Glossary of Mortgage Terms
Basis Points – basis points are increments of 100th of one percent. For example, 1.50% expressed in basis points is equal to 150 basis points. Commercial mortgage spreads are often quoted in basis points.
Spread – Commercial Mortgage Backed Securities are securities made up one or more commercial mortgage loans. These securities are often sold by investment dealers to institutional investors. A key feature of CMBS is that each class of interest in the securities may have different rank in respect of repayment of interest and principal. This allows senior investors to accept a lower return given the lower risk they are assuming relative to junior investors. CMBS are put together by conduit lenders.
Conduit Lenders – conduit lenders originate mortgage loans, aggregating them until they have enough loans collected to form Commercial Mortgage Backed Securities or CMBS. The conduit lender then sells its interest in the mortgage loans, often by way of an investment dealer, to institutional investors.
Construction Loan – a construction loan is secured for the construction period of a new real estate project. A construction loan is ordinarily replaced with a term loan.
Escrows – (also referred to as reserves)are funds held by the servicing agent or lender to pay for future costs associated with the mortgage or the property. Examples of commonly held escrows include funds for property taxes, future repairs or tenant inducements.
Fixed Rate Loan – a fixed rate loan has an interest rate that is fixed for the term of the loan.
Floating Rate Loan – the interest rate on a floating rate loan fluctuates with some reference or index, often the prime lending rate, banker’s acceptance or LIBOR.
Interim Loan – an interim loan is ordinarily used as a temporary measure prior to securing a term loan. Interim financing is generally made for periods of less than three years. Examples of interim loans include construction financing or short term loans used to substantially renovate a property.
LIBOR – the London inter-bank overnight rate. This is a reference rate used by lenders as a basis for floating rate loans.
Mortgage Banker – a mortgage banker acts as principal or as an intermediary in securing all types of real estate financing. For example, a mortgage banker can often provide or otherwise secure first or secondary mortgage financing, mezzanine loans, equity loans or other forms of equity financing.
Mortgage Broker – a mortgage broker typically acts as an intermediary in securing a select type of real estate financing. For example, a mortgage broker may focus on single-family mortgages or construction financing.
Reserves ( also referred to as escrows) are funds held by the servicing agent or lender to pay for future costs associated with the mortgage or the property. Examples of commonly held escrows include funds for property taxes, future repairs or tenant inducements.
Servicing Agent – a servicing agent, such as CMLS, is appointed by the lender to administer a mortgage loan. Lenders have a number of reasons why they may choose to work with a servicing agent such as where they do not have a mortgage administration department of their own, the loan is geographically distant from the lender’s office(s), or the lender does not have expertise in administering the particular loan in question.
Spread – this is a term used by investors to refer to the difference between the interest rate in a mortgage contract and the yield on a similar term government bond. For example, if a five year government bond is yielding 5.00% and the mortgage contract calls for an interest rate of 6.50%, the spread is 1.50%. The spread is often quoted in basis points. In the example above, 1.5% would be expressed as “150 basis points.”
Term Loan – a term loan has a fixed term until maturity of usually in excess of three years. Term loans are usually secured by completed, income producing commercial properties.
Yield – the yield on a mortgage is the lender’s future receipt of all payments of interest and capital expressed as a percentage of the amount invested in the mortgage.
Yield Maintenance – yield maintenance can arise when a borrower wants to pay out a mortgage prior to maturity while maintaining future payments of principal or interest as scheduled in the mortgage contract. The borrower makes a lump sum payment representing the outstanding principal balance as well as the present value of future interest payments. These funds are then used to purchase risk-free securities (usually government bonds) such that the interest on the securities plus the funds on hand are equal to the remaining scheduled payments under the mortgage contract.
