securities to the investors.
Master Servicer
A company responsible for making sure that the servicing function is carried out, but which may not actually perform the function itself. A securitization backed by assets from many originators or which has more than one primary servicer often has a master servicer. The master servicer subcontracts the collection functions to other companies. A master servicer generally does not outsource administrative functions such as processing remittances and preparing investor reports.
Monoline Insurer; Bond Insurer
An insurer writing only a single line of insurance contracts (credit insurance), which is similar to a financial guarantee. Securitization transactions make use of monoline insurance contracts as credit enhancements. Most of the major bond insurers carry triple-A ratings from Moody's and Standard & Poor's. Some of the leading bond insurers are: Ambac, FGIC, Financial Security Assurance (FSA), and MBIA Insurance Corp.
Originator(s)
Lender(s) who originally supplied funds to make the loans being securitized. In the residential mortgage sector, originators often sell their loans to other companies ("conduits" or "aggregators") that pool them for securitization.
Primary Servicer
See "Servicer."
Seller
The entity assigning receivables in a securitization transaction.
Servicer
The entity that performs the functions necessary for billing borrowers, collecting payments, performing collection activities on delinquent accounts, providing customer service, tracking and reporting activity, making required servicing and delinquency advances, and other duties as required by the Servicing Agreement or Pooling and Servicing Agreement. See also back-up servicer.
Receivables sale agreement
The agreement under which the seller sells the receivables to the SPV. Also referred as Purchase and Sale Agreement.
Collateral

the term generally refers to:

  1. Assets serving as security for a loan,
  2. Assets subject to lien, charge or encumbrance,
  3. Assets backing or underlying a securitization, and the cashflows generated by these assets.
Covenants
Formal conditions or clauses which are written into credit agreements. Often the document which contains these covenants and terms is called the indenture.
Clean up buyback or call
An option with the seller or servicer in securitization transactions where the seller or servicer can buy back the outstanding securitized instruments when the principal outstanding has been substantially amortized leaving a small uneconomic amount to serviced. Normally, clean up call is exercised when the outstanding principal falls below 10% of the original.
Collateral Rep Lines
Within the Dec tables, prepayment assumptions are derived by segregating the underlying loans into subgrouping of loans with similar characteristics and attributing unique prepayment patterns to each subgroup. Each subgroup is called a Rep Line.
Dec Tables

Tables showing, as of the time of the securitization and for each subsequent 12-month period, the percentage of the initial class principal amount of each class of certificates still outstanding under various prepayment assumptions.

  1. The calculation and presentation of the dec tables must be verified and signed-off on by a certified public accounting firm.
  2. Prepayment assumptions will be derived by segregating the underlying loans into subgrouping of loans with similar characteristics (rep lines) and attributing unique prepayment patterns to each rep line.
Description of Certificates
This section provides a detailed description of each class of offered certificates and retained certificates, including, among other items, class designations, interest rates, priority of interest payments, priority of principal payments, priority of loss allocations, timing of interest payments, how the certificates will be registered and tracked, how payments will be made on the certificates, definitions relating to payment of interest and principal on the certificates, the timing and amount of any cap agreements, how the index on floating rate securities will be determined, how prepayment interest shortfalls are calculated, credit enhancement mechanisms, clean-up call mechanisms, and identification of the trustees.
Description of Originator
This section sets forth information about the primary (or only) originators of loans backing the certificates, including a general description of the companies and their ownership, primary office locations, and operations, sources of loans, servicing capabilities, loan underwriting procedures and guidelines, traditional loan products and credit grades, specialty loan products and credit grades, and any significant litigation.
Description of Servicer
This section provides information about each servicer, including a general description of its ownership, primary office locations, size of servicing and subservicing portfolio, tables showing historical delinquencies, foreclosures, REOS and losses realized in its servicing and subservicing portfolio, and duties of each servicer in this securitization.
Description of Master Servicer
This section provides information about the master servicer, including a general description of its ownership, primary office locations, size of servicing and subservicing portfolio, a table showing historical delinquencies and foreclosures of its servicing and subservicing portfolio, and duties of the master servicer in this securitization.
Eligibility criteria
The criteria for selection of receivables which are to be assigned by the seller to the SPV. These are normally contained in the receivables sale agreement with a provision that a breach of the criteria would amount to breach of warranties by the seller, obliging the seller to buy-back the receivables.
ERISA Considerations
This section describes which of the offered certificates may be purchased by an employee benefit plan or other retirement plan that is subject to ERISA and is an "accredited investor."
Expected Maturity
The estimated date of final payment on the security, based on prepayment forecasts for the securitized assets.
Federal Income Tax Considerations
This section describes the tax opinion that the issuer's counsel will render concerning the tax status of the trust(s) and discussed the tax treatment of the offered certificates.
Flow of Funds
The rules dictating the priority with which interest and principal is paid out of the trust to senior and subordinate certificateholders, the master servicer, the servicer, the monoline insurer, the credit risk manager, the PMI insurer, the residual holder, and any other party who may have a claim to the cashflows. The flow of funds is sometimes described as the securitization "waterfall."
Legal Investment Considerations
This section highlights legal considerations that various categories of investors should weigh before investing in certain classes of the offered certificates.
Legal Matters
This section identifies the law firm rendering legal opinions with respect to the securitization.
Mortgage Loan Description and Tables
This section presents a detailed discussion about the mortgage loans underlying the securitization, and presents extensive statistical information about the loans as of the cut-off date.
Offered Certificates
These are the classes of certificates that are offered for sale to investors, and are typically all of the classes given credit ratings by the rating agencies.
Parties to the Transaction

