A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

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Abstract of Title - A summary of past ownership and any other public records relating to the title of a property.  Before a buyer purchases property, an attorney or title company can examine that property’s abstract of title to determine if there are any defects that need to be cleared before the title is considered clear, marketable, and insurable. 

Acceleration, Acceleration Clause - A provision in a mortgage agreement that allows a lender or servicer to demand immediate repayment of the entire loan balance under certain circumstances, such as failure to make regular mortgage payments, nonpayment of taxes, or for breach of any other conditions of the mortgage or when the servicer decides to send the borrower down the slippery slope of the loan-servicing-scam. 

Ad valorem taxes -- property taxes on the assessed value of a property. Ad valorem is Latin for "according to value." 

Advances - Normally, mortgage loan servicing agreements require the servicer to pay the trustee a full month of scheduled interest (and usually scheduled principal) on each loan, even if the Servicer does not collect the full amount from the borrowers.  This is why servicers become very aggressive in their attempts to get payments in when the amount of equity in the property is so low that foreclosure is not profitable.

If a borrower is delinquent, the Servicer also pays all costs incurred in the collection, foreclosure and liquidation process.  The Servicer is repaid either by the borrower who may cure the delinquency by paying all the late payments and all associated fees or costs, or, if the borrower does not cure the delinquency, the Servicer will complete the foreclosure process, liquidate the property, and it then takes from the liquidation proceeds all monies needed to pay all the required advances to the trustee.  The certificate holders (investors) in theory only get what is left over but are often protected by insurance.

ALLONGE, French law.  When a bill of exchange, or other paper, is too small to receive the endorsements which are to be made on it, another piece of paper is added to it, and bears the name of allonge. Pard. n. 343; Story on P. N. 121, 151; Story on Bills, 204. See Rider."
A LAW DICTIONARY: ADAPTED TO THE CONSTITUTION AND LAWS OF THE UNITED STATES OF AMERICA AND OF THE SEVERAL STATES OF THE AMERICAN UNION, Revised Sixth Edition, by John Bouvier (Philadelphia: Childs & Peterson, 1856)
http://www.constitution.org/bouv/bouvier_a.htm

"§ 151.  There is no limit to the number of successive indorsements, which may be made upon a Promissory Note; and, if they cannot be written on the Note itself, a paper may be annexed thereto, which is called, in France, Alonge, on which the latter indorsements may be written, and which will be deemed part of the Note, and of the same obligation, as if written on the Note itself.[4]
. . .
FN 4:  Chitty on Bills, ch. 6, p. 262 (8th edit. 1833); Story on Bills, § 204; Pardesseus, Droit Comm. Tom. 2, art. 343; Pothier, De Change, n. 24; Folger v. Chase, 18 Pick. R. 63."
Commentaries on the law of promissory notes, and guaranties of notes and checks on banks and bankers, by Justice Joseph STORY (Boston:  Little & Brown, 1845), page 168.
http://books.google.com/books?id=vFU9AAAAIAAJ&dq=story%20promissory%20notes&

pg=PA167#v=onepage&q&f=false

"ALLONGE.  When the indorsements on a bill or note have filled all the blank space it is customary to annex a strip of paper, called an "allonge", to receive the further indorsements.  Fountain v. Bookstaver, 141 Ill. 461, 31 N.E. 17; Haug v. Riley, 101 Ga. 372, 29 S.E. 44, 40 L.R.A. 244; Bishop v. Chase, 156 Mo. 158, 56 S.W. 1080, 79 Am. St. Rep. 515."
A Law Dictionary, 2nd ed., by Henry Campbell Black (St. Paul, MN: West Publishing, 1910), p. 60-1.

AMMINET - Automated Mortgage Market Information Network.  A nationwide electronic quotation system developed by the Federal Home Loan Mortgage Corporation, and operated by a non-profit corporation.  The system provides market information to subscribers on buy and sell orders for various types of mortgages and mortgage-backed securities.

Appellant - the party that appeals a decision of a lower court. 

Appraisal - A written justification of the price paid for a property, primarily based on an analysis of comparable sales of similar homes nearby and provided by a licensed appraiser.  (NOT a BPO!)

Assignment Fraud - involves modifications to the original loan where the name of the bank who actually owns the note is changed on execution of the Loan Modification Agreement. The problem with these “modifications” (actually new loans with new “lenders”) is that the old loans remain unaffected. The existing cloud on title to the property, the mortgage deed (or deed of trust), the note, the obligation, the purported assignments etc. is being compounded by attempts to allow impostors to foreclose on the mortgage, collect on the note, modify the loan, or approve a short sale. The time bomb is title where securitized loans were recorded, foreclosed, modified or sold. The parties (other than the borrower and possibly the Trustee on the Deed of Trust) had actual knowledge that the “lender” was not the Lender, the terms of the obligation were already changed at the time of closing, the appraisal was false, the underwriting was negligent or fraudulent, the Good Faith Estimate was by definition rendered neither in good faith nor even close to an accurate estimate, and the list goes on and on.

Asset Backed Securities - A security backed by receivables other than those arising out of real estate, i.e., autos.

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Bankruptcy -- the legal process in which a person or firm formally declares their inability to pay debts.  In Chapter 7 filings, any available assets (with some exceptions) are liquidated and the proceeds are distributed to creditors.  Chapter 11 filings are reorganizations of bankrupt businesses; Chapter 13 covers work-outs of debts by employed individuals with some assets.   Upon a court declaration of bankruptcy, a person or firm surrenders assets (Chapter 7) or makes pre-arranged payments over three to five years (Chapter 13) to a court-appointed trustee who distributes the funds to the approved debtors.

