Finance & Capital
Finance & Capital
Encyclopedia terms, articles, and lessons about finance & capital.
Encyclopedia Terms
Accounting
Accounting in note investing tracks loan-level and portfolio-level transactions for accurate tax reporting, profitability analysis, and investor.
Accounts Payable
Accounts payable (AP) is money owed to vendors for services received. For note investors, AP includes fees to servicers, attorneys, title companies, and.
Accounts Receivable
Accounts receivable is money owed to a business. For note investors, the mortgage note itself is the receivable — a debt asset generating returns.
Accredited Investor
An accredited investor meets SEC financial thresholds like $1M net worth or $200K income, qualifying them for private note fund offerings and syndications.
AFS / HTM Unrealized Losses
AFS securities mark to fair value through AOCI; HTM stays at amortized cost. Rising-rate unrealized losses hit AFS capital, not HTM.
Allowance for Credit Losses (ACL)
ACL is a bank's reserve for expected lifetime loan losses under CECL. Coverage below 100% of nonperforming loans signals under-reserving.
Basis Point
A basis point equals 0.01% and is used to express interest rate changes and pricing spreads in mortgage note transactions.
Bridge Loan
A bridge loan is short-term financing that covers the gap between an immediate capital need and longer-term funding for note investors.
Brokered Deposits
Brokered deposits are third-party-placed funds treated as volatile funding. PCA restricts them when a bank falls below well-capitalized.
Capital
Capital is cash or liquid assets available to purchase mortgage notes. The amount and source of capital shapes an investor's deal flow and pricing power.
Cash-on-Cash Return
Cash-on-cash return is annual pre-tax cash income divided by total cash invested. Note investors use it to price performing loans by working backward.
CECL (Current Expected Credit Loss)
CECL is the FASB ASC 326 lifetime-expected-loss standard that replaced the incurred-loss model in 2020 for banks and credit unions.
CET1 (Common Equity Tier 1)
CET1 is the highest-quality bank capital divided by risk-weighted assets. Basel III minimum is 4.5%; 7% with the conservation buffer.
Charge-Off Ratio
The net charge-off ratio measures a bank's loan losses as a share of its loan book. Above 1% is elevated; above 2% is acute stress.
Commercial & Industrial (C&I) Loan
C&I loans finance business working capital and equipment outside real estate. Typically 15-25% of a bank's book; floating-rate, cyclical.
Commercial Real Estate (CRE) Loan
CRE loans are mortgages secured by income-producing real property. Banks above 300% of capital in CRE face heightened supervisory scrutiny.
Compound Interest
Compound interest is calculated on both the original principal and all previously accumulated interest, accelerating growth over time.
Entity
An entity is a legal business structure — LLC, corporation, or trust — that separates personal assets from note investing liabilities and meets licensing.
First-Lien vs. Second-Lien Mortgage
First-lien mortgages have senior foreclosure priority and 60-85% recovery; second liens are junior with 0-30% recovery contingent on equity.
Freddie Mac (FHLMC)
Freddie Mac (FHLMC) is a GSE that buys and securitizes mortgages, playing a central role in the secondary mortgage market.
General Partner (GP)
A general partner (GP) is the managing partner who controls operations and bears unlimited liability in a note fund, while limited partners provide.
Ginnie Mae (GNMA)
Ginnie Mae (GNMA) is a U.S. government agency that guarantees mortgage-backed securities backed by federally insured loans.
Gross Return
Gross return is total income from a note investment before deducting servicing fees, legal costs, and other expenses — compare to net return for true.
Hard Money Loan
A hard money loan is a short-term, asset-based loan from a private lender, underwritten on collateral value rather than borrower credit — common for rehab.
Hedge Fund
A hedge fund is a private pooled investment vehicle that buys large portfolios of mortgage notes from banks and GSEs, often reselling loans downstream to.
Held-for-Sale (HFS) Loans
HFS loans are a bank's disposition pipeline, marked at lower of cost or fair value. Reclass triggers if held beyond ~180 days.