These are all the entities that provide some aspect of or service to investors in the security, including:

  • Originator(s)
  • Seller
  • Depositor
  • Owner trustee
  • Indenture trustee
  • Master Servicer
  • Primary Servicer(s)
  • Credit Risk Manager
  • PMI Insurer
  • Cap Provider
  • Investment Banker(s)
  • Rating Agencies
  • Monoline Insurer
Pooling
The combining of different loans into standardized or predefined units for trading purposes. This activity increases the homogenization of the underlying collateral. A key benefit of pooling is a diverse, generic security.
Pre-Funding
In some securitizations, the issuer sells more a greater amount of certificates than the initial balance of underlying mortgages. The issuer has up to 90 days to assign into the trust an amount of loans sufficient to fully collateralize the certificates. The excess proceeds must be maintained within the trust until additional loans are transferred into the trust. To the extent the issuer does not full collateralize the certificates within 90 days, the amount of any shortfall is paid to the certificateholders from the excess cash retained within the trust at the end of the 90 days and is treated as a prepayment.
Pricing Speed
This is the prepayment speed assumption from the Dec tables that serves as the basis for determining yield and setting price on each offered certificate.
Ratings
This section discusses the required ratings by each rating agency for issuance of the securities, the meaning of the ratings, and factors the ratings do not specifically address.
Re-configuration of cash flows
In a Pay Through transaction, the SPV does not pay to the investors on the same intervals or subject to the same fluctuations as the underlying receivables. For example, receivables might have monthly pay-ins, but the SPV might be paying on quarterly basis. This is called re-configuration of cash flows.
Risk Factors
This section identifies significant sources of risk associated with an investment in the offered certificates.
Servicing of the Mortgage Loans
This section describes any required transfer of servicing, the split of duties between the Master Servicer and the Servicers, servicing compensation and payment of expenses, prepayment interest shortfalls, advances, duties for filing primary mortgage insurance claims, duties for collection of taxes, assessments and similar items, duties to obtain and maintain appropriate insurance coverages, duties to provide evidence of compliance , mechanism of a servicer or master servicer default, duties of the credit risk manager (if any), and the servicer's option to repurchase defaulted loans and to exercise a cleanup call.
Summary of Terms

This is the first section of a prospectus supplement. It highlights selected information from the document, typically presented in the same order as the detail sections of the document. Key areas summarized are:

  • Parties to the transaction
  • Classes or securities, initial dollar amounts and interest rate of each
  • Description of timing and priority of distributions to the certificates
  • Description of limited recourse of certificates
  • Description of risk factors
  • Description of priority and methodology for allocating losses to certificates
  • Description of credit enhancements
  • Description of liquidity enhancements
  • Description of the mortgage loans
  • Details on the servicing of the mortgage loans
  • Clean up call options
  • The tax status of the certificates
  • ERISA considerations
  • Legal investment considerations
  • Ratings of the certificates
Trust Agreement
This section generally describes the terms of the trust agreement(s) under which the certificates are issued, including identification of the trustee(s), duties of the trustee(s), assignment of the mortgage loans, and voting rights of the various classes of certificateholders.
Underwriting
This section addresses terms of the underwriting of the offered securities by the investment banks, and other functions and duties that the investment bank may be performing.
Use of Proceeds
This section addresses how the Depositor will use the proceeds of the securitization, which typically is limited to the purchase of the mortgage loans underlying the securitization.
Waterfall
See "Flow of Funds."
Yield, Prepayment, and Weighted Average Life

This section generally describes the factors that will impact the yields and weighted average life of the certificates, with emphasis given to factors affecting the likelihood of prepayment of the underlying loans, changes in index rates, application of excess cash flow and the amount of overcollateralization, and subordination of any offered subordinate certificates.