Typically, foreclosures are at least temporarily halted during the Chapter 13 process, although many servicers will attempt to have the protection waived.

Bankruptcy Fee – [Monitoring Fee; Proof of Claim (POC) Fee]  Fee charged to borrower by lender or servicer as a result of bankruptcy filing by borrower, often a flat fee included in amount owed listed on proof of claim filed by servicer in chapter 13 or added to account as recoverable expense or corporate advance without notice to borrower or bankruptcy court approval.

Basis Point - One one-hundredth of one percent, which means that one percent is composed of 100 basis points.

Bond - certificate that is evidence of a debt.  The debt is initiated when the issuer sells the bond to the holder for a specific amount of cash. The issuer is obligated to pay the holder of the bond a fixed sum (the bond's face value) at a stated future date and to pay interest (usually twice a year) at a specified rate during the life of the bond.  Bonds may be issued by corporations, the federal government, and by state and local governments as a means of raising funds in the capital markets.  Bonds may be issued in registered form, in which the name of the holder is on record with the issuer, or in bearer form, in which the name of the owner is not registered and the bond is payable to whomever bears, or presents the bond to the issuer for redemption.

In mortgage-backed securities, used to refer to both true Bonds and Certificates of Ownership issued by the Trust that holds the assets (i.e., deeds or mortgages).

Bond Rating - A Bond Rating is an opinion on the likelihood of a bond paying investors interest and principal as promised.  Most often, a Bond Rating is simply referred to as a Rating.  Currently, three Bond Rating Agencies dominate the United States ABS market: Standard & Poors, Moody's Investors Service, and Fitch IBCA.  Duff and Phelps Credit Rating Agency was active in the ABS markets until it was purchased by Fitch IBCA in the year 2000.

BPO - Broker Price Opinion. "Drive-by appraisal" of a broker known and trusted by the Servicer (and even owned by the servicer in the case of Fairbanks and RRR).  Rather than a formal (and more expensive appraisal which might alert the homeowner/borrower that something is about to happen) the BPO merely provides the Servicer with an opinion on what the property is worth.  Digital cameras and the Internet have reduced this to a "drive-by shooting" process.

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Certificate - Most home equity asset-backed securities are issued as Certificates, which represent a beneficial interest in the Trust that holds the assets securitized.  Some ABSs are issued as Notes or Bonds.

Certificate of Title - A written statement, provided by an attorney or title company that contains an affirmation about the status of a property’s title. It is the attorney or title company’s professional opinion that the title is clear and marketable; however, a Certificate of Title does not guarantee that there are not any defects that may not have been uncovered in the title search. It does not offer the level of protection of a title insurance policy.

 Cloud on title (cloud) n. an actual or apparent outstanding claim on the title to real property. "Clouds" can include an old mortgage or deed of trust with no recording showing the secured debt was paid off, a failure to properly transfer all interests in the real property (such as mineral rights) to a former owner, a previous deed which was improperly written or signed, an unresolved legal debt or levy by a creditor or a taxing authority, or some other doubtful link in the chain of title. Often the "cloud" can be removed by a quiet title action, by finding a person to create or execute a document to prove a debt had been paid or corrected. Title companies will refuse to insure title to be transferred with a "cloud," or they will insure ownership except for ("insure around") the "cloud." 

An apparent claim or encumbrance, such as a lien, that, if true, impairs the right of the owner to transfer his or her property free and clear of the interests of any other party.

The existence of a cloud on title casts doubt upon the ability of an owner of real property to convey marketable title to his or her land, thereby lessening its value. The owner must present evidence to dispel the cloud on title if he or she wants to transfer ownership free of legal uncertainty. One method to remove a cloud on title is the commencement of an action to quiet title.West's Encyclopedia of American Law

CMBS - Commercial Mortgage-Backed Securities.

CMO - Collateralized Mortgage Obligation - a type of bond having mortgages or mortgage-backed securities as collateral.  Principal and interest payments from an underlying pool of mortgages are redirected to pay the CMO holders until the CMO’s are retired.  A single issue of CMO’s contains two or more classes of bonds called tranches, each with a different length of maturity, providing a form of call protection to the holder of a CMO.  A holder who wants to lock in a CMO investment for a specific length of time will buy into a tranche with a low risk of being retired early because the underlying mortgages are paid off early.  Such low prepayment risk tranches are called planned amortization classes (PACs).  Changes in prepayment rates in the underlying pool of mortgages are absorbed first by another tranche, so that the PAC remains unaffected by prepayment risk.  CMO’s generally pay principal and interest semiannually.  CMO were first issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) in June 1983. (See also REMIC.)

Conduit - A company in the business of pooling large numbers of loans for the purpose of  securitization.

Conforming Mortgage - A mortgage that meets Fannie Mae and/or Freddie Mac purchase requirements.  Generally, Fannie Mae and Freddie Mac purchase only prime quality loans below a Federally mandated limit.  Conforming loans are generally not found in Home Equity pools because it is more efficient to sell these loans to Fannie Mae or Freddie Mac.

Conventional Mortgage - A mortgage that is not insured or guaranteed by a government agency such as the US Department of Housing and Urban Development (HUD) or the Veteran’s Administration.

Conveyance - The transfer of title of real from one party to another.

Corporate Advance - Disbursement for servicing-related expenses (not escrow expenses) paid with servicer funds rather than escrow funds, to be recovered from borrower. May include foreclosure expenses, attorney fees, bankruptcy fees, force placed insurance, and so forth.

