Secondary Mortgage Marketing Glossary & Definitions

Our secondary mortgage marketing glossary outlines useful definitions for the mortgage industry’s most-used terms and phrases. View our list of top secondary marketing terms and then subscribe to our Market Commentary or Join our Newsletter for additional insight into the secondary mortgage market.

Hover over a phrase to see a brief version or click on the word to see our full definition of the term down below.

Secondary Mortgage Marketing Glossary & Definitions

Our secondary mortgage marketing glossary outlines useful definitions for the mortgage industry’s most-used terms and phrases. View our list of top secondary marketing terms and then subscribe to our Market Commentary or Join our Newsletter for additional insight into the secondary mortgage market.

Click on a phrase to see our full definition of the term down below.

Accrual Based Accounting
Accrual Based Accounting - An accounting method under which income and expenses are charged to the periods for which they are applicable, rather than when payment is made or received.

At-The-Money
At the Money - In the context of options trading, the point at which the strike price is equal to the market price of the underlying security.

AOT – Assignment of Trade
Assignment of Trade (AOT) - In the context of the sale of mortgage loans, this is a transaction where the originator sells a loan or pool of loans to an investor while simultaneously assigning an appropriate and acceptable open TBA trade the originator has on with a broker dealer to the investor. The execution price the investor would pay the originator gets market adjusted for the movement of the trade(s) being assigned over to produce the final adjusted price. This process then eliminates the bid/ask spread that the originator would normally expect to incur from the broker dealer from pairing out of the trades themselves rather than assigning.

Basis Point
Basis Point - One one-hundredth of one percent. 25 basis points = .25%.

Basis Risk
Basis Risk - The risk that two related markets will nonetheless not move in lockstep with each other, creating financial risk for parties that hold opposite positions in the two markets. For example, hedging mortgages with treasuries creates the risk that mortgage prices will decline faster than treasury prices in a market sell off. When you are hedging mortgages with TBA’s you are essentially eliminating most of the basis risk, which is why it is generally the preferred vehicle for hedging.

Bear Market
Bear Market - A market characterized by falling prices for the asset in question.

Bid
Bid - A bid is a price quote provided to a party that is looking to sell a position or asset. For example, to establish a position hedging new locks that are in the originator’s pipeline, a secondary marketing analyst would contact a broker/dealer and ask for a “bid” on a FNMA 4.0% TBA.

Bid-Ask Spread
Bid-Ask Spread - The difference in price between the bid and offer quotations, which strongly influences transaction costs associated with trading and hedging positions.

Broker/Dealer
Broker/Dealer - A regulated entity that provides market liquidity in the form of bid and offer quotations on financial positions including TBA’s.

Bulk MSR Bid
Bulk MSR Bid - A bid to purchase a portfolio of the MSRs associated with seasoned loans.

Bulk Whole Loan Bid
Bulk Whole Loan Bid - A bid from a correspondent lender to purchase (typically) new loans.

Bull Market
Bull Market - A market characterized by rising prices.

Buy Up/Buy Down Grid
Buy Up/Buy Down Grid - Quotations offered to originators that are creating pools for Fannie Mae and Freddie Mac. The “Buy Down” multiple is the multiple the agencies will quote for a one-time payment to monetize some or all of the guarantee fee as part of the pooling process. The “Buy Up” is where the agency will buy some of the excess servicing again facilitating the pooling process.

Call Option
Call Option - A contract granting the right, but not the obligation, to purchase an asset at a designated “strike price” for a specific period of time.

Cash Basis for Accounting
Cash Basis for Accounting - A method of accounting where income and costs are booked at the time cash is received or paid.

Co-IssueCo-Issue - A three way transaction involving the sale of loans to one of the agencies with a simultaneous sale of servicing to a separate third party (the “co-issue buyer”).
Convexity
Convexity - A measurement of the change in the duration of an asset given a move in interest rates.

CPR Prepayment Curve
CPR Prepayment Curve - CPR (the conditional prepayment curve) represents a constant rate of prepayment, usually measured on an annual basis. It differs from the PSA prepayment curve because it is one unchanged rate over the life of the loan or portfolio.

