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Glossary

Accrued interest. Interest deemed to be earned on a security but not yet paid to the investor.

Adjustable-rate mortgage (ARM). A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM's interest rate is tied to an objective, published interest rate index.

Amortization. Liquidation of a debt through installment payments.

Average life. The average amount of time that will elapse from the date of MBS purchase until principal is repaid based on an assumed prepayment forecast. Alternatively, average life is the average amount of time a dollar of principal is invested in an MBS pool.

Basis point. One one-hundredth (1/100, or .01) of 1 percent. Yield differences among fixed-income securities are stated in basis points.

Beneficial owner. One who benefits from owning a security, even if the security's title of ownership is in the name of a broker or bank ("street name").

Bid. The price at which a buyer is willing to buy a security.

Book-entry. A method of registering and transferring ownership of securities electronically, thereby eliminating the need for physical certificates.

Call protection. A feature that provides assurance to an investor that early or unscheduled redemption of a particular security will not occur due to a decline in interest rates.

Cap. Maximum rate of interest on an adjustable-rate mortgage loan.

Credit risk. Risk of a default by the issuer or other party in its financial obligations to the investor.

Confirmation. A document used by securities dealers and banks to state in writing the terms and execution of an oral agreement to buy or sell a security.

Conventional mortgage loan. A mortgage loan granted by a bank or thrift institution collateralized solely by real estate and not insured or guaranteed by a government agency.

Coupon rate. Stated annual percentage of interest paid on a fixed-income investment.

Current face. The current monthly remaining principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.

CUSIP number. A unique, nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form, the CUSIP number is printed on its face.

Custom pool. A pool issued under the Ginnie Mae II program which has only one issuer.

Discount. Amount by which the purchase price of a security is less than its par value, which raises the effective yield of the security above the coupon rate.

Empowerment zone. One of several urban areas in which properties are eligible for Ginnie Mae's Targeted Lending Initiative.

Extension risk. Risk that prepayments will be slower than the assumed rate causing later-than-expected return of principal.

Face value. The par value of a security, as distinct from its market value.

Factor. A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value. The Bond Buyer publishes the "Monthly Factor Report," which contains a list of factors for Ginnie Mae, Fannie Mae and Freddie Mac securities.

FHA. The Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. An agency of the United States Government created in 1934 under the National Housing Act, to insure certain residential mortgage loans.

FHA-insured loans. Mortgage loans insured by FHA.

Fixed-rate mortgage. A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.

Floor. Minimum rate of interest on an adjustable-rate mortgage loan.

Ginnie Mae. The Government National Mortgage Association is a wholly owned U.S. government corporation within the Department of Housing and Urban Development. Ginnie Mae was created to support a secondary market in government-insured and guaranteed mortgage loans. Ginnie Mae guarantees the timely payment of principal and interest on its securities. The full faith and credit of the United States guarantee these payments. Ginnie Mae securities are backed by pools of FHA, VA and RHS insured or guaranteed mortgages.

Ginnie Mae I. Pass-through mortgage securities on which registered holders receive separate principal and interest payments on each of their certificates. Ginnie Mae I securities are single-issuer pools.

Ginnie Mae II. Pass-through mortgage securities on which registered holders receive an aggregate principal and interest payment from a central paying agent on all of their Ginnie Mae II certificates. Ginnie Mae II securities are collateralized by multiple-issuer pools or custom pools, which contain loans from one issuer, but interest rates that may vary within one-half percentage point in pools issued after July 1, 2003 or one percentage point in pools issued prior to July 1, 2003.

Ginnie Mae guaranty. Ginnie Mae guarantees the timely payment of principal and interest on its securities, backed by the full faith and credit of the United States.

Ginnie Mae issuer. A mortgage lender who is eligible to participate in Ginnie Mae's MBS program.

Information agent. Firm designated by Ginnie Mae to make certain information about its securities is available to the public.

Interest. Compensation paid or to be paid for the use of money, generally expressed as an annual percentage rate.

Issue date. The date on which a security is deemed to be issued or originated.

Issuer. An entity which issues and is obligated to pay amounts due on securities.

Jumbo pools. Ginnie Mae II pass-through mortgage securities collateralized by pools which are generally larger and contain mortgages that are often more geographically diverse than single-issuer pools. Mortgage loans in jumbo pools may vary in terms of the interest rate within one-half percentage point in pools issued after July 1, 2003 or one percentage point in pools issued prior to July 1, 2003.

Letter of credit. An arrangement in which a lender agrees to substitute its credit for a borrower's under specified conditions.

Liquidity. Capability to sell an asset or investment.

Market price or market value. For securities traded through an exchange, the last reported price at which a security was sold; for securities traded "over-the-counter," the current price of the security in the market.

Maturity date of MBS. The last possible date on which the last payment of the longest loan may be paid (also known as "stated maturity").

Mortgage. A legal instrument that creates a lien upon real estate securing the payment of a specific debt.