Correspondent - An agent in the primary mortgage market who originates and funds loans, generally according to a conduit's guidelines with the expectation of selling the loans to the conduit.  Also known as a Mortgage Banker.  Some Correspondents sell loans on a "flow" basis to Conduits, which means they are sold as they are produced, while other choose to sell on a "bulk" basis, meaning the Correspondent acquires a large number of loans and then sells them as a block to the best bidder.

Coupon -- (1) a tab attached to a bond, which can be torn off and presented to collect an interest payment, usually semiannually.  (2) a percentage of a bond's face value, which is the annual rate of return received by the bondholder.

Coupon bond -- a written document evidencing a debt obligation to which interest coupons are attached.  Each coupon bears a different maturity date and states the interest due on that date.  The bondholder clips the coupons from the bond as they mature and presents the coupons to the bond issuer for payment of interest.

Coupon book -- a set of notices, usually computer generated, that the borrower returns to the lender, one at a time, with each loan repayment or with each deposit to a savings account such as a club account.

Coupon rate -- the annual interest rate of a debt instrument.  More generally, the annual interest rate on any indebtedness.  In mortgage banking, the term is used to describe the contract interest rate on the face of a bond or note.

Cure - The repayment of all past due sums owed by a delinquent borrower.  A borrower typically cures by simply paying all delinquent amounts due, but it is not uncommon in the home equity market for borrowers to cure by completely paying off the loan in full, either by refinancing or from the sale of the house.

Cushion – (Reserve) An additional sum of money required by lender to be paid into escrow account as part of monthly escrow payment to protect lender against increases in escrow expenses.

CUSIP - A CUSIP is a sequence of nine numbers and letters that uniquely identifies each publicly traded security.  The word CUSIP is short for Committee on Uniform Securities Identifying Procedures and was developed by the American Bankers Association.

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Deed - A legal instrument that documents the transfer of ownership of a title to real property.  The document contains a description of the property, is signed and witnessed according to the state where the property is located, and is delivered to the buyer at closing.

Deed-in-Lieu of Foreclosure - where the borrower abandons the property to avoid foreclosure.  Some call it "mailing in the keys."

Deed of Trust - A document used in certain states instead of a mortgage.  An agreement in which a borrower pledges real property as collateral for a loan.  Same as a mortgage agreement, but in a Deed of Trust, the title is transferred to a Trustee rather than to the borrower.  This is a recorded document that secures the note or contract between you and the lender. It is a three party document, naming the borrower, lender and the trustee; usually a title company, and references the property that is being encumbered or liened by the dollar amount of the loan.

 Default Servicer - (Subservicer; Special Servicer) Servicer of subprime, home equity, non-performing and other loans in which increased default-related activities are anticipated.

  Demand Letter - Notice of Intent to Foreclose Letter notifying borrower of a delinquency or default, possibly a notice of intent to foreclose.

Demand Letter Assessment - Fee for sending the demand letter or notice of intent to foreclose.

 Disbursement – (Escrow Disbursement) Use of funds to pay for servicing-related charges and expenses, including payments made out of escrow.

 Double-Funding - involves a mortgage originator sending simultaneous funding requests for the same loan to two different warehouse lenders. Both warehouse lenders, unaware of each other, would send funding for the loan to the title companies specified by the mortgage originator. The mortgage originator then disburses the money from one lender to the borrower, while directing the title company to wire the money received from the other lender to mortgage originator’s bank account. The mortgage originators then provide fabricated mortgage documents to the warehouse lenders that falsely represented that the lender’s funds had, in fact, been used to finance borrower loans.

 Due Date - Date on which borrower’s monthly installment of principal, interest, and escrow (if applicable) is due as stated in note.

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Escrow - The deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.  In the loan servicing scam, escrow accounts are either not set up correctly (resulting in taxes or insurance not being paid) or are used to draw off principal and interest payments to create a shortfall in the payment and a resulting late fee and late payment report to the credit bureaus.

Equitable right of redemption - a right under state law of a defaulted borrower to redeem his or her property up to the date of the mortgage foreclosure sale by paying in full the outstanding mortgage debt.

Equity - in real estate, equity is the difference between the fair market value of a property and the amount of any mortgage debt, or liens against the property, still outstanding.  In business, the excess of a firm's assets over its liabilities.

Equity Stripping - (1) A result of the loan servicing scam.  Various types of other scams achieve the same thing, but it usually starts when the borrower is told that they can solve all their problems and keep their home.  The scammer either pushes a forbearance agreement (in the servicing scam) or in the case of lending scams, promises loan money that never appears.  The end result often is that the homeowners end up owing more per month than before the foreclosure and are quickly forced out of the house. In most cases, the homeowners receive little or nothing for their home equity.  (2) An asset protection scheme where the owner of a property has a lien placed against it by an entity he more-or-less controls, thus showing an asset to creditors that is impaired by the value of the lien.

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Fannie Mae (FNMA) - A corporation created by Congress, that purchases conventional mortgages from lending institutions and sells them as mortgage-backed securities directly to investors.  (See FHLCMC, which sells them to the investment broker/dealer community.)

Federal Housing Administration (FHA) - A division of the Department of Housing and Urban Development (HUD), this government agency insures residential mortgage loans that are made by private lenders, protecting the lenders against loss in the event of borrower default.  The FHA also sets standards for underwriting mortgage loans.

