Distressed Debt Glossary

Orient yourself with this complete glossary of terms - learn the lingo to communicate effectively with your counter-parties.

The following is a nearly comprehensive collection of the acronyms, terms & phrases you will find helpful as you build your investing career. It isn’t necessary to review everything right now but a quick look will help you start to get comfortable with the language.

Use this list as a reference whenever you need an explanation!

Abandonment: The voluntary relinquishment of rights of ownership by failure to use the property, coupled with intent to abandon (give up the interest). If a homeowner has vacated, investors will refer to the property as Vacant. Many times, this information is not known until someone local to the property has investigated.

Absentee Landlord/Owner: An owner of tenant-occupied real estate that does not actively manage their investment. Many times resulting in neglect and deferred maintenance. Sometimes referred to as a slumlord.

Abstract of Title: Summary of public records relating to the title to a particular property from which an attorney or title insurance may determine whether there are any title defects which must be cleared before a buyer can purchase the property with clear, marketable and insurable title.

Accounting: The process of recording, reporting, and analyzing the financial transactions of a business. When referring to investing in mortgage notes, it refers to amortization, loan balance, payment history and billing information.

Acceleration Clause: Mortgage stipulation which gives the lender the right to demand payment in full upon the happening of a certain event, such as default (failure to make payments), change of ownership without notifying the lender (“Due on Sale Clause”), destruction of the property or other event which endangers the security of the loan.

Accessory Building: Used for the benefit of a main building, such as a tool shed, garage or similar structure.

Accounts Payable: Money owed. Generally used in business and not personal finance. Usually represents payment due for services or materials.

Accredited Investor: A qualification for sophistication – an individual with a net worth that exceeds $1 million or an income exceeding $200,000 in each of the two most recent years with the reasonable expectation of the same income level in the current year (including spouse: $300,000)

Accrued Interest: Interest on a note that has been earned by investor but not paid. Since interest is normally paid in arrears, accrued interest does not necessarily indicate a delinquency in payment.

Acquisition Costs: Costs of acquiring a note other than the purchase price: due diligence expenses, recording fees, title insurance, etc.

ACH Payment: “Automated Clearing House”. Electronic payment taken from one bank account to another. Typically preferred by performing note investors for consistency & automatic payments from borrowers.

Additional Insured: An individual or company, in addition to the insured, who is listed in the declarations of an insurance policy. Ideally, note investors are named as an additional insured on their borrower’s policy for any loans they own.

ARM (Adjustable-Rate Mortgage): A loan with an interest rate that changes periodically in keeping with a current index. Typically, ARMs start off with a lower interest rate comparable to a fixed-rate mortgage.

Administrative Fee: Fees paid to a financial institution for certain services. (charge to borrower for making payments by phone, preparing a modification agreement, etc)

Adverse Possession: Method of obtaining ownership rights by the open, notorious, exclusive, and hostile possession of private real property for a period of time which varies from state to state (typically 5 to 30 years). Some states have additional requirements such as payment of property taxes or physical residence. Known in some states as “squatters rights”

Affidavit: A written statement or declaration made under oath before a notary public or other authorized officer.

Allonge: Also called an “allonge to note” or endorsement, this is a document transferring ownership of a note to a third party. Once created, the allonge becomes part of the note and typically has the language: “Pay to the Order of ________, without recourse”

Amortization: A payment plan which enables the borrower to reduce debt gradually through monthly payments of principal and interest. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases.

Amortization Schedule: Table showing how much of each payment will be applied toward principal and how much toward interest over the life of a loan. Shows the gradual decrease of the loan balance until it reaches zero.

APR (Annual Percentage Rate): Not the note rate on the loan. Calculated according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. The APR is always higher than the actual note rate on a loan.

Annuity: Income from investment paid in a series of regular payments.

Appraisal: An opinion of value based on factual analysis. More comprehensive than a BPO (broker’s price opinion)

Appreciation: Describes an increase in value of property or the difference between the original value of the property and the current value.

Arrears: The state of being behind in payments. Also refers to the amount of interest past-due.

