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Glossary of Finance and Economic Terms (N-R)

Please Note: All definitions used in this glossary were derived from the Freddie Mac Seller/Servicer Guide glossary. For specific information governing the use of material presented on this website, see our Terms & Conditions.

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Negative Equity. Condition achieved when the market value of a property declines by more than the borrower’s equity position--that is, the sum of the original down payment, any loan principal repayments and house-price appreciation. For example, suppose a borrower puts down $20,000 to buy a home, and the value of the property promptly declines by more than $25,000. The negative equity amounts to $5,000, meaning the borrower would have to pay $5,000 out-of-pocket to immediately refinance into a 0-percent equity loan at a lower interest rate. 

No-Closing-Cost Mortgage. Loan that transfers to a lender the borrower’s  responsibility to pay the fees associated with executing a mortgage. Fees often  can exceed $5,000. This arrangement frees borrowers of the need to bring  cash to the closing table when refinancing, rendering obsolete the guidance  that interest rates must drop by 2 percentage points before the new loan  payments prove sufficient to offset refinancing costs.

Noncallable Debt. Liability that prohibits the issuer from redeeming the debt  before the scheduled maturity date. 

Nominal Terms. Price changes expressed in current dollars, meaning the price reflects changes, including inflation-driven contributions, in the value of a home or other object.

Nonconforming Mortgage.  Loan in an amount that exceeds the qualification limits for GSE purchase or government insurance or warranty. See jumbo mortgage. 

Nonperforming Loan. Mortgage that is in foreclosure or is past due by 90  days or more.

Normal Distribution. Statistical function characterized by a bell-shaped curve  centered at the distribution’s average value (or mean) and that is symmetric  about the mean.

Notional. Dollar amount upon which the cash flows of a derivative are  calculated. For example, an interest-rate swap exchanges interest payments;  the payments are calculated by multiplying the interest rate by the notional  amount.   

Off-Balance Sheet. Accounting treatment for an item that generally is described  in a disclosure footnote on a firm’s balance sheet. The investment does not  count as an on-balance-sheet asset or liability either because the firm cannot  quantify its value or because the value is contingent on future events. The item  is entered on the balance sheet when its value is later determined.   

On-Balance Sheet. Assets and liabilities shown on a firm’s balance sheet to  reflect its financial condition. The balance sheet is a summary of financial  positions recorded in accordance with accounting conventions.   

Operating (Operations) Risk. Chance of loss attributable to human error,  internal or external systems failures, fraud or inadequate internal controls and  procedures.

Optimum Capital. With respect to residential-mortgage finance, the point at  which the incremental benefits to society of lower mortgage costs balance the  incremental costs to society of lower institutional bankruptcy risk.

Option. Financial agreement giving an investor the right--but not the obligation--to buy (call option) or sell (put option) a good, security or currency at a prearranged price within a specified time period.

Paid-In Capital. Capital received from investors in exchange for stock, as  distinguished from capital generated from Retained Earnings Includes common  and preferred stock.

Panelized Housing. Residential structures built from wall panels assembled at  the factory and then transported to the construction site.

Participation Certificate (PC). Name by which Freddie Mac refers to  mortgage securities issued and guaranteed by the company.

Payment Cap. Limit on the amount a loan payment may increase or decrease  over the life of an adjustable-rate mortgage..

Perfect Correlation. When two events always occur together.

Performing Loans. Those mortgages repaying as scheduled.

Personal Cash. As defined by Freddie Mac’s underwriting guidelines, the  following loan-applicant funds can count as part of a borrower's down payment:  savings, checking account money on deposit, loan proceeds when fully secured  by the borrower’s owned assets, proceeds from the sale of owned assets, net  proceeds from the trade-in of a prior home, prior rent credit, trust fund  disbursements, verifiable cash deposits and pooled funds from extended  family members. The value of lots owned by the loan applicant qualifies as  well.

Pool Insurance. Credit enhancement that lowers the cost of default insurance  for liabilities that are grouped together. The collateral required for each loan  can be reduced when loans are part of a pool because the chance of a single  loan going into default is higher than the chance of all loans in a pool going  into default, assuming the reasons for default are unrelated.

Portfolio Effect. See Diversification Effect.   

Portfolio Runoff. Decrease in the size of a servicer’s mortgage portfolio,  usually triggered by a refinancing boom that leads to a concurrent drop in the  company’s servicing revenues.

Pre-Commitment. Experimental approach to capital-adequacy regulation that  permits a bank to specify in advance the amount of capital needed to cover its Trading-Book risk exposure over a quarter. If the loss threshold is exceeded,  the bank then faces penalties that could range from public disclosures to  additional capital requirements or fines.

