Mortgage Servicing Glossary

appraisal. An independent evaluation of a property’s value. For single-family residences, the critical factor is comparables, or “comps,” which are recent sales of similar homes nearby. Lenders can use automated appraisal systems (automated valuation model) or can physically appraise the house (manual appraisal).

capitalized unpaid principal balance. The unpaid principal balance at default plus delinquent interest, taxes, and insurance payments in arrears.

Claim without Conveyance of Title program. This US Department of Housing and Urban Development (HUD) program, which has been in effect since 1987, encourages third parties to purchase foreclosed homes directly from servicers instead of having servicers convey the homes to the FHA.

credit overlays. Credit underwriting requirements or surcharges imposed by lenders above the requirements set by the FHA, Fannie Mae, or Freddie Mac. Lenders use credit overlays to manage their risk exposure.

cure. If a delinquency is fixed, the mortgage becomes current and is considered cured.

debenture interest. The interest on the outstanding mortgage balance that accrues to the servicer from the date of default to the day the FHA pays out the insurance proceeds to the lender.

debenture interest curtailment. The amount of the debenture interest a servicer loses for failing to comply with the FHA’s loss mitigation policies and procedures.

deed in lieu of foreclosure. A foreclosure alternative under which the borrower voluntarily transfers ownership of the property to the mortgage owner in exchange for a release from all mortgage obligations.

delinquency. When a borrower falls behind on mortgage payments. Mortgages are typically measured as 30 days, 60 days, or 90 days delinquent. After a borrower is 90 days delinquent, the mortgage is considered seriously delinquent.

distressed properties. Homes whose owners cannot maintain them. These properties suffer from neglect, can be vacant or abandoned, or are in poor condition.

Fannie Mae and Freddie Mac. The two major government-sponsored enterprises, or GSEs, that operate in the mortgage market. They purchase mortgages from lenders, pool them into mortgage-backed securities (MBS), and guarantee timely payment of principal and interest to investors, thus taking on the credit risk of the securities while leaving investors with only interest rate risk. They charge a guarantee fee, or g-fee, for this guarantee. Like a servicing fee, this is a “strip.”

Federal Housing Administration, or FHA. An entity within HUD that insures low–down payment mortgages for low- and moderate-income borrowers and first-time homebuyers. The price of the insurance is called the mortgage insurance premium. It is held in reserve in the FHA’s Mutual Mortgage Insurance Fund as a buffer against losses.

Federal Housing Finance Agency, or FHFA. The federal regulator of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

federal procurement laws. Federal laws governing the procurement of goods and services by a government entity.

FHA insurance claim. What a servicer of an FHA-insured mortgage files with the FHA to seek reimbursement for the shortfall between the outstanding loan amount and the net proceeds from the sale of a foreclosed property.

FHA property conveyance. When an FHA servicer forecloses on a home, the property must be repaired and then transferred or “conveyed” to HUD. The property must meet HUD’s property condition requirements before it can be transferred.

Flex Modification. A Fannie Mae and Freddie Mac loan modification program that replaced the Home Affordable Modification Program. It lowers borrowers’ monthly payments to help avoid foreclosure.

forbearance. A loss mitigation option under which borrowers’ monthly payments are temporarily suspended, usually for no more than a year. Forbearance gives borrowers time to work out whatever financial hardship is preventing them from paying their mortgage, such as finding a job after becoming unemployed.

foreclosure. The legal process used to resolve a distressed mortgage so the servicer can sell the property securing the loan and use the proceeds to satisfy the loan. There are two types of foreclosure: judicial and nonjudicial. A judicial foreclosure requires the servicer to file a foreclosure action in court. A nonjudicial foreclosure requires notice of a foreclosure sale and publication.

Ginnie Mae. A US government corporation within HUD that guarantees securities backed by loans insured by the FHA, the VA, and the Rural Housing Service.

lien. The security interest in a property granted to a mortgage lender or other creditor that can be redeemed if the loan is not paid according to agreed terms. First liens have first call on the property. Second and subsequent liens stand behind and are less secure than the first (i.e., they only get paid if any funds are available after the first lien holder is fully paid).

loan modification, or “mod.” A loss mitigation tool in which the lender alters the original terms of a mortgage in the delinquent borrower’s favor so the borrower can resume making monthly payments. Loan modifications often reduce losses and are cheaper for servicers and investors than foreclosures, which are time consuming and expensive. Modifications can extend the term of the loan, reduce the interest rate, reduce the principal (either through principal forgiveness or principal forbearance), or a combination of the three.