Flipping - Land or property flipping (as distinct from loan flipping which is repeated refinancing by predatory lenders) happens when property is purchased and quickly resold for a large profit, after little or no meaningful rehabilitation. There is growing evidence that property flipping has become epidemic in low-income urban housing markets. 

(From http://www.nhi.org/online/issues/113/focer.html )

FICO - Short for a commonly used credit score based on statistical models developed by Fair Isaac and Company, Inc. headquartered in San Rafael California.

Forbearance - In mortgages, it refers to an agreement by a lender to refrain from taking legal action when a mortgage is in arrears, as long as the borrower complies with a satisfactory arrangement to pay off the past due balance by a future date.

Force-placed insurance - NOT a homeowner's policy.  Force-placed insurance is something a lender purchases from an insurance company to cover the value of the loan in case of a property loss.

Forecloser - The party trying to foreclose. 

Foreclosure - Foreclosure is a procedure that varies significantly from state to state, allowing a lender to force the sale of a property (usually at public auction) to pay back a debt secured by that property.  The details of the Foreclosure process vary from state to state. (See Judicial foreclosure and Non-judicial foreclosure).  A loan typically enters Foreclosure when a Notice of Default is sent warning the borrower that payment is past due and that the property will be sold to satisfy the debt if the borrower does not pay all sums owed.

Forgery - "[F]orgery is committed when a defendant, by fraud or trickery, causes another to execute a ... document where the signer is unaware, by reason of trickery, that he is executing a document of that nature." (People v. Parker (1967) 255 Cal.App.2d 664, 672)

Fraud on the Court: occurs when the judicial machinery itself has been tainted, such as when an attorney, who is an officer of the court, is involved in the perpetration of a fraud or makes material misrepresentations to the court. Fraud upon the court makes void the orders and judgments of that court.

In Bulloch v. United States, 763 F.2d 1115, 1121 (10th Cir. 1985), the court stated "Fraud upon the court is fraud which is directed to the judicial machinery itself and is not fraud between the parties or fraudulent documents, false statements or perjury. ... It is where the court or a member is corrupted or influenced or influence is attempted or where the judge has not performed his judicial function --- thus where the impartial functions of the court have been directly corrupted."

 Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMAC) - A corporation, created by Congress, that purchases conventional mortgages from lending institutions (that are members of the Federal Reserve) and sells them as securities to the dealer community.  (See Fannie Mae, which sells them directly to investors.)

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Government National Mortgage Association (GNMA or Ginnie Mae) - A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD).  Created by Congress on September 1, 1968, GNMA performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for making home loans.  The difference is that Ginnie Mae provides funds for government loans (FHA and VA)

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Hearsay - Evidence provided by a person who heard it from someone else but did not actually witness the event themselves.

HOEPA - Home Ownership and Equity Protection Act of 1994.  The law addresses certain deceptive and unfair practices in home equity lending.  It amends the Truth in Lending Act (TILA) and establishes requirements for certain loans with high rates and/or high fees.  The rules for these loans are contained in Section 32 of Regulation Z, which implements the TILA, so the loans also are called "Section 32 Mortgages."

HUD-1 Settlement Statement - A document mandated by the federal government to be prepared for the closing of a real estate transaction.  It describes the loan transaction, including fees, points, mortgage insurance, and hazard insurance.  The itemized listing of all fees will be numbered according to a standardized system used by all lenders.  Also sometimes referred to as a Closing Statement or Settlement Sheet.

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Instrumentality Rule - Under the instrumentality rule, a separate corporate existence (protection from the acts of a subsidiary) is disregarded where a subsidiary is viewed as organized and controlled and its affairs so conducted that it is seen only as an adjunct and instrument of the parent corporation.  In these circumstances, the parent corporation is held responsible for the obligations of its subsidiary. Some corporations avoid exposure to the rule and the resultant liability by having interest in but supposedly limited control of loan servicing companies.

Issuer - Technically, the certificates (or more loosely, the bonds) that investors buy are issued by a Trust that holds the collateral, so the Trust is the issuer.  Market participants, however, often refer to the company (i.e., the seller, sponsor or conduit that caused the Trust to be created and that assembled the collateral for the Trust), as the issuer.

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Judicial Foreclosure - Involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust.  Generally, after the court declares a foreclosure, the property will be auctioned off to the highest bidder.  (See Non-judicial Foreclosure.)

Junior mortgage - a mortgage that is subordinate to claims of a prior lien or mortgage.  Borrowers sometimes use junior mortgages to obtain additional funds needed for down payments or closing costs.  Lenders tend to discourage junior financing because the borrower has little or no equity in the home.  Also called a second mortgage.

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Late Charge Assessed – (Late Charge Adjustment Fee) charged to borrower’s account when payment made after due date (usually fifteen days after due date).

LENDER

A person or entity who loans money to others. He from whom a thing is borrowed.

The contract of loan confers rights and imposes duties on the lender. The lender has the right to revoke the loan at his mere pleasure and is deemed the owner or proprietor of the thing during the period of the loan, so that an action for a trespass or conversion will lie in favor of the lender against a stranger who has obtained a wrongful possession or has made a wrongful conversion of the thing loaned; e.g., mere gratuitous permission to a third person to use a chattel does not, in contemplation of the common law, take it out of the possession of the owner. In this the Civil agrees with the common law.

