Dictionary of Foreclosure-related Terms

Adjustable Rate Mortgage (ARM)

A mortgage loan subject to changes in interest rates during the course of the loan term.  When rates change, adjustable-rate mortgage (ARM) monthly payments increase or decrease at intervals determined by the lender.  The change in monthly-payment amount, however, is usually subject to a cap. 

In hybrid ARMs, the interest rate is fixed for a period of time – often three, five, seven or ten years -- and then coverts to an adjustable rate thereafter.  This type of mortgage is also sometimes called a “balloon mortgage”.

Appraisal

A document from a professional that gives  an estimate of a property's fair market value based on the sales of comparable homes in the area and the features of a property. An appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Balloon Loan or Mortgage

A mortgage that typically offers low rates for an initial period of time (usually five, seven or ten) years: After that time period elapses, the balance is due or is refinanced by the borrower.  This is also known as an adjustable rate mortgage or “ARM” mortgage.

Balloon Payment

The final lump sum payment due at the end of a balloon mortgage.  This is often used by lenders as a way to make monthly payments artificially low.
Bankruptcy: A federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts. This usually occurs when someone owes more than they have the ability to repay.

Collections Department

The department in a bank or mortgage company responsible for recovering lost monies from delinquent loans.

Complaint

A document preceding a lawsuit.  A complaint normally includes a statement of all claims being raised by the person bringing the lawsuit.

Debt to Equity Ratio

The debt to equity ratio is a financial ratio used to determine whether a government agency, business, household or other entity can safely borrow over long periods of time.  The ratio is calculated by dividing an entity's outstanding debt by the amount of equity it holds. 

A high debt to equity ratio may indicate that an entity is financing its growth with debt.  For government agencies, debt to equity ratio is important because it will determine whether it has a strong or weak bond rating.

Deed-in-Lieu

To avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt. This process does not allow the borrower to remain in the house but helps avoid the costs, time and effort associated with foreclosure.

Default

The inability to make timely monthly mortgage payments or otherwise comply with mortgage terms.  A loan is considered in default when payment has not been paid after 60 to 90 days.  Once in default, the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.

Default Notice

A formal notice to a borrower declaring that a default has occurred and that legal action may be taken.

Delinquency

Failure of a borrower to make timely mortgage payments under a loan agreement.  Generally, after 15 days, a late fee may be assessed.
Detroit Vacant Property Campaign: The Detroit Vacant Property Campaign (DVPC) is an initiative of Detroit Local Initiatives Support Corporation (LISC) and is led by Community Legal Resources (CLR). 

DVPC works to provide policy development and analysis, technical assistance and legal resources to reduce the negative effects of vacant property and enhance the future of Detroit’s neighborhoods.

Equity

Home equity refers to the value of a property excluding the amount owed on a mortgage or outstanding debt.  Home equity can increase as a result of value appreciation or as a mortgage is paid off.  

Escrow Account

As used in the housing context, an escrow account is a separate account in which the lender puts a portion of each monthly mortgage payment.  An escrow account provides the funds needed for such recurring expenses as property taxes, homeowners insurance, mortgage insurance, etc. This is generally viewed as a desirable practice that helps families manage their housing costs by spreading the payments for these expenses throughout the year.

Eviction

A legal process terminating the right to occupy a home, apartment or business property.  State law eviction proceedings are required before putting someone out.

Fannie Mae

Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors. By purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.  This is also known as a Government Sponsored Enterprise (GSE).

Federal Housing Administration (FHA)

The Federal Housing Administration was established in 1934 to advance homeownership opportunities for all Americans. The FHA assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

FightMortgageForeclosure.com

Hosted by Wayne County, this site is a tool for residents who are behind on their mortgage payments or are in default.  The Wayne County Mortgage Foreclosure Prevention Program provides education and awareness training, housing counseling and intervention. 

Financial Hardship Letter

A financial hardship letter is one that explains to a bank or financial institution a homeowner's failing financial situation.  If properly written, it can encourage a remediation plan from the lender in order to keep the family in the home.

Forbearance

A lender may decide to not take legal action when a borrower is late in making a payment.  This occurs when a borrower sets up a plan that both sides agree will bring overdue mortgage payments up to date.

Foreclosure

A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.  Foreclosure laws are based on the statutes of each state.