ARV (After Repaired Value): Projected value of a property after repairs or improvements have been made. Calculated by researching recently sold comparable properties in better condition.

Assignment: The transfer of an asset from one owner to another. A written, recorded document by which a mortgage is transferred from one person to another. The “assignor” transfers the property to the “assignee”. Synonymous examples include: assignment of mortgage, assignment of deed in trust or assignment of security instrument. (Assignment of lease, assignment of rents are other types of assignments)

Assignment Chain: Multiple assignments documenting subsequent transfers. For example, one assignment may transfer for the originating bank to a third-party bank. A separate assignment created later would transfer from the third-party bank to a private note investor. The assignment chain consists of the complete Chain of Title.

Assumable Mortgage: Type of mortgage that may be transferred with all existing terms from seller to buyer. Does not include a “Due on Sale Clause”

Balloon Mortgage: A mortgage loan with lower payments that requires one large payment due upon the maturity date (typically at the end of five or seven years).

Bankruptcy: Sometimes referred to as BK. Filed as a last resort by borrowers, typically to stop a foreclosure action and find relief from insurmountable debt.

Bankruptcy (Chapter 7): Individual is allowed to keep certain exempt property. Most liens (such as mortgages) survive. Other assets, if any, are sold (liquidated) by the trustee to repay creditors. Most types of unsecured debt are discharged by the bankruptcy. Bankruptcy discharge stays on the individual’s credit report for up to 10 years for most purposes.

Bankruptcy (Chapter 13): The reorganization for consumers, in which borrowers partially or fully repay their debts. In a Chapter 13, borrower keeps their property and uses income to pay all or a portion of the debts over three to five years. The minimum amount repaid is roughly equal to your nonexempt property. Borrower must pledge disposable net income (after subtracting reasonable expenses) for the period which they make payments. At the end of the three-to-five-year period, the balance owed on most debts is erased.

Bankruptcy Voluntary Petition: document filed with the court to initiate a bankruptcy proceeding, filed by the debtor. Lists borrowers assets, liabilities and other important financial information.

Beneficiary: In states which deeds of trust are commonly used instead of mortgages, the lender is called the beneficiary.

Billing Statement: monthly bill sent by a lender/loan servicer to borrower. Provides customer with a summary of activity on an account, including balance or payoff, payments made, credits, finance charges and late fees.

Bill of Sale: A written document included in the purchase or sale of a mortgage note transaction. Typically exists as Exhibit B of a standard purchase/sale agreement. Signed by seller after funds have been received to serve as a receipt for the purchase.

Borrower: The party who has signed the note & mortgage and owes funds to the lender. May also be accompanied by a co-borrower.

BPO (Broker Price Opinion): Typically costs <$100. Estimate of potential sales price of property based on selling prices of comparable properties in the area. Sometimes known as a “Drive By” appraisal because it is conducted on the exterior only (broker does not enter property)

Broken Chain of Title: Incomplete history of assignments used to transfer ownership to the end buyer of a mortgage note transaction. Chain of title breaks when a document or recording is missing. Typically it is the seller’s responsibility to cure any break by preparing the missing documents and finding the appropriate companies to sign.

Broker: In the note business, this refers to a person or company that brings buyers & sellers together and earns a fee for doing so. Reputable brokers are acceptable to do business with but most investors prefer to deal with the principal owner of the asset in question.

Capital: Cash available for investment, AKA “dry powder” or “liquid funds”

Cash-on-Cash Return: A simple calculation of the rate of return often used in real estate transactions. Measures the annual return made on an investment in relation to the down payment or purchase price. ($500 per month = $6,000 per year / $25,000 investment = 24% cash-on-cash return)

Certified Check: A personal check drawn by an individual that is guaranteed to be good. The bank holds the funds to pay the certified check and will not honor a stop payment by the payer.

Certified Copy: A true copy, attested to be true by the office holding the original.

Chain of Title: The complete history of the transfers of title to an asset over time, from the original owner (typically the originating bank) to the current owner. Evidenced in mortgage note transactions by the assignment of mortgage.

Claim: Assertion of some right or demand. Typically made to an insurance company in the event of title issues or property damage.