Cross-Hedge
Cross-Hedge - The hedge of an asset with an instrument having different characteristics. Differences can include product or coupon and exposes the position to basis risk.

Derivative
Derivative - An instrument whose price and performance is “derived” from the performance of another instrument.

Direct Trade
Direct Trade – A lender negotiates a commitment to sell a loan or group of loans directly to the investor with specific terms.

Duration
Duration - Measures the sensitivity of a bonds price to the changes in interest rates.

Excess Servicing
Excess Servicing - An interest cash flow that remains after accounting for required servicing and the coupon into which the security is pooled with the agencies.

Fallout
Fallout - In the context of mortgage loan pull through, the percentage of loans in a pipeline that are canceled, withdrawn, or denied in the loan pipeline prior to closing.

Forward Commitment
Forward Commitment - A commitment by a seller to deliver an asset or commodity at a designated price and specified time in the future.

Guarantee Fee
Guarantee Fee (“G-Fee”) - A payment made to the agencies from the mortgage’s interest payments that compensates the agencies for insuring the credit performance of the loans in a pool.

Hedging
Hedging - An activity that protects an asset from market fluctuations by taking an offsetting position in a similar asset.

Interest Rate Risk
Interest Rate Risk - The risk that changes in market interest rates will negatively impact the prices of financial assets including bonds and mortgages. For example, hedging is used as a way of counteracting interest rate risk on an open mortgage pipeline.

In the Money
In the Money - In the context of a TBA position, trades that are profitable.

Liquidity Risk
Liquidity Risk - The risk that buyers or sellers of positions may no longer materialize as expected, especially during periods of market turbulence.

LLPA
LLPA - Loan Level Price Adjustments.

Long Position
Long Position - A position that benefits from rising prices of the asset. As an example, in the context of pipeline management the long position would refer to the open loan pipeline.

Margin Call
Margin Call - An demand for immediate funds by a trade counterparty in order mitigate the counterparty exposure.

Mark-to-Market (M2M, MTM)
Mark-to-Market (M2M, MTM) - A valuation of a firm’s financial positions at current market prices. For instance, in the case of a mortgage loan pipeline the Mark-to-Market would price each loan to current market valuations.

Mark to Model
Mark to Model - the determination of the Value of a financial asset when the market for that asset is limited. Instead of a market price, reasonable and defendable assumptions about the asset behavior are input into a model and a value is calculated.

Mortgage Backed Security (MBS)
Mortgage Backed Security - Securities that combine or “pool” mortgage loans to create liquid and fungible assets.

Mortgage Pool
Mortgage Pool -An aggregation of mortgage loans typically with similar attributes into some vessel or entity.

MSR – Mortgage Servicing Rights
MSR - Mortgage Servicing Rights - Simply put, a cash payment that serves as compensation to a business that services loans. Generally, it is always paid from the interest payments of the mortgages themselves.

Naked Position
Naked or Naked Position - An uncovered or unhedged mortgage position. For example, a loan is locked with a borrower and that interest rate risk is not mitigated by either an offsetting hedge or best efforts lock at the time of borrower lock.

Option
Option - The right but not the obligation to buy or sell an asset at a designated “strike price” for a predetermined period of time.

Out of the Money
Out of the Money - In the context of a TBA position, trades that are unprofitable.

Pair Off
Pair Off - In the context of TBA hedging, buying back a short position and using it to directly offset a hedge position.

PSA Prepayment Curve
PSA Prepayment Curve - One of several standard methodologies to measure the projected prepayment of a mortgage asset. The curve is based on an index, so that 100 PSA represents slower prepayment rates than 200 PSA, and more than 50 PSA. The 100 PSA curve represents a prepayment rate that changes each month, increasing by .2% per annum each month for the first 30 months, then remaining at that rate (6%) for the remaining life of the loan. A 200 PSA curve would increase by .4% for the first 30 months, then remain at the 12% per annum rate for the remaining life of the mortgage loan. Other PSA curves are calculated in the same manner.

Put Option
Put Option - A right to sell an asset at a predetermined price.

Securitize
Securitize - To convert loans and other assets into fungible securities for sale to investors.