Foreclosure Prevention Counselor

Counseling assistance provided to help struggling homeowners avoid a foreclosure and possibly retain their home.  Certified Foreclosure prevention counseling programs are free or have nominal fees.  Do not pay large sums of money for counseling assistance.

Foreclosure Rescue Scam

The scam targets those who have fallen behind on their mortgage payments.  A con artist promises to help homeowners save their home but is actually intent on stealing the home or most of its accumulated equity.

Forfeiture

A clause in a contract for deed or lease-option agreement stating that if the owners of the property do not honor the agreement, they forfeit all rights to their property.

Freddie Mac

Federal Home Loan Mortgage Corporation (FHLM). This is a federally chartered corporation that purchases residential mortgages, securitizes them and sells them to investors. This provides lenders with funds for new homebuyers.  This is also known as a Government Sponsored Enterprise (GSE).

Housing and Urban Development (HUD)

The U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans. It does this by addressing housing needs, improving and developing American communities and enforcing fair housing laws.

HOPE NOW

HOPE NOW is an alliance between HUD-approved counseling agents, servicers, investors and other mortgage market participants that provide free foreclosure prevention assistance.

Hope for Homeowners (HFH)

Hope for Homeowners (HFH) is a program specifically for “underwater” borrowers – meaning they owe more on their mortgage than their house is worth.  HFH has been recently incorporated into President Obama’s Making Home Affordable program by requiring principal write-downs to help homeowners increase the equity they own in their homes.

Housing Counseling Agency

Provides counseling and assistance to individuals about loan default, fair housing and home buying. Many services are free at non-profit agencies - look for agencies certified by HUD or MSHDA (in Michigan).

Judicial Foreclosure

A foreclosure process that proceeds through the court system.

Lender

A term referring to any person or company that makes loans for real estate purchases.  This is sometimes referred to as a loan officer or lender.

Lien

A legal claim against property that must be satisfied when the property is sold. The value of the property is used as security in repayment of a debt.  Examples include a mechanic's lien, which might be for the unpaid cost of building supplies, or a tax lien for unpaid property taxes. 

A lien is a defect on the title and needs to be settled before transfer of ownership.  A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.

Loan Modification

This is when a lender agrees to modify the terms of a mortgage without refinancing the loan.

Loan Servicer

The company that collects monthly mortgage payments and disperses property taxes and insurance payments.  Loan servicers also monitor nonperforming loans, contact delinquent borrowers and notify insurers and investors of potential problems. 

Loan servicers may be the lender or a specialized company that only handles loan servicing under contract with the lender or the investor who owns the loan.

Loan Workout

This term covers a variety of negotiated agreements you might arrange with creditors to address a debt you are having trouble paying.  Most commonly, the term means an agreement with a mortgage lender to restructure a loan to avoid foreclosure.

Loss Mitigation

A process to avoid foreclosure in which the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

Loss Mitigation Department

Departments within banks and mortgage servicing companies that are dedicated to assisting homeowners avoid foreclosure and making sure the bank loses as little money as possible from bad loans.

Making Home Affordable

Making Home Affordable is part of President Obama's comprehensive strategy to get the housing market back on track.  Through the Making Home Affordable Program, millions of American families may be eligible to refinance or modify their loans to a payment that is affordable now and into the future.

Michigan Foreclosure Task Force

The Michigan Foreclosure Task Force is a statewide clearinghouse for information and a unified voice to keep homeowners and renters in their homes.  Task Force members include housing counseling agencies, legal service providers, nonprofit organizations, state and local government agencies and officials, lenders, community development corporations and private sector partners who are committed to protecting consumers and helping distressed communities.

Michigan Foreclosure Prevention Program

The Michigan Foreclosure Prevention Program is a project of The Michigan Poverty Law Program (MPLP), a cooperative effort of Legal Services of South Central Michigan and the University of Michigan Law School.  MPLP provides state support services to local legal aid programs and other poverty law advocates.

Michigan State Housing Development Authority (MSHDA)

The Michigan State Housing Development Authority provides financial and technical assistance through public and private partnerships to create and preserve safe and affordable housing.

MSHDA’s Save the Dream program assists homeowners who are experiencing financial difficulties or facing foreclosure, our statewide network of homeownership counselors, a second mortgage program to assist current MSHDA borrowers, and refinance programs available to eligible homeowners. 