Clear Title: A title that is free of liens or legal questions as to ownership of the property.

Cloud on Title: An outstanding claim, encumbrance or legal issue which, if valid, would affect or impair the owner’s clear title to the subject property.

CLTV (Combined Loan to Value): A calculation which expresses the amount of all secured debts attached to a property as a percentage of the total value of the property. If a borrower owes a $60,000 1st mortgage, $40,000 2nd mortgage and the house is worth $125,000, the CLTV ratio is $100,000/$125,000 or 80%. A ratio of more than 100% means the property is underwater from the borrower’s perspective.

Collateral: Property pledged as security to back up a promise to repay debt. In the note business, the mortgage evidences the lender’s legal claim on the borrower’s collateral.

Collateral File: Sometimes called the collateral folder or shortened to “collateral” – refers to all paper files that make up a mortgage note investment, most critically: the note, mortgage, assignment & allonge.

Collateral Assignment: An additional, separate obligation made part of a contract to guarantee its performance such as by agreeing to transfer certain property to insure the performance of the contractual agreement.

Collection Letter: Letter sent to delinquent borrower indicating the intent of lender to pursue all legal remedies if an account is not brought current, usually sent by an attorney prior to a Demand Letter.

Collections: The efforts a mortgage company takes to collect past due payments.

Counter Offer: An offer (instead of an acceptance) made in response to an offer. Part of the negotiation process.

Contiguous: Sharing a common border. Some mortgages are secured by contiguous lots or other types of connected properties.

Contingency: A condition that must be met before a contract is legally binding. For example, a note buyer may include a contingency in the loan purchase/sale agreement that the complete payment history or chain of title will be made available prior to funding.

Contract: An agreement that establishes enforceable legal relationships between two or more parties. May refer to a loan purchase/sale agreement or a borrower workout agreement.

Convertible ARM: An Adjustable Rate Mortgage loan that can be converted to a fixed-rate during a certain time period.

Conveyance: Transfer of title to property. Includes most instruments where an interest in a parcel of real estate is created, mortgaged or assigned.

Corporate Advance: Funds paid by a lender on behalf of the borrower. Example: when the lender pays to bring delinquent taxes current or purchases forced placed insurance on a property.

Corporate Resolution: An action taken by vote of the directors of an LLC (or other corporation). A title insurance company or closing agent may require corporate resolution prior to insuring a transaction or closing a deal.

County: A political division within a state, usually encompassing one or more cities or towns. Some exceptions include New York City (which contains multiple counties, 5 of which are called boroughs) and Louisiana, where they are called a Parrish

County Records: Public recorded documents where notice is given regarding chain of title, liens and other matters affecting real estate. The mortgage (or deed-of-trust) and assignment of mortgage are recorded here along with the deed to the property.

Cram Down: a court ordered reduction of the secured balance due on a loan, granted to a homeowner who has filed for personal bankruptcy. The bankruptcy court treats the outstanding mortgage balance in two segments: the amount of debt equal to the current appraised value of the home is treated as a secured claim, which the borrower must continue to pay. The amount of debt in excess of the property’s value becomes an unsecured claim, which is usually not paid in full.

Credit History: A record of an individual’s repayment of debt. History of one specific debt on a credit report is called a “pay string”

Creditor: One who is owed money. In note investing this is also called the lender, note holder or investor.

Credit Report: A report of an individual’s credit history prepared by a credit bureau and used by a note investor to determine the level of risk associated with a specific borrower. Includes information on foreclosures, bankruptcy and other public records. Every loan or other debt included on the report is referred to as a “trade line”

Daisy Chain: Refers to a deal that has multiple brokers involved. It is very difficult to get a deal done in this scenario. Unless they are direct themselves, note investors should try to work with brokers who are direct to the seller.

DBA: “Doing Business As”

Debt: Money owed from one person to another.

Debt Service: The amount of money owed to pay all liens secured by a subject property.

Debtor: One who owes a debt

DTI (Debt-to-Income): A calculation used by mortgage companies to qualify borrowers for a mortgage or a resolution to resolve delinquency. Calculated by dividing the borrower’s gross monthly income by their debt service.