Servicing Fee
Servicing Fee - A fixed rate percentage (usually measured in basis points), which, when multiplied by the current principal balance of the mortgage loan, represents the compensation a servicer will receive to service the mortgage loan.

Servicing Multiple
Servicing Multiple - The value of a servicing asset expressed as a percent of the principal balance, then normalized by dividing the value by the servicing fee of the loan or the portfolio. For example, a servicing portfolio worth 100 basis points, with a servicing fee of 25 basis points, would have a servicing multiple of 4.

Short Position
Short Position - A position that benefits from a decline in prices of the asset. As an example in the context of hedging, the short position would refer to the open TBA trades.

SMM Prepayment Curve
SMM Prepayment Curve - The “Single Monthly Mortality” curve, represents a constant prepayment rate measured on a monthly basis. Thus it is the same as the CPR curve, only expressed as a monthly rate rather than an annual rate.

Specified (or “Spec”) Pools
Specified (or “Spec”) Pools - Loans with special characteristics that attract investors may be pooled together in a “specified” pool. Investors will pay more for the opportunity to own a pool with attractive characteristics. The most common spec pool is a set of low balance loans. Low balance loans typically prepay slower than high balance loans, so that if they have a higher than market rate, they would be perceived as very attractive with a high rae that is expected to prepay slowly. Thus many buyers of mortgage pools with “payup” (pay more) for a spec pool.

Spread
Spread - Spread is a broadly used term, but generally speaking refers to the difference in prices or yields between two assets or asset classes.

TBA (To-Be-Announced)
TBA (To-Be-Announced) - A forward contract to deliver or receive Mortgaged Backed Securities.

Theta
Theta - A term used in MCT’s model to describe the negative duration of servicing in a mortgage pipeline.

Tick
Tick - Generally references one 32nd of percentages in a bonds price. For example one tick is 1/32 or .03125 as a decimal.

WAC (Weighted Average Coupon)
WAC (Weighted Average Coupon) - The weighted average note rates of the mortgages in a pool.

WAM (Weighted Average Maturity)
WAM (Weighted Average Maturity) - The weighted average time to maturity of the loans contained in a pool.

Yield
Yield - The expected return of an asset. In the case of MSRs, it is the pretax return utilized to determine the net present value, or price, of a servicing asset.

Accrual Based Accounting – An accounting method under which income and expenses are charged to the periods for which they are applicable, rather than when payment is made or received. 

 

At the Money – In the context of options trading, the point at which the strike price is equal to the market price of the underlying security.

 

AOT – Assignment of Trade – In the context of the sale of mortgage loans, this is a transaction where the originator sells a loan or pool of loans to an investor while simultaneously assigning an appropriate and acceptable open TBA trade the originator has on with a broker dealer to the investor. The execution price the investor would pay the originator gets market adjusted for the movement of the trade(s) being assigned over to produce the final adjusted price. This process then eliminates the bid/ask spread that the originator would normally expect to incur from the broker dealer from pairing out of the trades themselves rather than assigning.

 

Basis Point – One one-hundredth of one percent. 25 basis points = .25%.

 

Basis Risk – The risk that two related markets will nonetheless not move in lockstep with each other, creating financial risk for parties that hold opposite positions in the two markets. For example, hedging mortgages with treasuries creates the risk that mortgage prices will decline faster than treasury prices in a market sell off. When you are hedging mortgages with TBA’s you are essentially eliminating most of the basis risk, which is why it is generally the preferred vehicle for hedging.

 

Bear Market – A market characterized by falling prices for the asset in question.

 

Bid – A price quote provided to a party that is looking to sell a position or asset. For example, to establish a position hedging new locks that are in the originator’s pipeline, a secondary marketing analyst would contact a broker/dealer and ask for a “bid” on a FNMA 4.0% TBA.

 

Bid-Ask Spread – The difference in price between the bid and offer quotations, which strongly influences transaction costs associated with trading and hedging positions.

 

Broker/Dealer – A regulated entity that provides market liquidity in the form of bid and offer quotations on financial positions including TBA’s.

 

Bulk MSR Bid – A bid to purchase a portfolio of the MSRs associated with seasoned loans.

 

Bulk Whole Loan Bid – A bid from a correspondent lender to purchase (typically) new loans.