In the civil law, the first obligation on the part of the lender is to suffer the borrower to use and enjoy the thing loaned during the time of the loan, according to the original intention. Such is not the doctrine of the common law. The lender is obliged by the civil law to reimburse the borrower the extraordinary expenses to which he has been put for the preservation of the thing lent. In such a case the borrower would have a lien on the thing and may detain it until these extraordinary expenses are paid and the lender cannot, even by an abandonment of the thing to the borrower, excuse himself from re-payment, nor is he excused by the subsequent loss of the thing by accident or by a restitution of it by the borrower, without insisting upon repayment. What would be decided at common law does not seem very clear.

Another case of implied obligation on the part of the lender by the civil law is that he is bound to give notice to the borrower of the defects of the thing loaned; and if he does not and conceals them and any injury occurs to the borrower thereby, the lender is responsible.

In the civil law there is also an implied obligation on the part of the lender, where the thing has been lost by the borrower and after he has paid the lender the value of it, the thing has been restored to the lender. In such case the lender must return to the borrower either the price or thing. The common law seems to recognize the same principles.  http://www.lectlaw.com/def/l025.htm 

Loaded couponing - the practice of a lender including the cost of mortgage insurance in the interest rate stated in the loan note, rather than listing it as a separate monthly charge.  The practice permits a lender to cancel the mortgage insurance at a later date, while continuing to collect the monthly insurance premium from the homeowner/borrower. The practice was prohibited in 1985 by the Federal Home Loan Mortgage Corporation.

Loan servicing - Collecting and processing of loan payments during the life of a loan. Include producing coupon books or monthly statements; collecting payments of principal, interest, and payments into an escrow account; disbursing funds from the escrow account to pay taxes and insurance premiums; and forwarding funds to an investor if the loan has been sold in the secondary market.

Loan Servicing Scam - A process of deliberately creating various default conditions on loans where a servicer sees opportunity for profit from the collection of fees, extension of various insurance policies, etc.

Loan modification - a process of changing the terms of the loan.  The reason most loan modifications are unsuccessful is because the entity attempting to modify the loan does not have the legal authority to do so under the Uniform Commercial Code.  The only party authorized to modify the loan is the holder in due course with rights to enforce, which is usually the investor(s) of the mortgage-backed security that contains your loan. (Also see  

Loan workout - a series of steps taken by a lender with a borrower to resolve the problem of delinquent loan payments.  Steps can include rescheduling loan payments into lower installments over a longer period of time so that the entire outstanding principal is eventually repaid. (refer to loan modification above.)

Lock Box Payment – (Coupon Payment) Borrower payment sent to designated address (usually post office box) at the servicer’s payment processing center (servicer may outsource service to third-party company who collects mail directed to post office box and deposits funds to servicer’s bank account).

LTV - Loan-To-Value ratio - the relationship, expressed as a percent, of the amount of money loaned to the appraised value of the real estate pledged as security for the loan.  For example, an $85,000 loan on a $100,000 house would have a loan-to-value ratio of 85 percent.

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Master Servicer - Master servicers are responsible for the oversight of primary servicers, with respect to the primary servicer's responsibilities; and providing liquidity to a transaction by advancing principal and interest, as well as certain property protection expenses, on delinquent loans.  If the transaction requires a special servicer, the master servicer will insure the smooth transfer from the primary servicer to the special servicer and monitor the ultimate disposition of problem loans.

MERS – (Mortgage Electronic Registration System)   Electronic registry system for tracking ownership of individual mortgages, servicing rights, and security interests used by MERS members.  

[Note: The following is from the MERS website: http://www.mersinc.org/index1.htm ]

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS & reg; System.

Beneficiaries of MERS include mortgage originators, servicers, warehouse lenders, wholesale lenders, retail lenders, document custodians, settlement agents, title companies, insurers, investors, county recorders and consumers.

MERS acts as nominee in the county land records for the lender and servicer.  Any loan registered on the MERS & reg; System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded.  MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Mortgage-Backed Securities - Mortgage-backed securities (MBS) are a type of investment that represents ownership in a group of mortgages. Principal and interest from the individual mortgages are used to pay principal and interest on the MBS.

Ownership in a group of mortgages is typically represented by a passthrough certificate (PC). Most passthrough certificates are issued by the Government National Mortgage Agency, a branch of the United States Government, or by one of two private corporations:  Fannie Mae or Freddie Mac. With these certificates homeowners' payments pass from the originating bank through the issuing agency to holders of the certificates. These agencies also frequently guarantee that the certificate holder will receive timely payment of principal and interest from the PCs.  

Mortgage Servicer - Here’s how Fannie Mae explains what servicers do and how they are compensated:

We do not perform the day-to-day servicing of the mortgage loans that are held in our mortgage portfolio or that back our Fannie Mae MBS… Typically, lenders who sell single-family mortgage loans to us initially service the mortgage loans they sell to us. There is an active market in which lenders sell servicing rights and obligations to other servicers.

Mortgage servicers typically collect and remit principal and interest payments, administer escrow accounts, monitor and report delinquencies, evaluate transfers of ownership interests, respond to requests for partial releases of security, and handle proceeds from casualty and condemnation losses. For problem loans, servicing includes negotiating workouts, engaging in loss mitigation and, if necessary, inspecting and preserving properties and processing foreclosures and bankruptcies. We have the right to remove servicing responsibilities from any servicer under criteria established in our contractual arrangements with servicers. We compensate servicers primarily by permitting them to retain a specified portion of each interest payment on a serviced mortgage loan, called a “servicing fee.” Servicers also generally retain prepayment premiums, assumption fees, late payment charges and other similar charges, to the extent they are collected from borrowers, as additional servicing compensation. We also compensate servicers for negotiating workouts on problem loans.