Deed: The document that transfers ownership of real estate, recorded in the county records.

Deed in Lieu: A resolution option for a delinquent borrower (typically owing more than the property is worth) in which a borrower voluntarily deeds the collateral property in exchange for a release from all obligations under the mortgage.

Deed in Lieu of Foreclosure: The transfer of title to the property from a borrower to the mortgage company to satisfy their mortgage debt and avoid foreclosure. Also called a “voluntary conveyance.”

Deed of Trust: Alternative to a mortgage in western states. The document that creates a secured debt attaching a note to property as collateral. Recorded in the county records. A deed of trust contains three parties: Borrower, Trustee, and Beneficiary. The deed of trust is an instrument that identifies the original loan amount, legal description of property being used as security, the parties, and the terms in the event of default.

Default: A borrower is in default when they fail to meet the terms of their loan agreement. Usually this is based on failure to make payments on time. Non-performing loans are in default.

Deficiency Balance: The difference between what a foreclosed home sold for and the remaining mortgage balance. The mortgage company may require the borrower to pay the amount of the deficiency balance even after the collateral property has been sold.

Deferred Payments: Payments that are authorized to be postponed as part of the resolution process to avoid foreclosure.

Delinquent: Behind in payments, in default (delinquent mortgages are more than 90 days late).

Demand Letter (NOI) – “Notice of Intent” to foreclose. Gives borrower 30 days to respond prior to the lender taking the next action in the foreclosure process.

Depreciation: The decline in property value due to market forces, neglect or deferred maintenance. The difference in the original property value and the current value. Also an accounting term which shows the declining monetary value of an asset and is used as an expense to reduce taxable income

Discharge: The release of the performance of a contract or other obligation. Occurs when a bankruptcy is successfully completed by the borrower.

Door Knock: Service provided by private investigators or loan services where an agent visits a borrower’s property on behalf of the lender to deliver documents, assess occupancy or give the borrower a phone for a warm-transfer to the lender’s collector

Down Payment: The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

Due Diligence: The critical process of research & analysis of all the facts about a piece of real property or mortgage conducted prior to valuing & purchasing an asset.

Due-on-Sale Clause: Provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.

E & O Insurance: Errors & Omissions. A policy designed to protect professionals, such as lenders or realtors’ clients from malpractice or mistakes made by human error.

Ejectment: Forced eviction process of a homeowner after Foreclosure.

Eminent Domain: The right of the government to take private property for public use upon payment of its fair market value.

Encumbrance: A legal right or interest in land that affects a good or clear title and diminishes the land’s value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search is completed to reveal the existence of such encumbrances.

Endorsement: Also called the allonge, an addition to the note transferring ownership of the instrument.

Engagement Letter: A letter that defines the legal relationship between two parties. Often used when hiring an attorney.

Entity: An organization that possesses a separate existence for tax purposes. Some types of entities include corporations and LLCs.

Equity: The homeowner’s financial interest in a property equal to the value of property above the amount of debt owed. Equity from the homeowner’s perspective is quantified by the CLTV (combined loan to value) or from a junior lien investor’s perspective as the LTV (loan to value).

Escrow: An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, a note buyer may put their purchase proceeds put into escrow until the seller has delivered collateral documents (to the Escrow Account) to be reviewed for completion. Also refers to the borrower’s funds held to pay taxes & insurance payments.

Escrow Account/Escrow Agent: The account or third party agent where the escrow funds or collateral documents are held to facilitate a transaction. Also, the account where borrower’s funds are held to pay taxes & insurance.

Escrow Analysis: A periodic review of escrow accounts to make sure that there are sufficient funds to pay the taxes and insurance on a home when they are due. A portion of each monthly payment from the borrower is allocated towards taxes & insurance.

Estate: The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.

Eviction: The lawful expulsion of an occupant from real property. Either a tenant after breaching their lease or a borrower after the property has been foreclosed.

Executor: The person or entity named in a will who has the responsibility of carrying out the terms of the will (collecting the deceased’s assets, paying debts, and distributing the remaining assets to the beneficiaries).