Preferred Equity. Stock ownership in a firm that gives preferred shareholders a  senior claim over common shareholders on the assets of a firm in the event of  bankruptcy. A firm must pay preferred dividends, according to a contractually  specified schedule at a rate that is either fixed or floating, before it can pay  dividends to common shareholders. Shareholders cannot redeem their stock  through the firm but can sell the shares privately.

Prefix. Number assigned to a type of mortgage pool that is used to identify  the general characteristics of the loans that comprise the group. For example,  the prefix "P0" signals that a mortgage security consists of 30-year,  single-family, fixed-rate, prepayment-protection mortgages that charge a  2-percent fee for breaking a three-year moratorium on prepayments. A "P2"  prefix denotes that the mortgages pooled together differ from the P0 mix only  in that the prepayment lockout period is five years and the buyout fee equals  six months of interest payments on the remaining balance.

Prepayment. Payoff of the remaining principal balance of a loan occurring prior  to the stated maturity date. Also can refer to an amount paid to reduce the  principal balance of a loan in excess of the agreed-upon amortization schedule.

Prepayment Risk. Possibility of receiving either full or partial principal  payments before they are due. A full prepayment often results from the sale or  refinance of a mortgaged property. A partial prepayment typically occurs when a  borrower applies additional money toward the reduction of the principal owed  on a mortgage. Prepayments also create reinvestment risk, given the possibility  that an investor must reinvest the prepaid principal at a lower interest rate  than the first investment was paying.

Present Value. Concept used by financial analysts to account for the fact that  a dollar today is worth more than a dollar at some point in the future.  Calculating the present value of future income involves discounting future  payments by an interest rate equal to the opportunity cost of funds. This  concept, for example, provides a way to define the borrower savings received  from refinancing by adjusting for the fact that the savings will be realized over  many years into the future.

Prime Mortgage Market. Main residential mortgage market, which primarily  deals with lending business that is highly creditworthy and therefore represents  the least risk of borrower default.

Principal-Only (PO) Strip. Type of security that generates its cash flow only  from principal payments of the underlying instrument. 

Private Mortgage Insurance. Credit enhancement required by a lender, typically  on mortgages with down payments of 20 percent or less. Generally the  borrower pays a monthly premium to offset the risk of loan losses to the lender  or investor in the event the borrower defaults.

Private-Label Issuer. Companies other than Freddie Mac, Fannie Mae and  Ginnie Mae that create and sell mortgage-backed securities or other bonds.  Private-label mortgage-backed securities frequently are collateralized by loans  that are ineligible for purchase by Freddie Mac.

Private-Label Security. In the housing-finance business, a mortgage-backed security or other bond created and sold by a company other than a government-sponsored enterprise. The security frequently is collateralized by loans that are ineligible for purchase by Freddie Mac or Fannie Mae.

Pro Forma Financial Statement. Hypothetical accounting statement that  reports a firm’s position as it would appear if an increase in sales or changes  in interest rates or some other event were to occur.

Probability Distribution. Statistical function identifying each possible value that  a random variable can assume and the likelihood of its occurrence.

Prompt Corrective Action. Early intervention by government supervisors when the financial position of a bank or other regulated entity begins to erode. The  goal is to prevent a weakened institution from reaching insolvency.

Purchase-Money Mortgage. Loan secured to purchase a home, as opposed to  a mortgage obtained through a refinancing to replace an existing mortgage.

Put Option. Contract giving the holder the right--but not the obligation--to sell  a good, security or currency at a prearranged price within a specified time  period.

RAROC (Risk-Adjusted Return on Capital). Capital-allocation model developed  and distributed by Bankers Trust Corp. that is used by its corporate customers  to calculate the risk capital needed to cover each business line within its  portfolio. The model first determines the risk-adjusted return on each asset or  activity then assesses the firm’s relative profitability by comparing returns to  the capital required.

Real Appreciation. Home-price appreciation less general consumer inflation.

Real Economy. Economic model that measures how effectively an economy  transforms inputs (labor, capital, land) to outputs (goods, services) by  expressing the changes in real terms--quantities rather than in dollars. For  example, the model measures how many units of an item can be purchased  with one hour of labor. This model was developed by 19th century neoclassical  economists who believed the amount of money an individual makes is less  important than how well the individual can live on the income.

Real Estate Mortgage Investment Conduit (REMIC). Multiclass bond backed by a pool of mortgage securities or mortgage loans. Similar to a collateralized mortgage obligation (CMO), a REMIC offers certain tax advantages to the security issuer. The terms CMO and REMIC often are used interchangeably.

Real Estate Settlement Procedures Act (RESPA). 1974 law requiring mortgage  lenders to provide borrowers with advance disclosures regarding loan  settlement costs and charges as well as information about the settlement  itself. RESPA prohibits fees for referring settlement business.

Real Interest Rate. Market interest rate minus inflation.

Real Terms. Price changes expressed in constant purchasing-power dollars. The value of an object, such as a home, is measured relative to the value of a fixed bundle of goods and services, thus removing the contribution of inflation and isolating the real price change. 

