Introduction
The secondary mortgage market is a complex environment with its own specialized language. Understanding key terminology is crucial for mortgage professionals to navigate its intricacies, whether involved in origination, servicing, trading, or investment. This glossary defines some of the most common and important terms you'll encounter, providing a foundational understanding for clearer communication and decision-making in the dynamic world of mortgage finance.
Core Pricing and Valuation Terms
Understanding how loans and securities are priced is fundamental.
Par
A price of 100% of face value. When a loan or security is sold at "par," the price paid is equal to its outstanding principal balance.
Discount
In secondary market sales, a discount is the amount by which the sale price of a note is less than its face value (e.g., a price of 98 or 98% of face value). The purpose of a discount is to adjust the yield upward for the investor.
Premium
An amount paid, often in addition to the interest, to secure a loan. In secondary market sales, it's the amount by which the sale price of a note is more than its face value (e.g., a price of 102 or 102% of face value). This adjusts the yield downward for the investor.
Basis Point (bps)
One one-hundredth of one percent (0.01%). Interest rates, yields, and fees in the mortgage market are often quoted in basis points. For example, 0.25% is equal to 25 basis points.
Tick
A minimum change in price—up or down. In the mortgage securities market, a tick is generally measured in 1/32 of a point.
Net Pricing
This represents the price paid for a loan minus any discount applied.
Risk-Based Pricing Adjustment
An adjustment added to the rate of return required to attract capital (an investor) to a particular investment, reflecting the perceived risk of that investment.
Servicing-Related Terminology
The rights and fees associated with managing the loan are key components.
Servicing Released Premium (SRP)
A premium paid by an investor to the originator or seller of a loan for the release of the servicing rights along with the loan itself. This is valuable to the investor as servicing represents an additional income stream. For the originating lender, SRP is an additional premium received.
Servicing Fee
The fee earned by a servicer for administering a loan for an investor. It's usually expressed as a percentage (basis points) of the unpaid principal balance of the loan and is deducted from the monthly mortgage payment before remittance to the investor.
Excess Servicing
Cash flows generated from a servicing portfolio that are greater than the actual costs incurred to service the loans within that portfolio.
Terms Related to Securities and Market Structure
The secondary market involves pooling loans into securities and various entities facilitating these processes.
Mortgage-Backed Security (MBS)
An investment instrument backed by a pool of mortgage loans as security. Ownership is typically evidenced by an undivided interest in the pool. Income from the underlying mortgages is used to pay interest and principal on the securities to investors.
CMO (Collateralized Mortgage Obligation) / REMIC (Real Estate Mortgage Investment Conduit)
Specialized types of mortgage-backed securities that are structured to meet specific investor cash-flow requirements by creating various tranches with different risk and maturity characteristics.
Securitization
The process of pooling loans (like mortgages) to create securities (such as MBS, CMOs, or REMICs). This process disperses risk (which can then be statistically analyzed) and generally creates more liquid instruments than whole loans.
Agency / GSE (Government Sponsored Enterprise)
Refers to entities like Fannie Mae, Freddie Mac, and Ginnie Mae. These organizations play a crucial role in the secondary market by purchasing conforming and government loans, issuing MBS, or guaranteeing securities. The Federal Home Loan Banks (FHLB) are also GSEs.
Conduit
An entity that aggregates mortgages from various originators. A conduit may then securitize these loans or sell them as pools to agencies or other investors. They often deal in non-conforming mortgages like jumbo, Alt-A, or subprime loans.
Whole Loan Sale
The sale of an entire individual mortgage loan (both principal and servicing rights, unless specified otherwise), rather than selling it as part of a security or selling off different aspects (like servicing) separately.
REIT (Real Estate Investment Trust)
A company, often publicly traded, that owns (and typically operates) income-producing real estate or real estate-related assets. REITs have a tax-favored structure for holding investments in commercial or residential real estate.
Key Rate and Fee Definitions
Distinguishing between different rates and fees is important.
Note Rate
The interest rate stated in the mortgage note, which evidences the borrower's personal obligation to repay the loan at that stated rate.
Security Rate / Coupon Rate
The interest rate stated on the face of a mortgage-backed security. This is not necessarily the same as the weighted average of the note rates of the mortgages in the pool backing that security due to fees and other factors.
Guaranty Fee (G-Fee)
The fee paid (typically by the lender/servicer to an agency like Fannie Mae, Freddie Mac, or Ginnie Mae) for guaranteeing to an investor the timely payment of principal and interest from the mortgages underlying an MBS.
Buy-Up
An upfront payment made to a loan seller (e.g., by an investor to a lender) in exchange for a higher ongoing guarantee fee on a mortgage-backed security.
Buy-Down
A fee paid (by the builder, seller, or borrower) to obtain a mortgage with a below-market interest rate, often for an initial period. The term also refers more generally to the act of paying points to reduce the interest rate.
Conclusion
The language of the secondary mortgage market can seem complex, but understanding these key terms is essential for anyone involved in mortgage banking. From pricing and valuation to servicing and securitization, clear definitions help professionals communicate more effectively, make more informed decisions, and better understand the forces that shape the industry. While this glossary covers common ground, the mortgage market is ever-evolving, making continuous learning a valuable asset.