So from the borrower’s standpoint, not much has changed because of securitization; the borrower still deals mostly, of not exclusively, with the servicer.

I have four questions:

OK, let’s take them one at a time, keeping in mind that there are servicers…

1) With mortgage-backed securities, is it really the case that a given mortgage is stripped into multiple pieces held by different entities?

Not exactly. First, mortgages are assembled into a pool, which is structured as a separate legal entity with mortgages as its assets. Then, this pool can be stripped, with strips becoming the pool’s liabilities; the alternative is a simple pass-through structure. The company that puts the pool together (such as Fannie Mae) is the sole equity holder.

2) If mortgages really are stripped into pieces, how does foreclosure work? If many different firms hold a piece of the mortgage, who initiates foreclosure? Who pays the costs of foreclosure? It would seem to me that many of the same obstacles to working out a refinancing deal would be present for foreclosing as well.

Foreclosure works just as it used to before securitization. “Many firms holding pieces of the mortgage” are creditors and thus have no say in the foreclosure matters. The out-of-pocket costs of foreclosures are paid by the pool (meaning that in the end they accrue to the company that created the pool); the decision to initiate foreclosure is also made by the pool (meaning, essentially, by the company that has created the pool).

3) If mortgages are not stripped into pieces, are there firms out there trying to scoop up failing mortgages at rock-bottom prices and getting on the phone with the homeowners to try to negotiate deals to avoid foreclosure? If mortgages are not stripped into pieces, I don’t understand why it is so hard to value these mortgage-backed securities.

Where would those firms “trying to scoop up failing mortgages at rock-bottom prices” come from? By now, whoever wanted to invest in mortgages, already has more than they know what to do with; that’s why we have a credit crunch on hand… As to difficulties in valuation, they come not so much from stripping, but from uncertainties surrounding mortgages; the borrower can default (and the amount to be recovered from selling the foreclosed home is highly uncertain, as house prices change over time) or refinance. Neither of these eventualities is in control of the lender, so valuation ultimately depends on assumptions the lender makes about probabilities and timing of default and/or refinancing, as well as about the likely value of the home in the event of default.

4) If indeed mortgages are stripped into pieces, weren’t people worried about the complications that would result when these mortgages were divided into pieces?

Yes and no. Complications should be weighted against opportunities they afford. Mortgage securitization offered an easy and cost-effective way to invest in mortgages for mutual funds and insurance companies…

Mortgage Servicing - see Loan Servicing.

Mortgagee - The creditor or lender in a mortgage agreement. 

     Mortgagor – The borrower in a mortgage agreement.

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Negative Amortization - The gradual increase in the balance due on a loan that occurs as a result of monthly payments that do not sufficiently cover the full amount of interest due. When loan payments do not cover the interest due, the principal does not get reduced. Furthermore, any deferred interest is added to the loan balance. An example of this situation is when payment caps on an Adjustable-Rate Mortgage (APR) limit the monthly payment amount even if interest rates rise. Another example is when loan servicers concoct forbearance agreements that create ever-higher amounts due that are applied to the loan balance.

Non-Judicial Foreclosure - Used when a power of sale clause exists in a mortgage or deed of trust.

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Overcollateralization - OC or sometimes O/C, is an almost universal form of credit support in the Home Equity market. If a pool is supported by OC, it means that the face value of the assets used as collateral exceeds the face value of the bonds that are secured by those assets. In principal, this implies that even if some of the underlying loans default there will still be enough collateral to repay the bonds.

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PMI - (1) Primary Mortgage Insurance. A contrivance of the insurance industry that forces a borrower to purchase an insurance policy on a supposedly "high-risk" (sub-prime) mortgage. The policy remains in force as long as the equity remains below a threshold, or, in the case of the loan servicing scam, as long as a servicer reports a late payment in a given year. (2) PMI Group, the majority stockholder in Fairbanks Capital.

Power of Sale (Clause) - A non-judicial foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee.

Pretender Lender - An entity who fraudulently attempts to invoke the jurisdiction of the court by pretending to be the lender, rather than the true party in interest: the true holder in due course with rights to enforce the note and deed of trust. 

Primary Servicer - Primary servicers responsibilities typically include: collecting monthly principal, interest, and escrow payments from individual mortgagors; remitting and reporting to the master servicer; and monitoring delinquent and problem loans, which may be directly handled by the special servicer. For commercial, which includes multifamily, primary servicers are also responsible for performing property inspections and collecting and analyzing property financial statements. In the absence of a master servicer, the primary servicer is responsible for the reporting and remitting of funds directly to the trustees and/or advancing principal and interest payments on delinquent loans. When there is no special servicer, the primary servicer would be directly handling the work-out of sub-performing and/or delinquent loans.

Prime Mortgage - A mortgage meets the standards set by Freddie Mac and Fannie Mae, or loans of similar credit quality that are suitable for securitization in the Jumbo market or the Alternative-A market. In general, Prime Mortgages are secured by high quality collateral, and are made to borrowers with good credit records and a monthly level of income that is approximately three or more times greater than their monthly housing related payment obligations (i.e., mortgage payment, hazard insurance premium and property tax obligation combined) plus other debt payments. See also Subprime Mortgage.

Property Inspection Fee – (Inspection or Property Preservation Fee) - Fee charged to borrower for inspections (usually drive-by) to

determine the physical condition or occupancy status of mortgage property, often imposed repeatedly once account is placed in default status.

