Glossary & Terms

ACRONYMS TERMS AHP: Affordable Housing Program Adjustable-rate mortgage (ARM): A mortgage loan with an interest rate on the note that is periodically AMA: Acquired Member Asset (FHLBs) adjusted based on an index that reflects the cost to the AMI: Area median income lender of borrowing on the credit markets. Most ARMs allowed in programs covered in this Guide are hybrid ARM: Adjustable-rate mortgage ARMs that have an initial fixed-rate period. ARMs may CIP: Community Investment Program have restrictions, or cap rates, on the amount of the CRA: Community Reinvestment Act first, periodic, and lifetime total changes in the interest rate. DTI: Debt-to-income ratio Aggregator: An entity that purchases mortgages from DU: Desktop Underwriter® (Fannie Mae) financial institutions and typically securitizes them into FDIC: Federal Deposit Insurance Corporation mortgage-backed securities that are then sold to the secondary mortgage market. FHA: Federal Housing Administration AMA investment grade: This is a determination by FHFA: Federal Housing Finance Agency the FHLB with respect to an asset or pool, based on FHLBs: Federal Home Loan Banks documented analysis, including consideration of applicable insurance, credit enhancements, and other Government-sponsored enterprises (refers to GSEs: sources for repayment on the asset or pool, that the Fannie Mae and Freddie Mac) FHLB has a high degree of confidence that it will be HUD: U.S. Department of Housing and paid principal and interest in all material respects, even Urban Development under reasonable likely adverse changes to expected economic conditions. IDA: Individual development account AMA program: An FHLB-established program to LMI: Low- and moderate-income buy mortgage loans, which may comprise multiple LLPA: Loan-level price adjustment AMA products.

LTV: Loan to value Approved lender: Lenders that apply for and meet requirements established by the entity (i.e., the Federal MBS: Mortgage-backed security Housing Administration, U.S. Department of Housing MPF: Mortgage Partnership Finance® Program and Urban Development, the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture, MPP: Mortgage Purchase Program and the government-sponsored enterprises) are PFIs: Participating Financial Institutions (FHLBs) granted permission to participate in the entity’s programs. Approved activities may include origination, PMI: Private mortgage insurance underwriting, purchasing, holding, servicing, or selling USDA: U.S. Department of Agriculture mortgages. Common eligibility requirements include a VA: U.S. Department of Veterans Affairs

61 | FDIC | Affordable Mortgage Lending Guide net worth threshold, a checklist of financial statements, can be carried out by the correspondent or the and a quality control program. investor. As a correspondent lender, the originating lender is acting as an extension of the investor. For Approved seller/servicer: An institution approved example, correspondent lenders work with approved to sell mortgages to, and to service mortgages pur- seller/servicers to originate government-sponsored chased by the entity (i.e., Fannie Mae or Freddie Mac). enterprise loan products. Common eligibility requirements include a net worth threshold, a checklist of financial statements, and a Credit enhancement obligation: Mortgage Partnership quality control program. Finance® Program credit-enhanced products divide mortgage losses on a given master contract between Area loan limits: Entities establish the maximum loan the FHLB and the member. The credit enhancement that can be insured, purchased, or guaranteed by the obligation defines the amount of risk assumed by the entity or program. Limits are based on median home member for the realized losses of a specific master values at the county level and entities typically update commitment. Member credit enhancement obligation limits annually. For example, the Federal Housing funds are applied to losses only after the FHLBs’ first Finance Agency (FHFA) sets “conforming loan limits” loss account has been depleted. for the government-sponsored enterprises, the Federal Housing Administration sets “statutory loan limits” for Down payment: A payment made in cash at the onset approved lenders, the U.S. Department of Agriculture of the purchase of an expensive asset. Homebuyers has “area loan limits,” and the U.S. Department of typically pay down payments that equal 5-25 percent Veterans Affairs follows FHFA guidelines. of the total value of a home although some federal and GSE programs allow lower down payments. Basis points: A basis point is one hundredth of 1 percent. That is, one basis point equals 0.01 percent or FICO score: A type of credit score that lenders use to there are 100 basis points in 1 percent. It is a common assess a borrower’s credit risk. FICO stands for Fair unit of measure for interest rates. Isaac Corporation, the company that created the FICO score. Scores are calculated using borrower credit Closing costs: Fees incurred by the borrower and/ or reports and range from 300 to 850. A lower score seller for costs associated with the closing transaction. indicates the borrower has poorer credit, and a higher Common fees include appraisal fees, tax service score indicates the borrower has stronger credit. provider fees, title insurance, government taxes, and prepaid expenses such as property taxes and First loss account: Mortgage Partnership Finance homeowner’s insurance. Fees are generally paid up Program credit-enhanced products divide losses front at closing or the lender may roll them into the between the FHLB and the member. The first loss mortgage, resulting in higher monthly payments. account is the amount of risk absorbed by the FHLB from the realized losses of a specific master Conventional loan: A mortgage that is not insured or commitment. FHLB first loss account losses are taken guaranteed by a Federal government agency, i.e., the prior to any credit enhancement obligation due from Federal Housing Administration, U.S. Department of the member. Housing and Urban Development, the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture, First mortgage: A mortgage in the first-lien position and the Bureau of Indian Affairs. Conventional loans that has priority over all other liens or claims in the include both loans that conform to government- event of default. sponsored enterprise (GSE) guidelines and those that Fixed-rate mortgage: The interest rate is defined when do not conform. Conventional mortgages delivered to the borrower takes out the mortgage and does not the GSEs are also known as conforming mortgages. change over the loan term. Correspondent lender: A lending institution that Ginnie Mae: Short for the Government National originates and funds loans in its own name and Mortgage Association. Ginnie Mae guarantees timely then sells them to another lender or investor. The payments on mortgage-backed securities (MBS) underwriting function in a correspondence relationship backed by federally-insured loans including those

