Attorney Trey Wilson - RL Wilson Law

06 October 2008


Mortgage: A real estate debt instrument under which the borrower gives the lender a lien on the property as collateral for repayment.

Prime mortgage: A real estate loan in which the borrower meets the underwriting standards set by federal home loan agencies Fannie Mae and Freddie Mac. Fannie and Freddie buy mortgages from lenders to sell as bundled mortgage bonds, but the lenders have to make sure their mortgages meet the federal underwriting guidelines to be eligible. A typical prime mortgage covers a maximum of 80 percent of the value of the house, and housing costs should absorb no more than 28 percent of the buyer's gross income.

Subprime mortgage: Type of loan aimed at giving more buyers a chance to own a home, particularly buyers with less money for a down payment, less income and checkered credit histories. In the last decade, lots of subprime mortgages were written with little or no down payments, low but adjustable interest rates and little credit scrutiny. Once the adjustable rates reset, subprime mortgages required substantially higher interest rates than prime mortgages, which made them attractive to investors who bought bundles of these mortgages from lenders.

Alt-A mortgage: Short for "alternative-A." These loans form a class of mortgage between prime and subprime. Typically, they involve buyers who would be considered prime but who have little documentation of their creditworthiness or are seeking jumbo loans beyond the limits accepted by Fannie Mae and Freddie Mac ($417,000 until Congress raised the limit earlier this year).

ARM: An adjustable-rate mortgage. Such mortgages usually have a low introductory interest rate that resets after three to five years at a higher rate.

Statement loans: When a buyer didn't want to bother with documenting income and credit history, some lenders offered statement loans that required nothing more than the buyer's word that he was good for the loan.

Piggybacks: Two loans taken out at once on the same property. A typical prime mortgage requires a 20 percent down payment. Buyers who don't have that amount are generally required to purchase private mortgage insurance, which covers the lender in case of default. To avoid PMI, many borrowers took out two mortgages at once – one for 80 percent of the value of the house and a shorter-term mortgage (typically an ARM) to cover the down payment. Both mortgages were tax-deductible, which made piggybacks more attractive to buyers than PMI. (PMI became tax-deductible in 2007.)

Silent seconds: Second loans taken out without the knowledge of the first lender. Many borrowers who took out piggyback mortgages did so without telling the lender making the first mortgage. This compromised the lender's credit check. Since most lenders planned to sell the mortgage to Fannie Mae, Freddie Mac or an investment bank that would bundle it into a mortgage-backed security, credit scrutiny often fell by the wayside.

Neg-ams: Negative- amortization mortgages. Negative amortization means that the loan amount keeps growing as the borrower makes payments lower than what's needed to pay off the interest and principal. The loans were based on expectations that home values would keep rising so that the borrower could pay off the mortgage when the house was sold.

Trey Wilson --Named By Scene in SA Magazine As One of San Antonio's Best Real Estate Litigation Attorneys -- September 2008 -- As voted on by peers