mark-to-market loan-to-value ratio, or MTMLTV. The unpaid principal balance of a mortgage divided by the property’s current market value. It measures how much equity (or negative equity) a borrower has in the home.

mortgage insurance, or MI. A type of insurance or insurance substitute (also known as a credit enhancement) on a high-risk (high-LTV) loan that protects lenders, insurers, and guarantors against losses from defaults on home mortgages.

mortgage originators. Companies that make mortgage loans to borrowers. Originators “underwrite” borrowers to determine whether they have the capacity and willingness to repay the loan. There are two types of originators: (1) depositories, namely banks, thrifts, and credit unions; and (2) nondepositories or independent mortgage bankers.

mortgage servicing right, or MSR. The financial instrument that spells out the obligation to service mortgage loans and the right to collect servicing fees in return. Mortgage servicing rights are bought and sold in an open market.

nonperforming loan, or NPL. A loan that is in default. Many loans become nonperforming and are considered “in default” after being delinquent for 90 days, but this can depend on the contract terms.

original loan-to-value, or LTV, ratio. The original loan amount divided by the home’s value at origination. All other things equal, a high-LTV loan is riskier to the lender because the borrower has a smaller investment in the first-loss position.

P&I. The principal and interest paid on a mortgage loan as part of a borrower’s monthly payment.

PITI. The principal, interest, taxes, and insurance that a borrower pays if the borrower places money in escrow with the servicer to cover taxes and insurance. P&I is a subset of PITI.

partial claim. HUD’s Partial Payment of Claims, or partial claim, program is used with a loan modification. It involves paying the servicer a portion of the insurance proceeds, which the servicer uses to reduce principal on a delinquent mortgage to reduce the monthly payment for the borrower. In a partial claim, HUD secures repayment from the borrower by placing a junior lien on the home, which must be paid in full when the loan is paid off or the house is sold.

performing loan. Loan on which payments of monthly interest and principal are current.

Primary Mortgage Market Survey, or PMMS. Freddie Mac’s PMMS surveys lenders each week on the rates and points for their most popular 30-year fixed-rate, 15-year fixed-rate, 5/1 hybrid amortizing adjustable-rate, and 1-year amortizing adjustable-rate mortgage products. The survey is based on first-lien prime conventional conforming mortgages with LTV ratios of 80 percent.

Pooling and Servicing Agreement, or PSA. The legal document that establish the rules under which loans in an MBS are pooled together and serviced. In the private-label market, PSAs vary from deal to deal and often include restrictions on the type and number of loan modifications in a pool.

real estate owned, or REO. Describes property owned by a servicer or investor after foreclosure or a deed in lieu.

recast. A type of loan modification in which the loan principal is reduced without buying the loan out of the MBS pool. The new (reduced) loan balance is then “recast” at the original interest rate and remaining term, resulting in a more affordable monthly payment.

recourse. A situation in which a lender may go after a delinquent borrower for any portion of the loan not paid off by the sale of the house, which is called the “deficiency.” Nonrecourse is the opposite. After the collateral is sold, the loan is considered fully paid. Judicial foreclosure procedures permit lenders to seek to recover any deficiency, while nonjudicial procedures do not.

re-pooling. The process of buying a securitized loan out of an MBS, typically for loan modification purposes, and selling it back into a security after the delinquency is cured.

servicers. The entities that collect and transfer mortgage payments from borrowers to investors, manage escrow accounts (payment of taxes and insurance), provide mortgage assistance through loss mitigation, and administer foreclosures. Servicers can be depositories (banks) or nondepositories (nonbanks). Servicers get paid a percentage of the loan amount each month. This is called a “strip” because it strips off a portion of the monthly loan payment.

short sale. A foreclosure alternative under which the owner of the mortgage agrees to sell the home for a price below the outstanding unpaid principal balance. A short sale by itself does not relieve the borrower from the obligation to pay the remaining loan balance, unless the owner of the mortgage waives the deficiency.

strip. A stream of revenue. Residential mortgage strips include principal strips, interest strips, guarantee fee strips, and servicing fee strips, all of which are a part of a borrower’s monthly payment. Strips can be separated from the monthly payment and securitized for sale to investors.

unpaid principal balance, or UPB. The portion of loan principal at a certain point that has not yet been repaid.

US Department of Agriculture, or USDA. The federal agency in charge of the nation’s agriculture, rural development, and food nutrition. The Rural Housing Service, part of the USDA, insures single-family residential loans to borrowers in rural areas.

US Department of Veterans Affairs, or VA. The federal agency in charge of administering veterans benefits, including VA-insured mortgages.