This section contains tables showing, as of the time of the securitization and for each subsequent 12-month period, the percentage of the initial class principal amount of each class of certificates still outstanding under various prepayment assumptions.

  • These tables are called Dec tables.
  • The calculation and presentation of the dec tables must be verified and signed-off on by a certified public accounting firm.
  • Prepayment assumptions will be derived by segregating the underlying loans into subgrouping of loans with similar characteristics (rep lines) and attributing unique prepayment patterns to each rep line.
Multiple Class Securities
A securitization transaction where the SPV issues several classes of securities such as senior and junior securities.
Pass-Through
Refers to the securitization structure where the SPV makes payments, or rather, passes payments to the investors, on the same periods, and subject to the same fluctuations, as are there in the actual receivables. That is to say, amount collected every month is passed through to investors, after deducting fees and expenses. Compare with Pay Through.
Pay-Through
A securitization structure where the payments to the investors are routed through the SPV who does not strictly pay the investors only when the receivables are collected by it, but keeps paying on the stipulated dates irrespective of the collection dates. In order to allow for smoothed payment to investors by removing the fluctuations in its collections, the SPV uses a guaranteed investment contract or credit enhancements or both.
Senior-Subordinate Structure
A deal structure that uses subordination as credit enhancement. A subordinate class or classes absorb losses and must be wiped out before any losses are allocated to the senior classes. For example, if $1000 of assets support a $900 senior certificate and a $100 subordinated certificate, the senior certificates would be insulated against the impact of losses on the assets so long as losses remain less than $100.
Sequential Pay Structure
A deal structure in which principal distributions to various tranches a mode sequentially, such that a given tranche receives no distributions of principal until each tranche scheduled to be paid earlier has been fully retired.
Credit enhancement; credit support

Refers to one or more initiatives taken by the seller in a securitization structure to enhance the security, credit or the rating of the securitized instrument, e.g., by providing a cash collateral, profit retention, third party guarantee, etc. Comparable to the various ways of securing a traditional credit transaction. Credit enhancement could be structural credit enhancement, seller credit enhancement, or third party credit enhancement. Common examples of credit enhancement include the following:

  • Subordination - the credit quality of a deal's senior class of bonds is improved by subordinating the junior classes (also called senior-subordinated structure)
  • Overcollateralization - the par amount of securities issued or outstanding in a deal is less than the aggregate principal amount of underlying assets being securitized
  • Excess Spread - difference between the interest rate on securitized financial assets and the interest rate on the bonds backed by those assets (similar to net interest margin for a finance company), which can be applied to offset losses
  • Reserve fund - with the structure of the securitization, an account containing cash or high-quality securities from which withdrawals can be made to offset losses or shortfalls on securitized assets
  • Guarantee - either the sponsor or a transaction or a third party, such as a bond insurer, can guarantee bonds.
Credit Rating
A formal evaluation of the credit quality of a bond, usually expressed with a symbol such as "AAA" or "Aaa". In the U.S., the most active rating agencies are Moody's, S&P and Fitch.
Excess Spread

the difference between the gross yield on a pool of securitized assets and the cost of financing those assets, including applicable servicing fees. Excess spread can be a source of credit enhancement for securitized assets, provided that it is available to absorb losses on the assets.

The actual amount of excess spread generated in a month might be

  1. applied to cover losses incurred during that month;
  2. converted into another form of credit enhancement (e.g., overcollateralization or reserve fund), or
  3. paid to the holder of the residual interest in the deal.

Most securitizations of home equity loans apply excess spread first to cover period losses, then to build-up overcollateralization to a predetermined level, and lastly for distributions of the residual interest.