Face Value: The balance owed on a note.

Fannie Mae (FNMA): The Federal National Mortgage Association, which is a congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.

Federal Housing Administration (FHA): An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.

Fee Simple: The greatest possible interest a person can have in real estate.

FDIC: Federal Deposit Insurance Corporation.

First Mortgage: Also called a “Senior Lien”, the mortgage that will be paid before any other recorded loans in the event there are not enough funds for all lien holders in the liquidation of the mortgaged property. Usually refers to the date in which loans are recorded, but there are exceptions.

Fixed-Rate Mortgage: A mortgage loan in which the interest rate remains the same for the life of the loan.

Forbearance Agreement: Is an agreement between the lender and the borrower in order to delay a foreclosure. The lender delays the foreclosure while the borrower begins a temporary payment plan within a designated timeframe. Allows the lender to set new terms to the loan that fit the borrower’s financial situation while keeping the foreclosure action ready to  initiate if the borrower fails to honor the agreement.

FMV (Fair Market Value):  The property value if the property were to be sold in the current market.

Forced Placed Insurance: Insurance placed on a property to protect the lender’s interest when the borrower has let their insurance lapse.

Foreclosure: Sometimes abbreviated to FC, the legal process by which the mortgaged property is repossessed by the lender from the borrower in default. Typically involving a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt. “To initiate FC” means to begin the process.

Foreclosure Prevention: Steps by which the mortgage company works with the homeowner to find a permanent solution to resolve an existing or impending loan delinquency.

FSBO (For Sale by Owner): The process of marketing, buying and selling of real estate without the representation of a real estate broker.

FTC: Federal Trade Commission

Garnishment: A legal proceeding in which a borrower’s income (such as a salary) is taken in payment of a debt. The amount that is taken is set by statute and, in most states, a judgement is required before garnishment.

General Partner (GP) A member of a partnership that has the authority to make decisions for the partnership and shares in profit and loss. A partnership must have at least one GP and may also have Limited Partners.

Good Faith: Something done with good intentions, without knowledge of fraudulent circumstances, or reason to inquire further. A basic expectation of proper business etiquette.

Grace Period: A period of time after the due date of a loan in which payments may be made and not considered delinquent.

Grantee: The person to whom an interest in real property is conveyed.

Grantor: The person conveying an interest in real property.

Gross Return: Profit funds received prior to taking out any expenses or costs.

Hard Money Loan: A high-interest loan originated by private individuals based primarily upon the property equity, rather than the credit worthiness of the borrower. Typically much faster process than traditional bank loans. Often used by investors to remodel properties when traditional lenders refuse to lend.

Hardship Letter: An explanation from the borrower as to the reason why they are having trouble making their mortgage payments such as job loss, medical emergency or illness, divorce, etc. Typically required by lenders when the regular mortgage payment cannot be made.

Hazard Insurance: Insurance coverage that pays for the loss or damage to a property.

Hedge Fund: A hedge fund is a pooled investment vehicle typically structured as a private investment partnership where professional fund managers oversee capital from private investors. Hedge funds in the context of the secondary mortgage market may participate in the trading of mortgage-backed securities and whole loans, contributing to liquidity and efficiency in the secondary mortgage market. Hedge funds often have the flexibility to invest across different asset classes, including mortgage notes, aiming to deliver positive performance regardless of overall market conditions. Investors in hedge funds include institutional entities, accredited investors, and high-net-worth individuals.

HELOC (Home Equity Line of Credit): A line of credit that’s based on a percentage of the equity in a property. Typically originated as a junior lien and secured with a mortgage.

Homeowners’ Authorization Letter: Homeowner’s approval giving a third party permission to speak on their behalf with a lender. May also be made to authorize junior lien holder to speak with senior lien holder.

Homeowners’ Options Letter: Letter many lenders send to delinquent borrowers detailing some of the options available to resolve their delinquency.

Improved Land: A parcel of land that has a structure built or has been otherwise enhanced.

Indicative Bid: Preliminary bid on a mortgage note or pool of loans prior to a complete verification of data.

