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Glossary of Finance and Economic Terms (S-Z)

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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Safety Net. Government backing of the financial system that guarantees its stability. The U.S. safety net includes deposit insurance and the liquidity provided by the Federal Reserve System when it serves as lender of last resort.

Scenario Analysis. Evaluation of the effect on a firm of alternative combinations of economic or operational factors. A stress test is an application of this simulation method that subjects the firm to extreme, negative shocks.

Seasoned Loan. Any loan more than one year old.

Secondary Mortgage Market. Market in which previously issued mortgages and mortgage-backed securities (MBS) are traded between lenders and investors. Freddie Mac serves as one of the primary conduits in the secondary market by linking investors and lenders.

Secular. Long-term or permanent change, as opposed to a short-term, cyclical change.

Securitizer. Organization acting as an intermediary, typically buying individual mortgages from originators and then combining them into securities sold to end investors.

Senior-Subordinate Bond. Multiclass security commonly used in the capital markets to induce investors to accept higher levels of risk in exchange for higher returns. Risk is layered into subordinate bonds or tranches that pay higher returns than do the senior classes. Cash-flow losses caused by homeowner delinquencies and defaults first are allocated to and borne by the junior classes of investors, thereby protecting the senior classes from losses.

Sensitivity Analysis. Measurement of the impact on the results of a simulation when small changes in critical assumptions are made.

Serious Delinquency. Point at which a mortgage payment is overdue by at least 90 days or a loan has entered into foreclosure.

Servicer. Company that manages the mortgage-payment process, which the routine collection of monthly payments from borrowers, transferring principal and to investors, overseeing escrow accounts and handling delinquency foreclosure problems that may arise. Lending firms that originate mortgages occasionally run in-house servicing operations but frequently contract with outside firms.

Servicing. Routine collection and processing of monthly principal and interest payments from homeowners, followed by the remittance of those payments to secondary market investors, such as Freddie Mac. Other functions include management of delinquencies and foreclosures.

Short Payoff Sale. Transaction in which an investor such as Freddie Mac accepts less than the full amount of a mortgage in exchange for a quick sale of the house by the borrower before a pending foreclosure occurs.

Site-Built Housing. Residential structures built to state or local construction standards that are constructed (stick built) or assembled (modular or panelized) at the property site.

Skip-Tracer. Investigative service hired by creditors after failing at repeated attempts to contact a delinquent borrower. A mortgage servicer typically waits until a borrower is at least 60 days past due to employ a skip-tracer to locate the borrower. Today’s high-tech skip-tracer conducts automated searches of extensive databases to verify or update the servicer’s contact information on the borrower.

Specific Market Risk. See Idiosyncratic Risk.

Speculation. Purchase of a derivative or any other type of investment in an attempt to earn a profit on it based upon movements in interest rates. Derivatives purchased for speculative purposes, as opposed to hedging purposes, increase interest-rate risk rather than reduce it.

Spread. Yield premium over U.S. Treasury securities.

Standard Mortgage. Loan made in accordance with generally accepted underwriting criteria to qualifying borrowers of all income levels.

Starting Rate. See Initial Interest Rate

Stress Test. Measure of the amount of risk associated with a company’s assets and contingent liabilities under simulated economic conditions selected as conducive to losses. Used to evaluate a firm’s ability to survive worst-case conditions.

Structured Debt. Security designed with customized cash flows intended to meet particular investor objectives. For example, debt issuers can manipulate a security’s maturity, nature of the interest rate (fixed or floating), market-index linkages and interest-payment date to satisfy an investor’s need to implement an interest-rate or currency view, hedge a specific risk, balance portfolio performance characteristics or minimize transaction costs. Investors typically are willing to pay a premium for tailored cash flows.

Structured Note. Financial instrument in which the interest rate or maturity is linked to some external factor, which, for example, could be a time-period trigger or a different interest-rate index.

Subordinated Debt. Debt that carries a lower-priority claim on issuer’s income or assets than that of other (senior) debt.