Pro Se - Acting as your own attorney. (Latin for "for self")  If you try this, prepare to be eaten or at least dragged across broken glass repeatedly.  Courts see pro se litigants as a waste of their time and a threat to the income of attorneys.  For more information, see: American Pro Se Association web site - www.legalhelp.org

Proof of claim - Formal submittal by a creditor in a bankruptcy proceeding, documenting the amount of the debt owed.

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Quick Sale – 

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Reconveyance Basics - A reconveyance or deed of full reconveyance removes the lien that the lender placed against the property when the loan was originally taken out. The reconveyance is recorded at the county recorder's office in the county in which the property is located. It must reflect the information found on the deed of trust so the county can index it properly, and a title search will show that the lien (and Note) has been paid in full or satisfied. 

http://www.rtrustee.com/reconveyance.htm  

Regulation Z - A federal law that requires lenders to fully disclose to the prospective borrower, in writing, the terms and conditions of a mortgage.  The information disclosed must include the Annual Percentage Rate (APR), payment due date and terms, and other charges.  A lender will often provide the Regulation Z disclosures with the loan application. Lenders must disclose the APR to a borrower within three business days of receiving his/her application.  Regulation Z is also called the Truth-in-Lending Act.

REMIC - Real Estate Mortgage Investment Conduit. The REMIC provisions, passed as part of the Tax Reform Act of 1986, allow issuer's flexibility in how to account for the transfer of mortgages to a trust. Under REMIC, the transfer can be treated as either a sale or a financing for accounting purposes, as opposed to the original CMO, which treats the transaction as an on balance-sheet financing. Simultaneously, REMIC election allows the trust to issue multi-class pass-through securities without taxation at the trust level, and allows investors to treat their REMIC investment as debt for tax purposes. The terms REMIC and CMO are often used interchangeably, although legally they are distinct structures.

REO (Real Estate Owned) - Property acquired by the Servicer on behalf of the Trust through foreclosure or deed-in-lieu of foreclosure on a defaulted loan. The servicer is typically responsible for selling the REO. Proceeds from the sale are returned to the trust In most cases, the sale of REO does not generate enough to pay off the balance on the loan underlying the REO, causing a loss to the pool.

Res Judicata - Latin/legalese for "the thing has been decided" The principle that a final judgment of a competent court is conclusive upon the parties in any subsequent litigation involving the same cause of action.  It basically prevents a litigant from getting yet another day in court after the first lawsuit is concluded by giving a different reason than he gave in the first for recovery of damages for the same invasion of his right.

RESPA - Real Estate Settlement Procedures Act. A consumer protection law requiring lenders to give advance notice of closing costs to borrowers.

Reverse Redlining - occurs when a lender or insurer particularly targets minority consumers, not to deny them loans or insurance, but rather to charge them more than would be charged to a similarly situated majority consumer.

RMBS - Residential Mortgage-Backed Securities.

ROBO-Signor - A person who signs a legal document under oath, but who lacks personal knowledge or verification of the facts contained in the document, and/or lacks the legal authority to sign the document rendering the document invalid.  Robo-signors usually work for a foreclosure-mill law firm, foreclosure factory or bank.  Their job is to sign hundreds or thousands of documents at a time.  Another reason the notarization of these documents is invalid is because the notary did not witness the signature.  Sometimes the Robo-signor will notarize his own signature by using the notary's stamp without the notary being present.  If proven, the document may be rendered void. (Google Robo signor)

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Scratch & Dent: “Scratch and Dent” is a real industry term. The approximate meaning is “loan with incurable defect.” “Curable” is a real industry term and indicates something like a loan that closed with too little MI coverage (a kind of “bad stuff that happens”): you can “cure” that by buying more coverage. If you can’t get the customer to pay for it, though (usually because you didn’t disclose the correct MI on the regulatory docs, and so if you start charging the borrower more MI, you then provide yourself a lawsuit or pissy regulator material), the loan has a serious long-term yield problem and qualifies for a “scratch & dent” pool.  A loan that once had a 30-day late but then made the last six payments is just “seasoned,” unless the late was EPD (Early Payment Default), in which case the loan, assuming it’s performing again, is S&D. (You can’t “cure” an EPD. It’s the mortgage equivalent of the unforgivable sin.) The stuff the rating agencies call “reperforming” is S&D. 99% of performing loans that are repurchased from an investor are sold by the repurchaser as “S&D.”

Securities market - a place or places where securities are bought and sold, the facilities and people engaged in such transactions, the demand for and availability of securities to be traded, and the willingness of buyers and sellers to reach agreement on sales. Securities markets include over-the-counter markets, the New York Stock Exchange, the Chicago Board of Trade and the American Stock Exchange.

Securitization - the process of gathering a group of debt obligations such as mortgages into a pool, and then dividing that pool into portions that can be sold as securities in the secondary market.

Servicer - The party to a transaction that has the responsibility for collecting and tracking the monthly payments from the borrowers, for pursuing all legal remedies against borrowers who fail to pay, and for remitting the collections to the trustee for distribution to the certificateholders.

The Servicer also usually has the responsibility for paying advances and for making compensating interest payments. The Servicer is paid a fee for this work. For home equity loans the fee is typically 50 basis points on an annualized basis (i.e., 50/12 basis points per month). Servicers also earn float on the funds they collect, and typically keep all late fees. Servicers also generally keep all excess proceeds generated from the sale of REO. Some Servicers delegate all or part of their work to one or more subservicers.