MIG policy
Mortgage indemnity guarantee policy - see under pool policy.
Overcollateralization
Amount by which the balance of mortgage loans underlying a securitization exceeds the balance of the rated principal bonds.
Pool policy
An insurance policy that covers losses sustained on a pool of mortgage loans. Also called MIG policy.
Spread account
An account in which profit retention by the Seller takes place.
Structural credit enhancement
A technique of credit enhancement by creation of senior and junior securities, thereby enhancing the credit rating of the senior securities.
Subordinate Bonds
Third party credit enhancement
A credit enhancement provided in a securitization transaction by third party guarantees, such as bank letter of credit, or monoline insurance contracts, etc.
Tranche
A piece, portion or slice of a deal. In the context of securitization, it refers to one class of securities issued in a transaction that created multiple classes issued simultaneously. In a deal that uses the senior/subordinate structure, the senior and subordinate classes are credit tranches of the deal. Sequential pay structures are examples of time tranching. Tranches have distinctive features which for economic or legal purposes must be financially engineered or structured in order to conform to prevailing requirements.
B-Class; Subordinate Class
The tranche or class that has the lower or lowest credit priority in a deal. The holder of the B class is sometimes called the "B-Buyer".
Bullet
Is a type of credit security which repays the entire principal in a single payment on the maturity date. Prior to the maturity or prepayment of the bond, interest payments are to be made in accordance with the payment schedule. Normally, corporate bonds pay off in lump sum principal, that is, are bullet paying bonds, whereas many mortgages, leases etc. pay off on an amortization basis. See also amortization.
Callable Bonds
A bond redeemable (prepayable), in whole or in part, by its issuer before its final maturity date. MBS and residential mortgage ABS are a special form of callable bonds because the borrowers on the individual underlying mortgage loans can prepay their loans. A mortgage loan borrower is long an option that allows him to prepay his loan. An investor who owns an MBS or ABS backed by the loan has a short position in the option
Companion Bonds
See Support Bonds
Fixed-rate Bond
a bond that pays a fixed (unchanging) rate interest for the entire time that it is outstanding (subject to a potential one-time step up for a predetermined amount subsequent to a scheduled clean up call date if the clean up call is not exercised).
Floater
An instrument that pays a floating rate of interest.
Floating rate note
A debt instrument carrying a floating rate of return. In context of securitization, refers to the bonds issued by SPV carrying a floating rate.
Interest Only (IO)

A security that receives some or all of the interest component of payments on underlying debt obligatiosn, but none of the principal component of such payments. Issuers of MBS sometimes create IOs - and their corresponding principal only (PO) securities - by separating interest and principal from an underlying pool of mortgage loans and allocating each to different classes of securities.

Often, an IO backed by residential mortgage loans has the unusual characteristic of negative duration. Thus, an IO can serve as a tool for hedging interest rate risk in a fixed income portfolio. Prepayment activity is a dominant evaluation factor, since prepayment will affect interest payments. Compare with principal only which does not face interest rate or prepayment risk.

Inverse Floater
A security where the rate of interest changes in the opposite direction on an underlying benchmark. For example, if an inverse floater uses LIBOR as its benchmark, increases in LIBOR will reduce the rate of interest on the security. In many cases, an inverse floater is created by subtracting the benchmark from a fixed rate (e.g. the inverse floater pays interest at a rate of 10% - LIBOR)
Jump Bonds
Are issues which are conditioned on an event or series of events. When the event - such as breaking a prepayment collar - occurs, it triggers a predetermined movement to another payment arrangement. This type of bond occurs in collateralized obligation structures.
Junior bonds
Bonds which are subordinated to senior bonds.
Net Interest Margin (NIM) Bond
A securitization backed by the residual interest(s) from one or more home equity loan or manufactured housing loan securitizations. NIM securitizations often represent leverage exposure to the credit risk and prepayment risk of the related HEL or MH transactions.
Notional Balance
With respect to an Interest Only (IO) security or other interest rate derivative contract, the amount used for calculating payments on the security from time to time. In the case of IO MBS, the notional balance might be the aggregate balance of all loans underlying the mortgage pool, the aggregate balance of a portion of the loans (e.g., loans with interest rates above a certain level), or it may be a fixed amount set forth in the securitization documents.
Planned Amortization Class (PAC)
Is a security which is structured to have a reasonable life expectancy provided the prepayment speeds stay within the defined ranges. The scheduled interest and principal payments tend to be more stable for these tranches relative to the other parts of the deal.
Principal Only (PO)
Is the principal only derivative of a credit structure. Typically, it is found in CMO deals.
Residual Interest

The most subordinated claim (equity) in a pool of securitized assets; generally retained by the seller of the assets (i.e., the sponsor of the securitization). In some product areas, issuers customarily sell or transfer residual interests to investors.

