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Glossary of Securitization Terms

Accrued Interest:
Interest earned but not yet paid.

Adjustable-Rate Mortgage  (ARM):
A mortgage loan with an interest rate and payments that are subject to change periodically over the life of the loan.

To repay a mortgage loan through a series of periodic payments that cover both principal and interest.

Average Life:
(see Weighted-Average Life.)

Book Entry:
An electronic issuance and transfer system for securities transactions, such as those maintained by the Federal Reserve system. Unless otherwise stated in the prospectus supplement, Fannie Mae MBS are issued in book-entry form.

Call Risk:
The possibility that prepayments will increase above an anticipated rate, causing earlier-than-expected return of principal, usually occurring during a time of falling interest rates.

The maximum rate of interest payable on an adjustable-rate security or mortgage loan.

In the case of FannieMae MBS, assets that back the MBS.

Constant Maturity Treasury (CMT):
An index published by the Federal Reserve Board calculated from the average yield of a range of Treasury securities adjusted to constant maturities of various time periods (six months, one year, ten years).

Constant Prepayment Rate (CPR):
A prepayment measure calculated by assuming that a constant portion of the outstandingmortgage loans will prepay each month. See also PSA Prepayment Speed.

Cost of Funds index (COFi):
An index of the weighted-average interest rate paid by savings institutions for funds, usually by members of the 11th Federal Home Loan Bank District.

Coupon Rate:
The stated annualized percentage rate of interest paid on an investment.

Credit Risk:
The possibility that an issuer or another party may default on in its financial obligations to the investor, may have its credit rating downgraded by a rating agency, or may experience changes in the market's perception of its creditworthiness.

Current Face Value:
The current amount of principal outstanding on a security, which is calculated by multiplying the original face value by the most recent factor.

CUSIP Number:
A unique, nine-digit number assigned to each publicly traded security maintained and transferred on the Federal Reserve book-entry system.

Failure to perform an obligation.  (In the case of a note or mortgage loan, usually by nonpayment of principal and interest installments.)

Disclosure Documents:
(See Prospectus and Prospectus Supplement)

The amount by which the purchase price of a security is less than its face value, which has the effect of raising the effective yield of the security above the coupon rate.

Distribution Date:
The date on which payments from a security to an investor are made (usually the 25th of the month for Fannie Mae MBS).

Effective Yield:
The annual return on an investment, which is calculated by dividing the coupon interest rate by the amount invested expressed as a percent of par value.

Extension Risk:
The possibility that prepayments will be slower than an anticipated rate, causing later-than-expected return of principal. This usually occurs during times of rising interest rates.  Face Value–The principal amount of a security.

Factor: The decimal value, calculated monthly, that represents the proportion of the original principal amount outstanding at a given time.

Final Distribution Date or Maturity Date:
The latest possible date on which an MBS receives payment. The actual final payment of any MBS will likely occur earlier, and could occur much earlier than the final distribution date or maturity.

Fixed-Rate Mortgage:
A mortgage loan with an interest rate and payments that do not change over the life of the loan.  Floor–The minimum rate of interest payable on an adjustable-rate mortgage.

A published interest rate used to determine the interest rate payable on an adjustable-rate mortgage.

The amount paid for the use of money, usually expressed as an annual percentage rate.

IO (Interest Only):
A security that pays the investor some or all of the interest payments on the underlying assets and little or no principal. Declining interest rates have an adverse effect on IOs.

Issue Date:
The date as of which a security is originally formed. LIBOR (London Interbank Offered Rate)–The interest rate charged among banks for short-term Eurodollar loans.  A common index for adjustable-rate mortgages.

The capability of ready conversion of an asset or investment to cash.

The amount added to a reference index that is used to determine interest rate changes on an adjustable-rate mortgage.

Market Price:
The current price of a security in the market.

Market Risk:
The possibility that the price of a security will change over time.

Maturity Date:
(see Final Distribution Date)

A pledge of real property as security for the repayment of a debt; the document that creates and represents the lien upon the real property that secures the debt.

Mortgage-Backed Security  (MBS):
An investment instrument that represents ownership of an undivided interest in a group of mortgages. Principal and interest from the individual mortgages are used to pay principal and interest on the MBS.

Option Risk:
The possibility that a borrower may prepay a mortgage in a time frame that adversely affects the investor's yield.

Original Face Value:
The original principal amount of a security on its issue date.

PO (Principal Only):
A security that usually does not bear interest and is entitled to receive only payments of principal from the underlying assets. Rising interest rates will have an adverse effect on POs.

A group of mortgages backing an individual MBS issue.

A price in excess of 100 percent of face value.

The unscheduled payment of all or part of the outstanding principal of a mortgage loan, including voluntary payments by the borrower as well as liquidations from foreclosures, condemnations, or casualty.

Prepayment Risk:
The possibility that the mortgages underlying the security are repaid faster or slower than expected.

The amount paid for a security, usually stated as a percentage of its face value. A par price is 100 percent, a premium price is higher than par, and a discount price is lower than par.

The remaining balance of a security or loan, exclusive of accrued interest.

Prospectus and Prospectus Supplement:
The legal documents that outline all material details of an investment.

PSA Prepayment Speed:
A measure of the rate of prepayment of mortgage loans developed by the PSA. This model represents an assumed rate of prepayment each month of the then-outstanding principal balance of a pool of  newmortgage loans. A 100 percent PSA assumes prepayment rates of 0.2 percent per annum of the then unpaid principal balance of mortgage loans in the first month after origination and an increase of an additional 0.2 percent per annum in each month thereafter (for example, 0.4 percent per annum in the second month) until the 30th month.  Beginning in the 30th month and in each month thereafter, 100 percent PSA assumes a constant annual prepayment rate (CPR) of 6 percent. Multiples are calculated from this prepayment rate; for example, 150 percent PSA assumes annual prepayment rates will be 0.3 percent in month one, 0.6 percent in month two, reaching 9 percent in month 30, and remaining constant at 9 percent thereafter. A zero percent PSA assumes no prepayments.

Public Securities Association (PSA):
The national trade association of banks, dealers, and brokers that underwrite, trade, and distribute mortgage-backed securities, U.S. government and federal agency securities, and municipal securities.

Record Date:
The date used to determine the owner of a security for purposes of distributing the next scheduled payment.

REMIC (Real Estate Mortgage Investment Conduit):
A multiple-class mortgage cash flow security.

Scenario Analysis:
An examination of expected investment performance over a variety of assumed economic conditions.

Secondary Mortgage Market:
The market in which existing mortgages or mortgage securities are bought and sold.

Settlement Date:
The date of the delivery of and payment for a security.

Stripped Mortgage-backed Security (SMBS):
A mortgage security that separates principal and interest payments from then underlying mortgage-backed securities.

Weighted-Average Coupon  (WAC):
The weighted average of the interest rates on the mortgage loans underlying an MBS. 

Weighted-Average Life (WAL):
The average amount of time that will elapse from the date of a security's issuance until each dollar of principal is repaid to the investor. The weighted-average life of an MBS is only an assumption. The average amount of time that each dollar of principal is actually outstanding is influenced by, among other factors, the rate at which principal, both scheduled and unscheduled, is paid on the mortgage loans underlying the MBS.

Weighted-Average Maturity  (WAM):
The weighted average of the remaining terms to maturity  (expressed in months) of the mortgage loans underlying the MBS.

The rate of return on an investment over a given time, expressed as an annual percentage rate. Yield is affected by the price paid for the investment as well as the timing of principal repayments.

The annual percentage rate of return on an investment, assuming it is held to maturity.

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