The practice of offering home loans to buyers with poor credit ratings or insufficient income, popularized during the housing boom. The sub-prime loans were then packaged with prime loans into "mortgage-backed securities," eventually prompting the mortgage crisis in 2008.
A type of loan in which the interest rate varies with a market index, making it hard for the borrower to predict what their interest rate would be a few years after signing the mortgage. Despite the ARM's indictment in the subprime crisis, a survey by Freddie Mac predicted that nearly 10 percent of borrowers will be getting this type of loan in 2011.
The process by which a bank, or lender, changes the terms of a mortgage in favor of the borrower, either by reducing the interest rate, extending the loan term or reducing fees and penalties. The major government program for modifications is known as Home Affordable Modification Program (HAMP), but lenders also have their own programs.
The investor is a bank that owns a "bundle" of mortgages, purchased from another bank, which may or may not contain subprime loans. While some investors say they have no say in the mortgage modification process, many servicers say their investors are the ultimate arbiters of modification decisions.
A servicer is the original bank that makes the mortgage contract with the homeowner. This is the bank to which homeowners pay their mortgage. Many servicers have sold mortgage bundles to their investors, making it hard to decipher whether the modification decision lies with the servicer or investor.
"Underwater" describes a homeowner who owes more on their house than its current market value. (Occasionally, mortgage counselors will refer to this as being "upside-down" in one's mortgage). Being underwater can result from refinancing (when too much money is taken out), from rising interest rates, or from falling property values in a certain area.
A type of loan in which the amount of the monthly payment is less than the amount of the interest charged for that period, so the size of the loan increases each month. (The term "amortization" refers to paying off a loan the typical way, in which part of the payment goes toward the interest and part goes toward the principal balance).