Institutional Note: A note originated by a financial institution, as opposed to one made by a private company or individual.

Interest-Only Mortgage: A mortgage where the homeowner pays only the interest on the loan for a specified amount of time.

Investment Property: A property not considered to be a primary residence that is purchased by an investor in order to generate income or otherwise gain a profit.

Investor: The owner of a mortgage note, property or other asset.

Junior Lien: A mortgage debt in a subordinate position. Typically in second position but may be behind more than one other lien.

Judgment: A final determination by a court of a matter presented to it. Most often a judgment is for a sum of money.

Legal Description: A description of land recognized by law, based on government surveys, spelling out the exact boundaries of the entire piece of land. It should so thoroughly identify a parcel of land that it cannot be confused with any other.

Lender: A general term encompassing all mortgagees and beneficiaries under deeds of trust.

Lender’s Policy: A title insurance policy which insures the validity, enforceability and priority of a lender’s lien. This policy does not provide protection for the owner.

Lessee: A party to whom a lease (the right to possession) is given in return for a consideration (rent).

Lessor: A landlord; one who gives a leasehold to a lessee.

Leverage: the principle of increasing one’s yield through the strategic borrowing of money

Lien: A claim against a property that affects the property owner’s ability to transfer ownership to another party, the lien owner can utilize the property as security for repayment of a loan, or other claims.

LOI (Letter of Intent): Typically refers to a note buyer’s purchase proposal to a seller in an effort to buy mortgage notes. Outlines the price, terms and other contingencies. Includes a line for the seller to sign upon their acceptance.

Line Of Credit: A loan sometimes called a “line of credit” where an owner uses equity in their property as collateral for a loan which permits the draw of funds up to a preset amount (see HELOC)

Liquidation: The sale of an asset to generate funds.

Liquidity: The relative speed of converting an asset to cash. Notes are typically a less liquid asset than other more commonly traded such as stocks or previous metals. Note brokers like FIXnotes help add liquidity to the market giving investors a faster exit for their investments.

Loan: Money lent in return for the payment of interest.

Loan Boarding: The process an investor or loan servicer undergoes when reviewing the data, collateral & other documentation upon purchasing a mortgage note.

Loan Counselor: Someone who is a “resolution specialist’ who negotiates with borrowers to resolve their delinquent loan status.

Loan Level: A term used to describe loans as individual assets instead of as an entire portfolio.

Loan Servicing Company: A licensed vendor that manages portfolios of mortgage notes. They collect and process loan payments, send statements to the borrower, manages the escrow account, forwarding funds to an investor, etc

Loan Pool: A large portfolio or group of loans. Also called a “tape”.

LPSA (Loan Purchase/Sale Agreement): The contract created between a buyer & seller in order to transact a mortgage note or portfolio of mortgage notes.

Loss Mitigation: The lender’s effort to determine the appropriate option/resolution solution to sell the loan or bring the mortgage current to avoid foreclosure.

LTV (Loan to Value): Similar to CLTV (combined loan to value), LTV is a calculation which takes the secured debts attached to a property as a percentage of the total value of the property. If a borrower owes a $60,000 1st mortgage and the house is worth $50,000, the CLTV ratio is $60,000/$50,000 or 120%. A ratio of more than 100% means the property is underwater.

Maturity Date: The date included on the mortgage document in which the borrower promises to repay the remaining balance due.

MERS (Mortgage Electronic Registration System): Assignment of Mortgage transfer system used by financial institutions. When a loan enters the private secondary market, assignments are created out of MERS instead of the name of the bank. MERS loans can be identified by a MIN number on the first page of the mortgage.

Mitigated: Make less severe.

Modification: Change to the terms of a mortgage loan, including changes to the interest rate, loan balance or loan term. Typically recorded in the county records.

Mortgage: A lien against property to secure a loan. Recorded in the county records. Also called a Security Instrument or Deed of Trust. Transferred via Assignment of Mortgage.

Mortgagee: The lender.

Mortgage Insurance: Insurance that protects the mortgage company against losses caused by a homeowner’s default on a mortgage loan. Mortgage insurance is often required if the borrower’s down payment is less than 20% of the purchase price.