Receivables. The unpaid balance due on accounts owed to a lender.

Receiver (Receivership). Entity designated to liquidate the assets of a firm that  has been declared insolvent. With respect to federally insured financial  institutions, the Federal Deposit Insurance Corp. typically assumes this role in  an effort to recoup money paid out of the insurance fund to the bankrupt firm’s  depositors.

Recession.  Downturn in the output of an economy. In the U.S., the length of a recession is measured from the start of two consecutive quarters of negative economic growth and concludes with two consecutive quarters of positive growth.

Recourse. In mortgage finance, a contingent liability (typically recorded as an  off-balance-sheet obligation) arising when a lender or investor sells a loan but  remains responsible for the payment of any outstanding debt in the event of its  default. By contrast, a mortgage sold without recourse means the new holder  bears the default risk.

Reference Note.SM Freddie Mac-issued, AAA-rated bond introduced in April  1998. The instrument, representing Freddie Mac corporate debt, is geared  toward investors needing an easily tradable, large-denomination alternative  issued at regular monthly intervals when shortages of U.S. Treasury notes and  bonds occur.

Refinancing Incentive. Financial benefit obtained by a borrower from  refinancing an existing mortgage. Measured as the savings gained from trading  an existing mortgage for a new mortgage with a lower interest rate.

Regime Shift. Regulatory or policy action that prompts a substantive change in  the status quo.

Regression Analysis. Statistical technique commonly used to summarize the  effects that one or more independent or explanatory variables have on a  particular dependent variable. For example, regression analysis can estimate  the impact of an additional dollar of house-price appreciation on the size of a  new mortgage obtained by households that refinance.

REO (Real-Estate Owned). Residential property acquired by the investor  through a foreclosure in satisfaction of a mortgage debt that is then held in the  investors' inventory of foreclosure homes until sold.                

Repayment Plan. Agreement reached between lender and borrower that increases the size of the borrower’s monthly loan contributions for a period of time until arrearages are repaid.

Repeat-Mortgage Transaction. Refers to a property for which Freddie Mac has  funded at least two loans over time for either acquisition or refinancing  purposes. Freddie Mac maintains a loan-level database of these transactions  that includes information about the terms of the old and new mortgages and the amount of appreciation on the property since the origination of the old  mortgage.

Reserves. Cash-equivalent assets available to a borrower at settlement after  all closing funds are deducted. One month’s reserves is equal to one monthly  mortgage payment. Reserves generally must be verified as a condition of  obtaining a home loan.

Retained Earnings. Portion of a company’s total earnings that is not paid out in  dividends but is used to finance fixed investments, increase liquid assets or  pay off loans.

Reviewable-Rate Mortgage. Mortgage issued at the prevailing interest rate  but reset at a new rate, upon the investor's review, when market rates change.

Right-Party Contact. Successful effort by a loan servicer to speak with the borrower of a mortgage about resolution of a delinquency.                

Risk. Extent to which values of actual outcomes differ from their expected  values.

Risk-Adjusted Performance Measure (RAPM). Method for evaluating a firm’s  optimal performance level, meaning the greatest expected return for a given  level of risk or, equivalently, the lowest risk for a given expected return. A  RAPM consists of the firm’s risk-adjusted return (revenues less expenses less  reserves allocated to cover expected losses) divided by risk-adjusted capital  (capital required to support unexpected default, interest-rate or market losses  less capital released by correlations among the risk factors).

Risk-Adjusted Profitability. Level of return expected on an investment, after  adjusting for the perceived risk involved.

Risk-Based Capital Standard (Risk-Based Capital Rule). Capital-adequacy rules predicated on the international Basle Accord, which stipulates that capital  levels must equal a proportion of risk-weighted assets, as opposed to  unadjusted total assets. Also can refer, in a general sense, to capital levels  that have been adjusted for risk.

Risk-Based Pricing. Method of pricing mortgages that charges different fees for  loans based on differences in anticipated default costs. An interest rate set  through risk-based pricing will vary by the risk-pricing expertise, business  volume and administrative efficiency of the lender offering the mortgage.

Risk Capital. In corporate finance, funds invested in an enterprise that  presents a large element of risk that cannot be hedged by the investors. Also  known as venture capital.

Risk Transfer Bond. Debt obligation that links interest payments to losses specified in the contract between issuer and investor. CAT bonds are a specific example of a risk-transfer bond.                

Rollover. Renewal of a loan at maturity.

Royalty. Payment made in return for some privilege or right, such as to a  musician for the privilege of playing one of the performer’s compositions on the  radio.

Rural Housing Service. Program within the U.S. Department of Agriculture that insures and guarantees mortgages on residences located primarily in rural  areas and owned by low- and moderate-income borrowers. It is the successor  to the Farmers’ Home Administration loan program.

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