Subordinated Tranche. When used to provide credit enhancement, this tranche is the first in line of all classes in a security to suffer default losses when the cash flow from the underlying collateral proves insufficient to pay all bondholders.

Subprime Mortgage Market. Market niche that finances mortgages that do not meet traditional underwriting standards. This market serves borrowers who have past credit problems or unconventional borrowing needs.

Super Conforming Mortgage. Mortgage using the higher conforming loan limits permitted by the Housing and Economic Recovery Act of 2008 (Act). The Act increases Freddie Mac's conforming loan limits in certain high-cost areas to the lesser of 115 percent of the area median home price or 150 percent of the conforming loan limit, which in 2009 is $625,500 for 1-unit properties.

Swaption. Derivative instrument used to establish how two parties periodically exchange payments on different holdings based upon the value of one or more market indexes.

Sweat Equity. Under certain mortgage programs, credit given toward a down payment for labor performed on the mortgaged premises by the borrower or for materials furnished by the borrower.

Sweep Account. Stock-brokerage account that manages idle cash from interest and dividends from several instruments--including stock purchases, savings and check paying--by immediately reinvesting it for a duration that is appropriately short-lived.

Systemic Risk. Chance of loss when economic disturbances affect a financial system as a whole, as opposed to firms individually. Typically characterized by weakening confidence in the payment and information system that supports a country’s financial system.

Targeted Mortgage. Loan made under a special-affordable lending program limited to lower-income households typically earning 100 percent or less of area median income and based on less strict borrower-qualifying criteria than is normally the case.

Third-Party Credit Enhancement. Agreement made by a party other than the issuer or the investor to boost the credit rating of an obligation by assuming some of the risk. Examples include Private Mortgage Insurance and a letter of credit issued by a bank promising to make good on a debt extended by another institution.

Trading Book (Trading Accounts, Trading Activities, Trading Portfolio). That part of a bank’s portfolio consisting of market-making transactions, arbitrage and Derivative deals, as opposed to a bank’s traditional activities of deposit taking and lending. In market making, a bank profits by earning commissions on trading volume and by investing primarily in debt or equity securities for their short-term profit potential. The term ‘‘trading’’ implies frequent and active buying and selling to take advantage of temporary differences in market prices. Unlike other parts of the bank’s portfolio, the trading book is Marked-to-Market daily.

Tranche. One of the bond layers issued as part of a multiclass instrument to meet different investor objectives for portfolio diversification.

Treasury Securities. Bonds issued by the U.S. government to satisfy a variety of borrowing needs. The market views these securities as virtually free of risk because they are backed by the full faith and credit of the federal government.

Truth in Lending Act (TILA). 1968 law requiring lenders to provide borrowers with complete written information about the terms of a loan--interest rate, length of the loan and repayment structure--as well as a written disclosure of the loan’s annual percentage rate (APR).

Universal Account. Visionary financial account through which all assets and liabilities of a consumer are managed together.

Value-at-Risk (VAR). Summary number of the maximum amount that a firm can lose on a particular portfolio over a specified holding period with a given degree of statistical confidence. A variety of approaches can be used to calculate value-at-risk, but estimates often are derived from estimating the behavior of underlying risk factors (such as interest rates and exchange rates) during a recent observation period. At Freddie Mac, the term is used differently, in that it refers to an internal exercise used to establish risk-loss limits rather than calculate loss probabilities.

Variance. Statistical measure of the volatility or dispersion of a distribution about its mean or average value.

Workout. Mutual agreement with a borrower who is experiencing an involuntary but temporary financial setback to bring a mortgage current.

Workout Ratio. Measure of a servicer's effectiveness at averting foreclosures, expressed as the number of delinquent loans saved from foreclosure as a percentage of those same loans plus loans that became REO.

Yield Curve. Graphic depiction, at a given point in time, of the relationship between yields and years to maturity of a set of similar financial instruments, usually U.S. Treasury securities with terms ranging from 30 days to 30 years. The yield curve usually slopes upward over time, reflecting the increased return required by lenders or investors to compensate for the additional risk associated with longer-term commitments.

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