Mortgage Modification: A process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e. mortgagor and mortgagee). In general, any loan can be modified to the benefit of the borrower in one or more of the following ways:

  • Reduction of principal balance
  • Reduction of interest rate
  • Reduction in late fees
  • Change in loan duration

Mortgagor: The borrower.

Motion for Relief (MFR): Motion for Relief from Stay is filed by an attorney in bankruptcy court to allow the lender to foreclose. Typically filed when the lender’s mortgage is not being paid.

Notary: An officer licensed by the state who has the authority to take the acknowledgments of parties signing documents. Acknowledges and attests to the validity of others. Notarized signatures are required for recorded documents.

Note, Secured: A note is a promise to pay. Also called a Promissory Note. This document is simply an IOU made to the lender by the borrower stipulating the terms of repayment. Notes are “secured” by the recording of a mortgage or a deed of trust. After recorded, this creates a lien against the property, giving the lender collateral in the event the note is not repaid.

Note, Unsecured: No collateral or equity backing the promissory note. May have been originated as an unsecured debt or the security instrument could have been stripped later in the life of the note.

Notice of Default: A formal notice to the borrower that a default has occurred and that legal action may be taken.

Non-Performing Loan: NPL or NPN, a loan that is in default. Traded at a discount on the secondary market.

Obligee: A person to whom a legal obligation or duty is owed; for example, the payee of a note – the Lender

Obligor: A person who has placed themselves under a legal obligation – the borrower

Operating Agreement: Document containing the terms and agreements for operating an LLC or corporation.

Owner Financing: a transaction in which the seller provides all or part of the financing, thus creating a private note.

PACER: Public Access to Court Electronic Records, a fee based website containing information from the Bankruptcy court.

Paper: A colloquial name for a note (because note investing is essentially investing in a stack of documents). Paper may be unsecured or it may be secured by real property or personal property.

Payee: The lender

Payment Status: Current, past due, delinquent, active foreclosure, etc.

Payoff Statement: Document sent to borrower from lender indicating the amount required to pay a loan balance in full and satisfy the debt.

Payor: The borrower.

Performing Loan: A loan where the borrower has made consistent payments for the life of the loan. Sometimes used synonymously with Re-Performing Loan (which means the borrower was previously in default but is now paying again).

POF (Proof of Funds): Evidenced requested by brokers and loan-sellers to qualify yourself as a capable buyer. A bank statement (with sensitive information redacted) will be typically be sufficient.

Pool Buyer: Bulk buyer of mortgage note portfolios.

Portal: Access to a vendor’s online system to review information provided.

Power of Attorney: An instrument authorizing an agent, called an attorney in fact, to act for a principal.

Prepayment: To pay off all or part of a debt early

Prepayment Penalty: A fee stipulated in some notes that may be charged to a borrower if the loan is paid off early.

Promissory Note: A promise to pay. A document signed by the borrower to the lender, referred to in the industry as the Note.

Proof of Claim: A written statement filed with the Bankruptcy Court to substantiate the claim of a creditor (the lender) against the borrower.

Public Records: County Records which by law give notice to all of matters relating to real estate

Quit Claim Deed: A conveyance by which a grantor transfers whatever interest they have in a property, without warranties or obligations. Deed is transferred subject to any and all encumbrances.

Reaffirmation: Referring to a mortgage lien that’s part of a bankruptcy; if the lien is reaffirmed it means the borrower acknowledges the responsibility for the debt and the lender can pursue the homeowner in the event of a default. If the borrower does not reaffirm the lien, then the lender can no longer pursue the borrower personally (but may pursue foreclosure against the mortgaged property).

Recorders’ Office: Each county has an office where employees work to keep records of all real estate transactions within the jurisdiction. This is where assignments, deeds and other recordable documents are mailed to be added to the public record.

Redemption: The regaining of title to real property after a judicial foreclosure sale, usually in a specified time period that is state specific.

Refinance: A new mortgage with new terms. The new loan pays off an existing debt and is often a useful strategy to help borrowers (with decent credit & equity) pay off a non-performing loan while reducing their interest rate and payment.

