Loan Modification Glossary
Acceleration Clause: Mortgage loan provision advancing date of full payment under certain circumstances.
Adjustable-rate mortgage (ARM): Mortgage providing periodic changes in the interest rate based on changing market conditions.
Appraisal: Estimating the value of real property as for sale, assessment or taxation usually performed by licensed/certified appraiser.
Amortization: the act of gradually paying off a debt (includes principal and interest) in regular installments over a period of time. Earlier payments are distributed to interest while later payments are distributed to the principal.
Auction: Public sale in which property is sold to highest bidder
Balloon Payment Mortgage: Mortgage which does not fully amortize over the term of the note leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. More common in commercial real estate than in residential real estate and may have a fixed or a floating interest rate.
Bankruptcy: A debtor upon voluntary petition or one invoked by the debtor’s creditors is judged legally insolvent. The debtor’s remaining property is then administered for the creditors or is distributed amount them. The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. Corporations and other business forms file under Chapters 7 or 11.
Borrower: Party in a loan agreement receiving money or other financial instrument from a lender and promising to repay in a specified time.
Collateral: Property or its equivalent a debtor deposits with a creditor to guarantee repayment of debt. Security or property which becomes subject to seizure upon default.
Complaint: Initial pleading starting a lawsuit and sets forth the allegations made by the plaintiff against the defendant and the plaintiff’s demand for relief.
Conforming Loan: Conventional mortgage loan under $203,150 that conforms to the loan amounts and mortgage guidelines used for Fannie Mae and/or Freddie Mac.
Conventional Loan: A fixed rate, fixed term mortgage loan issued to a borrower other than one insured by the Federal Housing Agency or guaranteed by the Department of Veterans Affairs.
Conveyance: Transfer of title of property from one person to another.
Creditor: Person or firm to whom money is due.
Current market value: Value of property when appraised at current market prices.
Debtor: Person who is in debt or under financial obligation to another.
Deed: Written legal document by which title to land is conveyed/transferred between two parties.
Deed of Trust: An instrument securing a debt in which a debtor conveys the legal ownership of real property to a trustee to be held in trust for the benefit of the creditor or to be sold upon the debtor’s default to pay the debt: a mortgage with a power of sales also called trust deed.
Default: The failure to live up to the terms of a contract. Generally, used to indicate the inability of a borrower to pay the interest or principal on a debt when it is due.
Deficiency: The difference between the amount owed under a security agreement and the amount the creditor is able to recover upon default of the debtor by selling the collateral.
Deficiency Judgment: Judgment in favor of a creditor who has not satisfied the full amount of a claim against a debtor.
Discharge (Bankruptcy Discharge): An order given by the bankruptcy judge, at the conclusion of all legal steps in processing a bankrupt person’s assets and debts, which forgives those remaining debts which cannot be paid, with certain exceptions. Debts for fraudulent or illegal actions, alimony and child support and taxes are not dischargeable and remain owed (but often not collectible if the bankrupt person has nothing). A discharge is bad news for unsecured creditors.
Encumbrance: A burden, obstruction or impediment on property that lessens its value or makes it less marketable. It is any right or interest that exists in someone other than the owner of an estate and that restricts or impairs the transfer of the estate or lowers its value. This might include an easement, lien, mortgage, mechanic’s lien or accrued and unpaid taxes.
Equity: The net value of real property, determined by subtracting the amount of unpaid debts secured by (against) the property from the appraised value of the property.
Equity stripping: A practice attributable to certain mortgage lenders that seeks to take advantage of the ignorance or gullibility of borrowers. Often associated with refinancing, home equity line of credit, or home improvement lending, the practices can take one (or more) of several forms: saddling borrowers with more debt than the can handle, tricking a borrower into a loan with high rates and fees, and overcharging or charging twice for routine services.
Escrow: Written agreement authorizing the holding of funds by a custodian, usually a bank or trust company. Banks typically hold escrow accounts for real estate taxes and property insurance due on mortgaged property.
Estate: All assets a person possesses such as securities, real estate, business interests, physical possessions and cash.
Eviction: Physical expulsion of someone from real estate by the assertion of superior title or through legal proceedings.
Fair Market Value: Price at which an asset or service passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts.
Forbearance: A policy of restraint in taking legal action to remedy a default or other breach of contract, generally in the hope that the default will be cured, given additional time.