Short Sale - A borrower in foreclosure may make a good faith effort to try and sell their house to payoff the loan, but find that the best offer they get is not enough to repay the debt. In some cases, the lender (or in the case of an RMBS, the servicer on the trust's behalf) will allow the sale at this insufficient price because the sale will cause a smaller loss than that anticipated from going through a lengthy foreclosure process.

Special Servicer - Special servicers are responsible for maximizing recoveries on non-performing loans and real estate owned assets, and are key to maintaining the credit quality of a pool containing non-performing loans and REO assets. The specific arrangement varies from one transaction to another, however, typically the loans are transferred to the special servicer at some pre-determined point based on delinquency and/or other performance measures. Currently, in residential transactions, the use of a designated special servicer is not as common as in the commercial products, however, the practice is becoming more widespread, particularly in loan products which are expected to have high delinquencies and therefore losses.

Subprime Mortgage - A loan secured by a mortgage that is not prime.  Subprime loans are also often called B&C loans because prime loans have traditionally been called "A" quality.  The Home Equity Market (Second Mortgage) is largely composed of securities backed by Subprime Mortgages.  The bulk of the loans are Subprime because the borrowers have been reported as having only fair to poor credit records, which means they supposedly have shown a higher propensity to default than Prime borrowers.  Typically, Subprime borrowers also have higher debt-payment- to-income ratios than Prime borrowers, which means they are over-leveraged compared to Prime borrowers.

Suspense Account – (Corporate Suspense Account; Suspense Activity)  Catch-all account used as place to temporarily put funds that are

in “suspense” until servicer makes decision on how to permanently allocate or apply, often used to hold less than full installment payments or payments received while account in default.

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TILA - Truth-in-Lending Act (see "Regulation Z").

Title insurance - the insurance that protects both the lender and the homeowner (borrower) against loss resulting from any defects in the title or claims against a property that were not uncovered in the title search, and that are not specifically listed as exemptions to the coverage on the title insurance policy.

Tranche - one of the classes, portions or segments of a bond or mortgage-backed security, such as a Collateralized Mortgage Obligation (CMO).  Each tranche normally offers different terms, usually involving the length of time it takes for principal to be repaid to investors.  With this type of security, all payments of principal from the underlying mortgages are diverted initially to the first tranche.  When all principal has been repaid in the first tranche, payments of principal begin to the second tranche and, after the second tranche is retired, the payments continue in turn to the rest of the tranches, like a series of steps, until investors in the last tranche have been repaid.  By selecting a particular tranche, investors choose whether they want their funds repaid quickly or whether they want to lock in their investment for a longer period of time.  In another meaning, tranche also refers to a portion of a bond that is distributed in another geographic area, such as a foreign country.

Trust - a legal entity created to manage property for the benefit of a specific person or persons.  A trust is funded when the owner (the grantor) transfers ownership of property to another (the trustee) for the immediate or eventual benefit of a third person, (the beneficiary).  The person who creates a trust is called a grantor, settlor or trustor.  The person designated to receive assets at the end of the trust term is called a remainderman.

In mortgage-backed securities, a form of ownership widely used in the ABS market to hold the assets securitized, and almost exclusively used for transactions in the home equity market.  Technically, the Trust is the Issuer of the Certificates in most transactions.

Trustee - The party responsible for distributing the pool's cash flow (typically net of Servicing Fees) to the respective owners of those cash flows.  Often, the Trustee is also the Backup Servicer.  Most, if not all, Trustees are divisions of major commercial banks.

Trustee Suspense Account - Suspense account used by servicer to hold payments received from chapter 13 bankruptcy trustee pursuant to borrower’s chapter 13 plan providing for cure of pre-petition mortgage arrearages.

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What is a UCC-1 agreement?  UCC-1 stands for Uniform Commercial Code Form 1. It is a "Financing Statement" that is filed to show that one party (usually a lender) has a security interest in another party's (usually a borrower's) property. It applies to personal property, not real estate. It is not an agreement. It is just notice to the world that one person claims that it has an interest in someone else's property, usually as collateral for a debt. It is normally filed in the office of the Secretary of State in the state where the debtor/borrower is located. In most cases, located means the state of incorporation for corporations, the state of creation for limited liability companies and other entities, and the state of residence for individuals. There must be another agreement, called a security agreement, that actually grants the security interest and defines the terms of the deal. The security agreement and the UCC-1 combined are like a mortgage on real estate. The mortgage is both the notice and the agreement for real estate, while for personal property the notice and the agreement are separate. 

Underwriter - A company, usually an Investment Bank, that coordinates the work of creating a security and usually takes the risk involved in issuing the security by agreeing to purchase the security from the issuer.  The Underwriter then has the risk of reselling the security to investors.

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Waterfall - The sequence the trustee follows when making payments to the various parties that have a stake in a transaction.  The Waterfall is specified in a document usually called the Pool and Servicing Agreement, and this document is usually filed on the SEC's website as an 8-K and is always summarized in the Prospectus Supplement.  Waterfalls are often complicated because the payment rules change over time according to preset schedules and in response to the pool's performance.

"A Wild Deed in simplistic terms is a Deed from someone who is not already in the title chain. The mere filing of self-serving documents as the pretender lenders have done, is a nullity. Any act proceeding from a nullity is also a nullity including the foreclosure and the deed that was issued is a nullity. This is because of the alleged auction sale in which the alleged creditor made a credit bid, was outside of the chain of title. What chain of title? Of course the one in the public records of the county in which the property is located. Add to that the fact that the party who made the credit bid was not a creditor and you can see how messy this venture is getting."  Livinglies

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