FDIC | Affordable Mortgage Lending Guide | 62 insured by the U.S. Department of Veterans Affairs, should be distinguished from hazard insurance, which Federal Housing Administration, U.S. Department a homeowner purchases to cover losses from, for of Agriculture Rural Development, and the U.S. example, fire or theft. Department of Housing and Urban Development Participating financial institution (PFI): A member or Office of Public and Indian Housing. Ginnie Mae housing associate of an FHLB that is authorized to sell, securities are the only MBS guaranteed by the credit enhance, or service mortgage loans to or for Federal government. its own FHLB through an AMA program, or a member Haircut: The percentage by which the market value of or housing associate of another FHLB that has been an asset(s) is reduced for the purpose of calculating authorized to sell, credit enhance, or service mortgage collateral requirements. loans to or for another FHLB pursuant to an agreement between the FHLB acquiring the AMA product and the Loan limit: The maximum allowable mortgage amount FHLB of which the selling institution is a member or under a particular program established by the federal housing associate. agency or government-sponsored enterprise (GSE), generally according to statutory parameters. For Pool: Defined by the FHLBs as a group of loans example, the Federal Housing Finance Agency (FHFA) acquired under one or more loan funding sets “conforming loan limits” for the GSEs, the Federal commitments, contractual agreements, or Housing Administration sets “statutory loan limits” for similar arrangements. approved lenders, the U.S. Department of Agriculture Private mortgage insurance (PMI): An insurance has “area loan limits,” and the U.S. Department of policy that protects lenders against loss if a borrower Veterans Affairs (VA) follows FHFA guidelines. defaults on a conventional loan. PMI is required for Loan-to-value (LTV) ratio: A ratio that compares the government-sponsored enterprise loans with loan-to- amount of the first mortgage with the appraised value value ratios over 80 percent. Purchasing PMI allows the of the property. It is calculated by dividing the loan borrower to make a smaller down payment. amount by the value of the property. The higher the Representations and warranties : Assertions that the down payment, the lower the LTV. seller makes in a purchase and sales agreement about Low- and moderate-income (LMI) communities: Low- the nature of the loan and which in turn form the income geographies have a median family income less basis for due diligence. If lenders are found to violate than 50 percent of the area median income. Moderate- representations and warranties, secondary market income geographies are those whose median family entities may force the lender to repurchase the loan or income is at least 50 percent but less than 80 percent may refuse insurance or guarantee claims. This is a tool of the area median income. Banks regulated under the for ensuring loan originators comply with the credit Community Reinvestment Act are evaluated on how terms required by the secondary market entities. well they meet the credit needs of low- and moderate- Secondary mortgage market: Market in which income communities. previously issued mortgages and mortgage-backed Master Commitment: A contractual agreement securities are traded among lenders and investors. between the purchaser and seller of mortgages that Underserved areas: Federal agencies designate provides the terms of the sale, including mortgage defined geographic regions (often specific census eligibility requirements and the time period for which tracts) as “underserved” based on median income and the agreement holds. minority population levels for purposes of directing Mortgage insurance: An insurance policy paid for by federal funds to improve the community or for other the borrower with the lender as beneficiary, in which purposes, including the assessment of how well a third party—the insurer—takes some of the loan- Community Reinvestment Act (CRA) regulated lenders default risk. In the event of foreclosure, the insurer are meeting their CRA obligations. pays a set amount to the lender to cover some or all of the outstanding loan balance. Mortgage insurance

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