Foreclosure: Process by which a homeowner who has not made timely payments of principal and interest on a mortgage loses title to the home. The holder of the mortgage, whether it be a bank, a savings and loan, or an individual, must go to court to seize the property, which may then be sold to satisfy the claims of the mortgage.
Fixed Rate Mortgage: Mortgage loan secured by real property featuring an interest rate that is constant for the term of the loan. Contrast with Adjustable-Rate Mortgage
Foreclosure Sale: Public sale of a mortgaged property following foreclosure of the loan secured by that property. Depending on the type of foreclosure proceeding, the sale may be administered by the courts (judicial foreclosure) or by an appointed trustee (statutory foreclosure). Proceeds of the sale are used to satisfy the claims of the mortgagee primarily, with any excess going to the mortgagor
High-Cost Mortgage: The legislation tightens the definition of a "high cost mortgage" for which certain consumer protections are triggered. The new definition, which amends the "Home Ownership Equity Protection Act," (HOEPA) is as follows:
- first mortgages with APRs that exceed Treasury securities by six (6) percentage points;
- second mortgages with APRs that exceed Treasury securities by eight (8) percentage points; or
mortgages where total points and fees payable by the borrower exceed the greater of five percent (5%) of the total loan amount, or $1,000. The bill revises the definition of points and fees to be more inclusive. It allows for two bona fide discount points outside of the 5% trigger
Home Equity Loan: Loan secured by a second mortgage on one's principal residence, generally to be used for some non-housing expenditure. Generally two types are available. A line-of-credit home equity loan establishes a credit line that can be drawn upon as needed. A traditional second mortgage provides lump-sum proceeds at the time the loan is closed.
Home Ownership and Equity Protection Act (HOEPA): The Act, amending the Truth in Lending Act, establishes disclosure requirements and prohibits equity stripping and other abusive practices in connection with high-cost mortgages. It is enforced by the Commission for non-depository lenders and by the states through their attorneys general.
Interest: The amount charged by a lender to a borrower for the use of funds. The interest rate is typically expressed on an annual basis. Interest equals principal x interest rate x period of time.
Interest only mortgage: Mortgage in which the borrower pays only interest for a set term. At the end of this term, typically five to ten years in the United States, the loan converts to a fully amortizing loan in which both interest and principal are paid. An interest-only loan reduces loan payments in the early years of a loan, so borrowers who expect their income will grow over the loan term can take out a larger mortgage for purchase of a home.
Judgment: The final resolution of a suit; the official court decision regarding the parties' rights and obligations, including whether the plaintiff is entitled to relief defined in the suit.
Judicial Foreclosure: Having a defaulted debtor's property sold where the court ratifies the price paid.
Jumbo Loan: A loan for an amount exceeding the statutory limit placed on the size of loans that Freddie Mac and Fannie Mae can purchase. Such loans must be maintained in the lender's portfolio or sold to private investors rather than Fannie or Freddie. These loans are often sought for purchase of luxury homes.
Junior lien: Lien that will be paid after earlier liens have been paid.
Lien: A right of a party, typically a creditor, to hold, keeps possession of, or control the property of another to satisfy a debt, duty, or liability. A mortgage would create such a security interest or lien upon property in the event of default.
Lis Pendens: Latin for a pending suit, a legal notice warning all parties that there is a lawsuit that may affect rights in certain property. The notice is published in a newspaper.
Modification: An adjustment of the terms of a loan during its term in a way not accounted for in the original loan contract but accepted later by mutual consent of the lender and borrower. Usually a concession to the borrower in an attempt to avoid foreclosure.
Mortgage: Debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid.
Mortgagee: The lender who arranges mortgage financing, collects the loan payments, and takes a security interest in the property financed.
Mortgagor: The borrower in a mortgage contract who mortgages the property in exchange for a loan and gives the title to the property to the mortgagee.
Negative Amortization Mortgage: Financing arrangement in which monthly payments are less than the true amortized amounts and the loan balance increases over the term of the loan rather than decreases; the interest shortage is added to the unpaid principal. In some cases, the interest shortage is added back to the loan and payable at maturity. For example, amortized payments for the first six months of a 30-year mortgage loan would be based on a 13% rate, but interest would be charged against equity at 18%; this rate charge would fluctuate every six-month period. In some loans, the negative amounts may be made up by applying such deficits against the borrower's down payment equity. Federal law requires mortgage lenders to make sure that borrowers understand the potential impact of negative amortization in several interest rate scenarios through a series of extensive disclosure documents.