  • If the securitized assets produce excess spread, the residual interest generally embodies the seller's right to receive the excess spread (e.g., ABS backed by home equity loans).
  • If a securitization uses overcollateralization as a form of credit enhancement, the residual interest also includes the seller's right to the overcollateralization after all other claims are satisfied (e.g., ABS backed by home equity loans).
  • If a deal is structured without overcollateralization and the seller retains the most subordinate classes of securities, those securities generally are not considered part of the residual interest. In that case, the subordinate securities are distinct form the residual interest even though they are retained by the seller.
  • In the case of CMOs/REMICS, residual interests can carry significant tax liabilities under U.S. tax laws. In fact, the tax liabilities associated with such residual interests can greatly exceed any cash flow to which the holder of the residual would be entitled.
Senior
Is a class of securities which have high or the highest claim against a borrower or assets of the borrower. Often they are secured or collateralized, or have a prior claim against the assets.
Stripped Mortgage Backed Securities
Are securities which are constructed from MBS pass-throughs. Essentially, these securities strip the cash flow stream into a separate interest only (IO) and principal only (PO) securities.
Subordinate Class
Tranche of securities which have lower priority or claim against cash flows and a higher priority of having to absorb losses. In this manner they protct senior classes from credit losses on the underlying assets. They are also called Junior notes and bonds. This compares to Senior securities.
Support Bonds
Bonds engineered to counterbalance or uphold Planned Amortization Class, Targeted Amortization Class or other superior bonds in a deal. Also, referred to as Companion Bonds.
Z Bonds
Also known as Accrual Bonds and Accretion Bonds. A CMO class on which interest accrues but is not paid currently. Instead, interest is added to principal each period. CMOs often include accrual bonds which are designated as "Class Z". Often, many of these securities contain option characteristics.
Expected Maturity
The estimated date of final payment on a security, based on prepayment forecasts for the securitized assets.
Legal Final Maturity
The date before which the bond must be retired in order not to be in default. In the case of residential MBS, it is determined on the assumption that none of the underlying mortgage loans prepay. A security's legal final maturity can be no earlier than its Expected Maturity.
SMMEA Eligible
Some investors may only purchase bonds that qualify as mortgage related securities under the Secondary Mortgage Market Enforcement Act of 1984 (SMMEA). Certain classes of bonds may not be SMMEA eligible, thereby reducing the number of potential investors for those classes.
ALCO
Acronym for Asset Liability Committee.
Call Option
Is a contract whereby the purchaser, owner or holder is given the right but is not obligated to purchase the underlying security or commodity at a fixed strike price within a limited time frame. Compare with put option.
Call Protection
Protection against prepayment risk. In subprime residential mortgage loans, prepayment penalties are a form of call protection. In commercial mortgage loans, examples of call protection include lockouts (temporary prohibitions against prepayment), defeasance (requirement to purchase securities that create an identical cash flow), prepayment fees (calculated as a predetermined percentage of outstanding balance), and yield maintenance penalties.
Call Risk
The possibility that prepayments will increase above an anticipated rate, causing earlier-than-expected return of principal, usually occurring during a time of falling interest rates.
Cap
Is the ceiling, upper limit price, or interest rate which would be paid.
Co-mingling risk
The risk that the cashflows collected by the seller gets co-mingled with that of the seller; hence, in bankruptcy, such cash would become the part of the bankruptcy estate of the seller and would not be available, for lack of traceability, to the SPV, even though it belongs to the SPV.
Counterparty
Refers to the party with whom a swap or options deal has been struck. In relation to securitization, it means the party with whom the SPV has entered into, say, an interest rate swap and accordingly, counterparty risk refers to the risks as to performance of the swap counterparty.
Embedded Option
An option included in the structure of a security. For example, the homeowner's ability to prepay his mortgage loan is a call option on the loan at par. An investor who owns MBS is short the call option. The embedded short call option is the reason that the MBS and certain other callable bonds display the undesirable characteristic of negative convexity.
Explicit Option
Is an option whose strike and expiration are clearly stated. There is a direct payment for this specific option contract. In the case of an implied option or embedded option, the price adjustment is reflected in the instrument such as a mortgage.
Extension Risk
The possibility that prepayments will be slower than an anticipated rate, causing later-than-expected return of principal. This usually occurs during times of rising interest rates.
First loss risk
Refers to extent of credit enhancement in a securitization transaction which is several times the historical loss, so as to make the investors virtually protected against risk of losses, other than catastrophe risk.
Interest Rate Risk
Is the risk associated with changes in general interest rate levels or yield curves. This compares to Prepayment Risk.
Interest Rate Swap
A single currency swap where parties agree to swap a fixed rate of interest for a floating rate of interest, or different bases for a floating rate of interest.
Lockout
A form of protection against the risk that a borrower will prepay a mortgage loan. A lockout is a prohibition against prepayments. A lockout may be eiher temporary (i.e., it expires after a specified period) or permanent (i.e., lasting the entire term of the loan). Lockouts are a feature of some commercial mortgage loans but seldom appear in residential mortgage loans.
Prepayment Risk
The risk that borrower prepay their mortgage loans. Residential MBS have the undesirable feature of negative convexity primarily because of prepayment risk. Mortgage loan prepayments tend to increase when interest rates fall and homeowners have the opportunity to refinance their loans at lower interest rates. In turn, the prepayments return a substantial portion of invested principal to the MBS investors, who may then be forced to reinvest at lower yields.
Amortization