Reinstatement: The borrower’s process of paying missed payments to cure a default so that the loan is considered current.

REO (Real Estate Owned): Properties owned by a bank or lender after a foreclosure or “deed in lieu”.

Repayment Plan: A borrower’s promise to pay arrears due on a mortgage over a specified time period while still making regular monthly payments.

Re-Performing Note: This is a note that was previously in default but is now performing. Traded at a discount based on yield ranging from 8-20%+

Retainer: The upfront fee paid to a vendor or attorney to retain their services.

RESPA (Real Estate Settlement Procedure Act): RESPA requires that borrowers receive disclosures at various times, outlines servicing and escrow account practices and describe business relationships between settlement service providers.

RESPA Letter: Also known as a “hello” or “goodbye” letter, this is the existing lender’s last contact and new lender’s first contact with a borrower. Required to be sent whenever a loan is sold or transferred, this letter notifies the borrower and gives them important contact information of the new loan servicer.

ROI (Return of Investment): The ratio of money gained or lost, (whether realized or unrealized), on an investment relative to the amount of money invested.

Satisfaction: The document that is recorded to release a lien when a loan has been paid off in a satisfaction. Recording this document acknowledges the full repayment of the debt. Also known as Satisfaction of a Mortgage or Release of Lien

SDIRA (Self Directed IRA) – An individualized retirement account that allows the account owner to make their own investment decisions. The IRS requires that a third-party custodian hold the IRA’s assets on behalf of the owner. Self-Directed IRA custodians will permit their clients to engage in investments a wide variety of investments, including, but not limited to, real estate, stocks, mortgages, precious metals, etc.

Servicer: Company that collects & accounts for principal and interest payments. See Loan Servicing Company.

Senior Lien: A mortgage having claim before any other lien or mortgage. Also called a first mortgage.

“Sharpen your Pencil”: A phrase used by some brokers and mortgage sellers during negotiation to coax a buyer into taking another look at the asset or portfolio to increase their offer.

Short Sale: A loss mitigation option when the lender agrees to let the borrower sell the property for less then the full amount due and accept the proceeds as payment in full.

Sub Performing Note: A cash-flowing loan where the borrower is not making the full monthly payments.

Subpoena: A writ issued by court authority to compel the attendance of a witness at a judicial proceeding, disobedience may be punishable as a contempt of court.

Subrogation: Substitution of one creditor for another.
Tape: A large portfolio or group of loans. Refers to the pre-PC days of business when Excel spreadsheet type documents were literally printed on a roll of paper.

Tax Lien: A claim against a property which may be sold by the taxing authority arising out of non-payment of taxes. An encumbrance placed upon the property as a claim for payment of a tax liability. A tax lien may be imposed for failure to pay city, county, estate, income, payroll, property, sales, or school taxes. Tax liens and assessments take priority over most, if not all other liens and are very state-specific.

Title: The documented evidence that a person or organization has ownership of real property.

Trustee: A person or corporation who manages the investments of a trust on behalf of the trust beneficiary. Trustees must act in accordance with the investment objectives set by the trust. They may not share in any profits in the trust account, but they may charge a reasonable fee for their services.

UPB (Unpaid Principal Balance): The current balance owed by a borrower on a mortgage note.

“Upside Down or Under Water”: Typically refers to a secured loan where the balance of the debt is greater than the value of the property.

Velocity of Money: The speed in which an investor can profit from their investments. A highly efficient organization can be successful closing less profitable deals at volume.

Voluntary Conveyance: The transfer of title from a borrower to the lender to satisfy the mortgage debt and avoid foreclosure, also called “Deed-In-Lieu of Foreclosure.”

W-9: Form used to obtain a tax identification number for an individual or entity.

Wiped: Refers to a lien that has been extinguished at a foreclosure sale due to insufficient proceeds to cover your position.

Workout: A workout (or resolution) can be a variety of negotiated agreements arranged between the lender and borrower to address a delinquent debt to avoid foreclosure.

Definitions provided are deemed to be accurate but not guaranteed. Head over to the Note Investor Forum with any questions!