Non-judicial Foreclosure: In states that use a deed of trust as a mortgage contract and in states that provide for such, a method of foreclosure that allows the lender to sell the property directly with no assistance from the courts. Contrast with judicial foreclosure.
Non-Recourse: loan where the lender's source of repayment is the cash flow generated by a project financed by the loan or the collateral securing the loan. The nonrecourse form of financing commonly is used in factoring of accounts receivable. The lender fully assumes the credit risk. If the borrower defaults, the lender's only recourse is to foreclose on the collateral backing the loan; the borrower is not liable personally for repayment. In a nonrecourse mortgage loan, for example, the lender must look to the collateral, rather than the borrower, as the ultimate source of repayment.
Note: formal unconditional promise in writing to pay on demand or at a future date a definite sum of money. The person who signs the note and promises to pay is called the maker of the note. The person to whom payment is to be made is called the payee of the note.
Notice of Default: A letter sent to a defaulting party as a reminder of the default. It may state a grace period and the penalties for failing to cure the default.
Power of Sale: A clause, sometimes inserted in mortgages or deeds of trust, which grants the lender (or trustee) the right to sell the property upon certain default. The property is to be sold at auction but court authority is unnecessary.
Predatory Lending: A practice attributed to certain mortgage lender that seeks to take advantage of the ignorance or gullibility of borrowers. Often associated with refinancing, home equity line of credit , or home improvement lending, these practices can take one (or more) of several forms: saddling borrowers with more debt than they can handle, tricking a borrower into a loan with high rates and fees, and overcharging or charging twice for routine services.
Prepayment Penalty: fee paid by a borrower to a bank when a loan or mortgage that does not have a prepayment clause is repaid before its scheduled maturity.
Principal: face amount of a loan evidencing the amount repayable, exclusive of interest, according to the terms of the note securing the obligation.
Promissory Note: See Note.
Public Trustee: one who holds legal title to property in trust for the benefit of another person, and who is required to carry out specific duties with regard to the property, or who has been given power affecting the disposition of property for another's benefit.
Quit-Claim Deed: Deed that conveys only that right, title, or interest that the grantor has, or may have, and does not warrant that the grantor actually has any particular title or interest in the property. The grantor under a quitclaim deed releases whatever interest he may have to the grantee.
Refinance: To replace an old loan(s) with a new loan(s).
Right of Redemption: The legal right of a mortgagor to redeem the property after it has been sold at a foreclosure sale. This right is granted by state law for a limited period of time, depending on the state.
Right of Reinstatement: The borrower’s right to pay off the entire loan between the time when the foreclosure has begun until before the actual sale date and in doing so stop all foreclosure action.
Strict Foreclosure: A foreclosure proceeding in which the mortgagee has the right to possess the mortgaged property directly upon default on the mortgage agreement.
Subprime Mortgage Loan: A a financial term that was popularized by the media during the "credit crunch" of 2007 and involves financial institutions lending in ways which do not meet "prime" standards to an extent which puts the loans into the riskiest category of consumer loans typically sold in the secondary market. These standards refer to the size of the loan, "traditional" or "nontraditional" structure of the loan, borrower credit rating, ratio of borrower debt to income or assets, ratio of loan to value or collateral, documentation provided on those loans which do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages (are "non-conforming"). Although there is no single, standard definition, in the US subprime loans are usually classified as those where the borrower has a FICO score below 640. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards. Subprime borrowers show data on their credit reports associated with higher default rates, including limited debt experience, excessive debt, a history of missed payments, failures to pay debts, and recorded bankruptcies.
Trustee: One who holds property in trust for another to secure performance of an obligation; the neutral party in a trust deed transaction.
Truth in Lending Act (TILA): act passed by Congress in 1969 requiring lenders to disclose key terms in extensions of credit. The act, part of the Consumer Credit Protection Act, requires venders to disclose the method of computing finance charges, the conditions under which a finance charge may be imposed, and the finance charge expressed as an Annual Percentage Rate . These credit terms must be disclosed clearly and conspicuously in consumer credit applications. The act also requires that borrowers who sign credit agreements giving the lender a security interest in the borrower's home have the right to rescind the contract within three business days. This is known as the borrower's right of rescission. The Truth in Lending Act, the earliest of the federal consumer protection statutes, has been amended several times, and has been copied in several states by state laws containing similar consumer protections.