the periodic repayment or return of the principal of a bond or loan. Residential mortgage loans in the U.S. experience amortization each month.
Coupon
Is the contractual rate of interest on a credit instrument.
Current Face Value
The current amount of principal outstanding on a security, which is calculated by multiplying the original face value by the most recent factor.
Yield
The rate of return on an investment over a given time, expressed as an annual percentage rate. Yield is affected by the price paid for the investment as well as the timing of principal repayments.
Yield-to-Maturity
The annual percentage rate of return on an investment, assuming it is held to maturity.
Excess spread
Refers to the excess of the income inherent in the portfolio of receivables, over and above the SPV's discounting rate and the expenses of the transaction. Represents the profit of the seller in the securitization transaction
Final Distribution Date or Maturity Date
The latest possible date on which an MBS receives payment. The actual final payment of any MBS will likely occur earlier, and could occur much earlier than the final distribution date or maturity
Matched funding
A funding which is matched in repayment pattern with the recovery pattern of an asset. Securitization, for the seller is an example of matched funding.
P&I
Are principal and income payments or principal and interest. Compare with principal only, interest only
Payer
Is a mortgage back securities term which refers to a tranche currently paying both interest and principal.
Prepayment
Is a payment by a borrower in advance of the scheduled payment date. Prepayment is normally an embedded option in loan contracts, particularly so in case of consumer loans.
Prepayment Penalty
Refers to a cost which may be charged against a borrower in the event of a prepayment.
Prepayment Risk
Is the potential loss due to prepayment by an obligor. The SPV may either pass through the prepaid amounts to investors thus resulting into faster payment of principal than expected, and reduced income over time, or if the SPV were to reinvest this money, the reinvestment may not produce rate of return as in the underlying receivables. Hence, prepayment is viewed as a risk in securitization, though sometimes, prepayment penalties may more than undo the damage.
Profit extraction
The extraction of the seller's spread in the securitization transaction, that is, the excess of the underlying rate of return in the receivables over the discount rate at which the SPV acquires the same. If the seller receives the whole of this profit upfront, he is said to have extracted the profit immediately. If he collects the profit by way of servicing fees, then the profit is extracted over time. If the seller transfers the receivables at their carrying value and agrees to extract the profit at the end of the transaction by way of residual income, then the profit extraction takes place at the end of the term.
Profit retention
Various devices by which the profit extraction by seller takes place otherwise than upfront.
Residual income
If the seller agrees to a profit retention in a securitization transaction, the retained profit will be subject to all the risks and rewards of the structure, and will be paid over to the seller on the termination of the transaction. This is called residual income.
Servicing fees
The fees payable to the servicer for servicing the transaction.
Adjustable Rate Mortgages
Is a mortgage loan which has a coupon or interest rate that is subject to change on predetermined reset dates, on the basis of variations in a reference rate. These loans use interest rate indices as the reference rate. Adjustable rate loans may have cap and floor features, meaning the maximum rate and the minimum rates after giving effect to variations. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features.
Aging
Is the concept which assumes that newly issued mortgages tend to prepay slower than mortgages which are older or seasoned. This aging refers to the underlying collateral and not the securities created upon that collateral.
Amortization
Is the periodic paydown of principal. This is a common feature of most fixed rate loans. Amortization schedule refers to a schedule showing the payment of principal and interest over time for a loan. Compare with bullet payment.
Benchmark
A standard to measure, monitor, price or evaluate a security, derivative, or portfolio. It could also refer to a rate used as the basis for adjustable rate loans or mortgages. For example, the treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets. For fixed rate bonds, swap rates and yields on U.S. Treasury securities are common benchmarks. For floating rate bonds, LIBOR is a common benchmark.
Bond Equivalent Yield (BEY)
Yield calculated on the basis of semiannual compounding, as in the case of corporate bond yields. Although MBS and ABS usually pay monthly, their yields and spreads normally are converted to a BEY basis for easier comparison with U.S. Treasury securities, agency debt and corporate bonds.
Burnout
Is mortgage market phenomenon representing the tendency of mortgage pools to become less sensitive to interest rate after a period of low interest rates or as they move toward maturity. The older the pool, the more "burnt out" is the sensitivity to interest rate changes.
Constant Prepayment Rate; Conditional Prepayment Rate; CPR
a widely accepted model or framework for describing or measuring prepayments on pools of mortgage loans or other financial assets; 10% CPR refers to a constant annual prepayment rate of prepayment such that 10% of the balance of a pool of loans is prepaid during each year.
Convexity
The second derivative of price with respect to yield; the change in a bond's duration for a percentage point change in its yield. Ordinary (i.e., non-called) bonds have positive convexity. That is, as yields rise their price falls at a decreasing rate and as yields fall their prices rise at an increasing rate. Callable bonds, including most MBS and ABS, display negative convexity. In general, negative convexity is an adverse trait and investors require extra compensation (in the form of incremental yield) to accept it. Convexity is visible as the degree and direction of curvature in the price-yield function for each bond. The duration of a bond at a given yield corresponds to the slope of the tangent line to its price-yield function at that yield.
Curtailment
A partial prepayment; a prepayment for less than the full outstanding balance of the loan.
Debt to income ratio
As an important tool to evaluate consumer loans, this ratio measures the monthly required repayment under a borrowing to the monthly income of the borrower. Depending upon the definition of the analyst, the income could mean the cashflows left after mandatory deductions at source, other loan repayments, etc.
Delinquency

