Facing foreclosure: The subprime meltdown and the Rockbridge area

Here are some terms you might run across when browsing this Web site.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

Alt-a loan
An Alt-a loan is a type of mortgage that falls between prime and subprime. Though the borrowers generally have good credit scores (and thus, clean credit histories), the mortgage itself has some issues that increase its riskiness, such as higher loan-to-value and debt-to-income ratios or a lack of documentation of the borrower's income.

Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage features an interest rate that varies depending on the market. The initial interest rate is often fixed for a period of time (generally two or three years), after which it adjusts periodically.

Bond rating
A bond rating is a grade assigned to bonds by one of the bond rating agencies (Moody's, Standard and Poor's and Fitch) that indicates how risky an investment the bonds are. The agencies assign these grades based on the issuer's financial strength or its ability to pay the bond's principal and interest in a timely fashion. A "triple-a" rating generally designates the least risky (or safest) investments.

Bubble
A bubble can be defined as an economic cycle characterized by rapid expansion followed by a contraction; a surge in prices in a particular sector followed by a drastic drop in prices as a massive selloff occurs; or a theory that security prices rise above their true value and will continue to do so until prices go into freefall (the bubble “bursts”).

Collateralized debt obligation (CDO)
An investment-grade security backed by a pool of bonds, loans and other assets.

Collateralized mortgage obligation (CMO)
A CMO is a mortgage-backed security created by pooling a large number of mortgages. These CMOs are then divided into tiers of bonds, which the bond rating agencies then grade.

FICO score (Beacon score)
Named after the company that developed it (Fair Isaac Corporation), a FICO score determines a borrower's creditworthiness. Scores range between 300 and 850; anything above 650 generally indicates a good credit history, while scores below 620 tend to fall into the subprime range. The scoring algorithm takes various factors in the following categories into account when determining credit risk: payment history, current level of indebtedness, types of credit used, length of credit history and new credit.

Foreclosure
A situation in which a homeowner is unable to make payments on his or her mortgage, so the lender can seize and sell the property. Foreclosure is generally a last resort.

Hedge fund
A hedge fund is a portfolio of investments that is open only to a limited number of investors. It generally requires a large initial investment, and investors must keep their money in the fund for at least a year. Hedge funds are less regulated than mutual funds because the majority of investors in the fund must be accredited -- the investors must have a net worth of more than $1 million and earn a certain amount of money per year.

Home equity line of credit (HELOC)
A HELOC is a line of credit extended to a homeowner that uses the borrower's home as collateral. Once a homeowner has paid off a certain percentage of his or her primary mortgage, he or she can draw on the line of credit formed from that balance. The repayment schedule is flexible as long as minimum interest payments are made monthly, though once the term has expired (anywhere from less than five years to more than 20 years later), the balance must be paid in full.

Mortgage
A mortgage is a type of loan used to purchase real estate without paying the entire value of the purchase up front. Using the piece of real estate as collateral, the borrower works out a predetermined set of payments with the lender. If the borrower defaults on the loan, the lender can foreclose on the property.

Non-amortizing loan
A type of loan in which payments on the principal are not made, while interest payments or minimum payments are made regularly. As a result, the value of principal does not decrease at all over the life of the loan. The principal is then paid as a lump sum at the maturity of the loan. Unlike most conventional loans, a non-amortizing loan's balance can increase over time.

Ponzi scheme
A ponzi scheme is an investment swindle in which some early investors are paid off with money put up by later ones to encourage large risks. It's named after Charles Ponzi, a notorious swindler from the 1920s.

Predatory lending
Predatory lending occurs when lenders entice borrowers to take out mortgages that carry hefty fees, a high interest rate, strip the buyer of equity or place the borrower in a lower credit rated loan to the benefit of the lenders.

Prime
A classification of borrowers, rates or holdings in the lending market that are considered to be of high quality. This classification is placed on those borrowers deemed to be the most credit-worthy, and the prime rate is the rate at which a lender will lend to its high-quality borrowers.

Recession
A significant decline in activity spread across the economy that lasts longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).

Real estate obligation
Another term for a foreclosed home.

Securitization
Securitization occurs when issuers create financial instruments by creating pools of other investments, dividing them into tiers and marketing the tiers to other investors. This way, smaller investors can purchase pieces of larger bonds.

Subprime mortgage
A type of mortgage that is normally made to borrowers with lower credit ratings. As a result of the borrower's lower credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate for carrying more risk.