Mortgage banker. An entity that originates mortgage loans, sells them to investors and services the loans.

Mortgage loan. A loan secured by a mortgage.

Mortgage note. The evidence of debt that is secured by a Mortgage.

Multiple issuer pool. A mortgage-backed securities pool, formed as a Ginnie Mae II MBS, normally consisting of more than one loan package. All of the loan packages in the pool will have similar characteristics. The resulting pool backs a single issuance of securities.

Mutual fund. A mutual fund is an organization that creates a portfolio by investing funds in securities, such as Ginnie Mae securities. Mutual funds are "open-ended" so that the portfolio investment may change. Ginnie Mae does not directly guarantee owners of fund shares; therefore, these owners must look to their mutual fund for payment, even if the portfolio consists solely of Ginnie Mae securities.

Offer. The price at which a seller will sell a security.

Original-issue discount. The amount by which a security's price at issuance is lower than its par value.

Original face. The face value or original principal amount of a security on its issue date.

Par. A price equal to the face amount of a security, as distinct from its market value. On a debt security, the par or face value is the amount the investor has been promised to receive from the issuer at maturity.

Paying agent. An entity responsible for making the payment of interest and principal to bondholders on behalf of the bond's issuer.

Payment date. The date that actual principal and interest payments are paid to the registered owner of a security.

Pool. A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. Ginnie Mae, Fannie Mae or Freddie Mac pass-through securities are identified by a number assigned by the issuing agency.

Premium. Amount by which the purchase price of a security exceeds its par value, which decreases the effective yield of the security below the coupon rate.

Prepayment. The unscheduled partial or complete payment of the principal amount outstanding on a debt obligation before it is due.

Prepayment risk. Risk that the mortgages underlying the security are repaid faster or slower than expected.

Price. The dollar amount to be paid for a security, stated as a percentage of its face value or par in the case of debt securities.

Principal. The face amount of a bond, exclusive of accrued interest, if any, and payable at maturity. With mortgage securities, principal refers to the amount outstanding on the mortgage loans.

P & I. Principal and interest. The term is used to refer to regularly scheduled payments or prepayments on mortgage securities.

PSA prepayment speed. Measure of the rate of mortgage loan repayments. It allows the mortgage-backed securities industry to make consistent assumptions.

Ratings. Designations used by investors' services to give relative indications of credit quality.

Record date. The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.

Registered owner. The name in which a security is registered, as stated on the certificate or on the books of the paying agent. Principal and interest payments are made to the registered owner on the record date.

RHS. Rural Housing Service. Federal government agency, formerly known as the Farmers Home Administration (FmHA.) Established to provide mortgage credit to qualified borrowers in rural communities. RHS guarantees loans for rural housing.

RHS loans. Residential mortgage loans guaranteed by RHS.

Safekeeping. The storage and protection of customers' securities, typically held in a vault, provided as a service by a bank or institution acting as agent for the customer.

Secondary market. The market for securities previously issued and sold.

Serial notes. Mortgage-Backed Securities comprised of consecutively numbered equal units of $25,000. The units are retired in sequential numeric order. The maturity date indicated on each unit is the date by which the unit would be retired if no prepayments of principal were made on the mortgages in the pool.

Servicing. Collection and aggregation of principal, interest and escrow payments on mortgage loans and mortgage securities, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing servicing, the servicer, receives a servicing fee.

Servicing fee. The amount withheld from monthly interest payments made on a mortgage which is retained by the mortgage servicer.

Settlement date. The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds. This may vary from other bonds.

Single-issuer pool. A mortgage-backed securities pool issued under the Ginnie Mae I or II programs, which consists of only one loan package and which has only one issuer.

SMMEA. Secondary Mortgage Market Enhancement Act of 1984.

SMMEA securities. Securities that are both ultimately secured by a first-lien mortgage loan and rated in one of the top two rating categories by at least one nationally recognized statistical rating organization. The complete definition may be found in Section 3(a)(41) of the Securities Exchange Act of 1934, as amended. Institutional investors should check state laws regarding investments in SMMEA securities.

Transfer agent. A party appointed to maintain records of secunties owners, to cancel and issue certificates, and to address issues arising from lost, destroyed or stolen certificates.

VA. United States Department of Veterans Affairs. Government agency that guarantees residential mortgage loans made by lending institutions to qualified Veterans of the United States armed forces or their surviving spouses.

VA loans. Residential mortgage loans made to Veteran borrowers under the VA's loan guaranty programs.

Weighted average coupon (WAC). The average coupon rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by remaining principal balance.

Weighted average loan age (WALA). The average number of months since the date of note origination of the mortgages in a PC pool, weighted by remaining principal balance.

Weighted average maturity (WAM). The average remaining term to maturity of the underlying mortgage loans that collateralize a security, weighted by remaining principal balance.

Yield. The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security's purchase price, coupon rate and maturity.

 
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