The condition of having failed to make one or more scheduled payments on a debt obligation. A borrower may be considered delinquent on its debt as soon as the due date for payment has passed, even though a grace period may apply. There are a number of different (and incompatible) methods that servicers of securitizations use for reporting delinquencies. For example, suppose (1) a securitized loan has payments due on the first day of each month (2) the servicer of the securitization reports on the condition of the loans as of the last day of each month, and (3) no payments are mad on the loan from January 1 through April 1. Three reporting methods would treat the loan as follows:

Discount Rate
Relative to securitizations, refers the interest rate used for computing the purchase price of receivables or the rate for computing present value of a sum payable in future.
Duration
(1) the negative of the first derivative of price with respect to yield; (2) the percentage change in a bond's price for a percentage point change in its yield. Nearly all bonds have positive duration (i.e., as yields rise their price falls). Interest-only MBS can have negative duration. Calculating duration is straightforward for bonds with fully predetermined cash flows. Estimating duration of a callable bond, such as an MBS, requires making assumptions about the timing of future prepayments.
Extending
Is a term to indicate an increase in the duration of mortgage backed and related securities. Generally, it is a consequence of slower-than-expected prepayments
Factor
The decimal value, calculated monthly, that represents the proportion of the original principal amount outstanding at a given time.
Fixed-Rate Mortgage
A mortgage loan with an interest rate and payments that do not change over the life of the loan. Contrast with adjustable rate mortgage.
Floating Rate
Refers to the condition whereby interest rate or exchange rates are free to change. Normally the basis of variation is provided
Floor
The minimum rate of interest payable on an adjustable-rate mortgage
Foreclosure
The exercise of an owner or secured creditor's rights over an asset to liquidate the amounts payable under a defaulted loan or credit contract. For example, in context of mortgages, the seizure of the mortgaged property; in case of leases, the repossession of leased property. Sometimes, could also refer to the prepayment of a mortgage or lease.
Hair cut
In context of capital adequacy requirements, means the extent of marginal capital needed for a particular asset. For example, the haircut for a regular loan given by bank is 8%; in case of lower risk-weighted assets, the haircut is lesser.
Home equity loans; HELs

A major asset class backing ABS. Traditionally the term "home equity loan" referred to a second mortgage loan. More recently, in the context of ABS, the term refers broadly to virtually all loans secured by residential real estate other than prime quality first mortgage loans. ABS professionals sometimes include all the following types of residential real estate loans within the HEL category:

  • Subprime mortgage loans (i.e., first lien loans to subprime borrowers)
  • Second lien mortgage loans
  • Home equity lines of credit (i.e., revolving lines of credit secured by the borrowers' homes)
  • High LTV mortgage loans

A loan granted based on the "equity" a home owner has built into his owned house, i.e., the excess of the market value of the house over the loans already taken. Typically, the home equity lender takes a secondary charge over the house if already mortgaged to a primary lender.