 

Bull Market – A market is characterized by rising prices.

 

Buy Up/Buy Down Grid – Quotations offered to originators that are creating pools for Fannie Mae and Freddie Mac. The “Buy Down” multiple is the multiple the agencies will quote for a one-time payment to monetize some or all of the guarantee fee as part of the pooling process. The “Buy Up” is where the agency will buy some of the excess servicing again facilitating the pooling process.

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Mortgage Glossary & Definitions Continued

Call Option – A contract granting the right, but not the obligation, to purchase an asset at a designated “strike price” for a specific period of time.

 

Cash Basis for Accounting – A method of accounting where income and costs are booked at the time cash is received or paid.

 

Co-Issue – A three way transaction involving the sale of loans to one of the agencies with a simultaneous sale of servicing to a separate third party (the “co-issue buyer”).

 

Convexity – Measures the change in the duration of an asset given a move in interest rates.

 

CPR Prepayment Curve – CPR (the conditional prepayment curve) represents a constant rate of prepayment, usually measured on an annual basis. It differs from the PSA prepayment curve because it is one unchanged rate over the life of the loan or portfolio.

 

Cross Hedge – The hedge of an asset with an instrument having different characteristics. Differences can include product or coupon and exposes the position to basis risk.

 

Derivative – An instrument whose price and performance is “derived” from the performance of another instrument.

 

Direct Trade – A lender negotiates a commitment to sell a loan or group of loans directly to the investor with specific terms.

 

Duration – Measures the sensitivity of a bonds price to the changes in interest rates.

 

Excess Servicing – An interest cash flow that remains after accounting for required servicing and the coupon into which the security is pooled with the agencies.

 

Fallout – In the context of mortgage loan pull through, the percentage of loans in a pipeline that are canceled, withdrawn, or denied in the loan pipeline prior to closing.

 

Forward Commitment – A commitment by a seller to deliver an asset or commodity at a designated price and specified time in the future.

 

Guarantee Fee (“G-Fee”) – A payment made to the agencies from the mortgage’s interest payments that compensates the agencies for insuring the credit performance of the loans in a pool.

 

Hedging – An activity that protects an asset from market fluctuations by taking an offsetting position in a similar asset.

 

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Interest Rate Risk – The risk that changes in market interest rates will negatively impact the prices of financial assets including bonds and mortgages. For example, hedging is used as a way of counteracting interest rate risk on an open mortgage pipeline.

 

In the Money – In the context of a TBA position, trades that are profitable.

 

Liquidity Risk – The risk that buyers or sellers of positions may no longer materialize as expected, especially during periods of market turbulence.

 

LLPA – Loan Level Price Adjustments

 

Long Position – A position that benefits from rising prices of the asset. As an example, in the context of pipeline management the long position would refer to the open loan pipeline.

 

Margin Call – An demand for immediate funds by a trade counterparty in order mitigate the counterparty exposure.

 

Mark-to-Market (M2M, MTM) – A valuation of a firm’s financial positions at current market prices. For instance, in the case of a mortgage loan pipeline the Mark-to-Market would price each loan to current market valuations.

 

Mark to Model – the determination of the value of a financial asset when the market for that asset is limited. Instead of a market price, reasonable and defendable assumptions about the asset behavior are input into a model and a value is calculated.

 

Mortgage-Backed Security (MBS) – Securities that combine or “pool” mortgage loans to create liquid and fungible assets.

 

Mortgage Pool – An aggregation of mortgage loans typically with similar attributes into some vessel or entity.

 

MSR – Mortgage Servicing Rights – Simply put, a cash payment that serves as compensation to a business that services loans. Generally, it is always paid from the interest payments of the mortgages themselves.

 

Naked or Naked Position – an uncovered or unhedged mortgage position. For example, a loan is locked with a borrower and that interest rate risk is not mitigated by either an offsetting hedge or best efforts lock at the time of borrower lock.

 

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Option – The right but not the obligation to buy or sell an asset at a designated “strike price” for a predetermined period of time.

 

Out of the Money – In the context of a TBA position, trades that are unprofitable.

 

Pair Off  – In the context of TBA hedging, buying back a short position and using it to directly offset a hedge position.