Modification 

A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.

Mortgage-Backed Security (MBS)

A security that represents an undivided interest in a group of mortgages.  Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Mortgage Interest Deduction

The mortgage interest deduction is a tax break for homeowners.  Homeowners with deductions that are large enough to warrant itemizing can deduct the amount of interest on their mortgage when they file their taxes.  The mortgage interest deduction is the largest subsidy for housing in the United States.

Neighborhood Stabilization Program (NSP)

Neighborhood stabilization refers to a set of activities aimed at helping communities cope with large numbers of foreclosures by bringing foreclosed properties back into productive use and working to minimize the destabilizing impacts of foreclosures.

Partial Claim

A loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.

Partial Payment

A payment that is less than the total amount owed on a monthly mortgage payment.  Normally, lenders do not accept partial payments.  The lender may make exceptions during times of difficulty.  Contact your lender prior to the due date if a partial payment is needed.

Predatory Lending/Predatory Loan

Abusive lending practices that include a mortgage loan to someone who does not have the ability to repay. It also pertains to repeated refinancing of a loan charging high interest and fees each time.

Pre-foreclosure Sale or Short Sale

A procedure in which the borrower is allowed to sell a property for an amount less than what is owed on it to avoid a foreclosure.  This sale fully satisfies the borrower's debt.

Real-Estate Owned Property (REO)

Real estate owned or REO property refers to property that is owned by a bank or other loan servicer as part of its real estate portfolio.  REO property is often synonymous with vacant, foreclosed homes and ones that are particularly challenging to market for resale.

Redemption Period

The specific amount of time after a foreclosure sale during which the foreclosed-upon homeowner can buy back their home.  The homeowner must pay the outstanding mortgage balance and all costs incurred during the foreclosure process.  The length of this period varies.  In Michigan, the redemption period is generally six months.

Reinstatement

A phase of the foreclosure process in which the homeowner has an opportunity to stop the foreclosure by paying money that is owed to the lender.

Refinancing

Paying off one loan by obtaining another. Refinancing is done to secure better loan terms (like a lower interest rate).

Repayment Plan

An agreement between a lender and a delinquent borrower in which the borrower agrees to make additional payments to pay down past due amounts while making regularly scheduled payments.

Reverse Mortgage (HECM)

The reverse mortgage is used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home.  A lending institution such as a mortgage lender, bank, credit union or savings and loan association funds the FHA insured loan, commonly known as HECM.

Securitized Loan

A loan backed by collateral such as property.  A mortgage loan is a securitized loan.

Servicer

The entity responsible for collecting mortgage payments from a homeowner.  Since lenders commonly sell loans to a third party after origination, the servicer for many homeowners’ loans will be a different entity than their original lender.

Shared Appreciation Loan

A form of financial assistance for homeownership in which the homebuyer must repay the original loan amount plus some percentage of the home price appreciation in lieu of interest.  This approach helps to reduce the need for new subsidy monies to help future homebuyers as housing costs increase.  Shared appreciation loans are often structured as a silent second mortgage that does not need to be repaid until the home is sold.

Sheriff Sale or Pre-foreclosure Sale

A Sheriff's Sale is an auction sale of property held by a sheriff.  A Sheriff's Sale occurs as a result of a court order to seize and sell the property. 

Pre-foreclosure Sale or Short Sale

A procedure in which the borrower is allowed to sell property for an amount less than what is owed on it to avoid a foreclosure.  This sale fully satisfies the borrower's debt.

Subprime

Subprime mortgages are made to borrowers with poor credit histories who do not qualify for prime interest rates.  To compensate for the increased credit risk, subprime lenders charge a higher rate of interest.

Summons

This document is provided at the beginning of the lawsuit to tell the defendant what is being requested and what must be done to respond to the complaint.  This is also called “original notice” or “notice of suit.”

Title

A legal document establishing the right of ownership; recorded for public record.  This is also known as a deed.

Underwater

Underwater mortgages are mortgage arrangements that leave the owner with more debt on the property than the current market value.

Underwriting Requirements

The tests or standards used by a lender when deciding loan approval.  These may include a minimum credit score, maximum debt-to-income ratio and other measures of a borrower's creditworthiness as well as the risk involved in extending a loan.

(Sources: ForeclosureResponse.org and HUD Glossary).