Implicit rate of return
The rate of return inherent in an investment paying back in periodic installments - the rate is derived mathematically so as to give a constant periodic rate on outstanding investment during any period, and fully pay back the principal invested at the end of the period.
Interest Rate
Is either the coupon or floating rate attached to a credit instrument or lending operation.
Jumbo Loan
A conventional loan that is too large to be purchased by Fannie Mae or Freddie Mac. Most of the time, the term jumbo loan refers to a loan that meets all applicable requirements of the Fannie Mae/Freddie Mac programs, except for size.
Loan to value ratio
In case of asset-based lending, means the amount of loan as a percent of the value of the asset on which the loan is secured.
Loss Mitigation

Sometimes a servicer can resolve a non-performing loan with techniques other than foreclosure. Examples include:

  • Taking a deed in lieu of foreclosure
  • Helping the borrower to sell the property
  • Accepting less than the full UPB in settlement of the loan on a sale of the property (short sale)
  • Establishing a forbearance plan in which servicer agrees not to proceed with the foreclosure for a defined period during which the borrower pays more than his scheduled payment each month to catch the loan up to a current status;

In any such cash, the servicer's objective is to maximize the recovery on the loan as quickly as possible. In choosing the best strategy, a servicer must be able to accurately assess both the value of the underlying property and the time required for the whole foreclosure/liquidation process.

Mortgage
Is a creation of security interest, normally over real property, in order to secure a loan or debt obligation.
Non-Performing Mortgage Loan
A residential mortgage loan that is in default and on which the borrower has ceased making payments. In essence, a non-performing loan represents the right to the eventual proceeds of the foreclosure on or other disposition of the underlying mortgaged property.
Prepayment
Receipt of principal proceeds in excess of amounts scheduled to be paid in a given period, in full or partial satisfaction of a loan, either through voluntary payment by the borrower (see "Voluntary Prepayments"), or through the liquidation of the property collateralizing the loan (see "Involuntary Prepayments").
Voluntary Prepayment

Payment by the borrower, of principal in excess of amounts scheduled to be paid in a given period, in full or partial satisfaction of a loan. Prepayment of the entire remaining balance on the loan is called a prepayment in full. Prepayment of a portion of the remaining balance is called a curtailment.

Voluntary prepayments in full happen for many reasons but the two most important are refinancing and housing turnover.

  • A refinancing prepayment occurs when a homeowner pays off his mortgage with the proceeds of a new loan.
    • Often, the homeowner's motivation for getting a new loan is to obtain a lower interest rate on his new loan than he had on his old loan (rate/term refinancing).
    • Sometimes the homeowner's reason for refinancing is to borrow more money (cash-out refinancing).
  • A housing turnover prepayment happens when a homeowner sells his home. Most conventional mortgage loans include a "due on sale" clause, which requires the borrower to repay the entire amount of the loan upon the sale of the related home.
Prepayment Curve
A graphical representation of the percentage of each period's unpaid principal balance, after deducting scheduled principal payments for the period, that has been reduced due to prepayments.
Prepayments in Full
Receipt of principal proceeds in excess of amounts scheduled to be paid in a given period, in full satisfaction of a loan, either through voluntary payment by the borrower (see "Voluntary Prepayments"), or through the liquidation of the property collateralizing the loan (see "Involuntary Prepayments").
Prepayment Rate; Prepayment Speed
Describes the pace of prepayments of the mortgage loans underlying and MBS or ABS.
Seasoning
Refers to the changes in the character of loans as they age.
Unpaid Principal Balance; UPB
The outstanding amount of a loan or bond; the amount that must be paid (together with and interest and any applicable prepayment penalties and fees) to repay a debt.
Weighted-Average Coupon (WAC)
The weighted average of the interest rates on the mortgage loans in a portfolio. In calculating the WAC of an asset pool, the interest rate of each loan is weighted by its balance.
Weighted-Average Life (WAL)

The average amount of time that will elapse from the date of a security's issuance until each dollar of principal is repaid to the investor. The weighted-average life of an MBS is only an assumption. The average amount of time that each dollar of principal is actually outstanding is influenced by, among other factors, the rate at which principal, both scheduled and unscheduled, is paid on the mortgage loans underlying the MBS.

In calculating a securities WAL, each payment date is expressed as the interval between the time of calculation and the payment date. Each interval is weighted by the amount of principal that will be distributed on the corresponding payment date.

Weighted-Average Maturity (WAM)
The weighted average of the remaining terms to maturity (expressed in months) of the mortgage loans underlying the MBS. In calculating the WAM of an asset pool, a loan's maturity (expressed in months from the time of calculation) is weighted by the loan's balance.

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