 

PSA Prepayment Curve  – One of several standard methodologies to measure the projected prepayment of a mortgage asset. The curve is based on an index, so that 100 PSA represents slower prepayment rates than 200 PSA, and more than 50 PSA. The 100 PSA curve represents a prepayment rate that changes each month, increasing by .2% per annum each month for the first 30 months, then remaining at that rate (6%) for the remaining life of the loan. A 200 PSA curve would increase by .4% for the first 30 months, then remain at the 12% per annum rate for the remaining life of the mortgage loan. Other PSA curves are calculated in the same manner.

 

Put Option – A right to sell an asset at a predetermined price.

 

Securitize – To convert loans and other assets into fungible securities for sale to investors.

 

Servicing Fee – A fixed rate percentage (usually measured in basis points), which, when multiplied by the current principal balance of the mortgage loan, represents the compensation a servicer will receive to service the mortgage loan.

 

Servicing Multiple – The value of a servicing asset expressed as a percent of the principal balance, then normalized by dividing the value by the servicing fee of the loan or the portfolio. For example, a servicing portfolio worth 100 basis points, with a servicing fee of 25 basis points, would have a servicing multiple of 4.

 

Short Position – A position that benefits from a decline in prices of the asset. As an example in the context of hedging, the short position would refer to the open TBA trades.

 

SMM Prepayment Curve – The “Single Monthly Mortality” curve, represents a constant prepayment rate measured on a monthly basis. Thus it is the same as the CPR curve, only expressed as a monthly rate rather than an annual rate.

 

Specified (or “Spec”) Pools – Loans with special characteristics that attract investors may be pooled together in a “specified” pool. Investors will pay more for the opportunity to own a pool with attractive characteristics. The most common spec pool is a set of low balance loans. Low balance loans typically prepay slower than high balance loans, so that if they have a higher than market rate, they would be perceived as very attractive with a high rae that is expected to prepay slowly. Thus many buyers of mortgage pools with “payup” (pay more) for a spec pool.

 

Spread  – Spread is a broadly used term, but generally speaking refers to the difference in prices or yields between two assets or asset classes.

 

TBA (To-Be-Announced) – A forward contract to deliver or receive Mortgaged Backed Securities.

 

Theta – A term used in MCT’s model to describe the negative duration of servicing in a mortgage pipeline.

 

Tick – Generally references one 32nd of percentages in a bonds price. For example one tick is 1/32 or .03125 as a decimal.

 

WAC – Weighted Average Coupon – The weighted average note rates of the mortgages in a pool.

 

WAM – Weighted Average Maturity –  The weighted average time to maturity of the loans contained in a pool.

 

Yield –  The expected return of an asset. In the case of MSRs, it is the pretax return utilized to determine the net present value, or price, of a servicing asset.

 

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Works Cited

“Financing Glossary of Terms.” Cambridge Realty Capital, www.cambridgecap.com/infocenter/financing-glossary-terms/.

“What’s What in the Financial Services Industry.” SOS: Broker Dealer Agent, www.in.gov/sos/securities/3471.htm.

Staff, Investopedia. “Assignment of Trade (AOT).” Investopedia, Investopedia, 13 Feb. 2018, www.investopedia.com/terms/a/assignment_of_trade.asp.

“Mortgage Glossary.” Mortgage Glossary | Mortgage Terms | Adventure Credit Union, www.adventurecu.org/explore/tools-resources/mortgage-glossary.

Sign Up to Go Beyond MCT’s Secondary Mortgage Marketing Glossary

Expand your knowledge of the secondary mortgage market by joining our newsletter for educational articles and timely market updates. With the MCT newsletter, you’ll remain well-informed on market trends, market activity, best practices, and more!

Customize Your Newsletter Content

  • General & Newsletter – General information and news from MCT.
  • Educational Articles & Whitepapers – Market trends, data analysis, capital markets coverage, and best practices recommendations.
  • Market Commentary – Latest news and commentary on market activity from MCT experts. Sent daily when the market is open.

 

Join Our Newsletter

    General information and news from MCT.
    Latest news and commentary on market activity from MCT experts. Sent daily when the market is open.
    Market trends, data analysis, capital markets coverage, and best practices recommendations.