Indirect Auto Lending
Indirect auto lending is dealer-originated auto financing. Concentrated portfolios typically show 2x the delinquency rate of direct lending.
Investment Value
Investment value is what an asset is worth to a specific investor based on their return targets, holding period, and cost of capital.
Leverage
Leverage is the use of borrowed capital — credit lines, debt facilities, or private loans — to increase buying power and amplify equity returns when.
Line of Credit
A line of credit is a revolving borrowing facility used both as a loan structure (HELOCs) note investors buy and as a portfolio financing tool for fund.
Liquidation
Liquidation is converting a note or REO property into cash through sale, payoff, or foreclosure — the final step in realizing returns on a note investment.
Liquidity
Liquidity measures how quickly an asset converts to cash. Mortgage notes are illiquid, requiring weeks or months to sell — making capital reserves.
Loan Modifications to Distressed Borrowers (LMD)
LMD is the FASB ASU 2022-02 framework that replaced TDR reporting in 2023. Four categories: principal forgiveness, term extension, rate cut, payment delay.
LTV (Loan to Value)
LTV is the ratio of a loan's unpaid balance to the property's market value. A lower LTV means more equity protecting the note investor's lien position.
Mortgage-Backed Security
A mortgage-backed security (MBS) is an investment created by pooling mortgage loans and selling shares to investors on the secondary market.
Multifamily Loan
Multifamily loans finance 5+ unit residential property. Underwriting follows NOI and cap rates, not borrower income — distinct from 1-4 family.
Net Worth Ratio
Net Worth Ratio is a credit union's primary capital metric. NCUA tiers: 7% well-capitalized, 6% adequate, 4% under, 2% critical.
OREO (Other Real Estate Owned)
OREO is real property a bank takes onto its balance sheet after foreclosure. Rising OREO balances are a leading indicator of bank distress.
Par Value
Par value is the face value or unpaid principal balance of a mortgage note. Buying below par creates a discount that drives investor returns.
Peer Cohort (Size Band)
A peer cohort groups banks or credit unions by total-asset size so a community bank is compared against similar institutions, not megabanks.
POF (Proof of Funds)
Proof of funds (POF) is a bank statement or letter verifying a buyer has the capital to close a note purchase. Sellers require POF before accepting offers.
Present Value
Present value is the current worth of future mortgage payments discounted at a specified rate — the foundation of every note pricing calculation.
Private Equity
Private equity refers to investment capital deployed into private assets, including distressed mortgage note portfolios.
Quarter-over-Quarter (QoQ)
Quarter-over-quarter (QoQ) measures change from the prior fiscal quarter. Banks report Mar/Jun/Sep/Dec; deltas in pp for ratios.
Real Estate Investment Trust
A REIT is a company that owns or finances income-producing real estate, giving investors access to real estate returns with stock-like liquidity.
ROI (Return on Investment)
ROI measures total profit on a note investment as a percentage of capital invested. It is simple but ignores hold time — pair with IRR for a full picture.
SDIRA (Self-Directed IRA)
A self-directed IRA (SDIRA) lets investors hold mortgage notes in a retirement account, enabling tax-deferred or tax-free growth on note income.
Securitization
Securitization pools mortgage loans into trusts and issues securities to investors, driving liquidity and creating deal flow for note buyers.
Simple Interest
Simple interest accrues only on the outstanding principal balance, not on accumulated interest. It is the standard method for mortgage notes.
Special Purpose Vehicle
A special purpose vehicle (SPV) is a separate legal entity created to isolate financial risk in mortgage note transactions.
Tangible Common Equity (TCE)
TCE strips goodwill and intangibles from common equity to show loss-absorbing capital. FDIC data uses total equity as a proxy in practice.
Texas Ratio
The Texas Ratio measures bank distress by dividing nonperforming assets by loss-absorbing capital. Above 20% historically signals elevated failure risk.
Tier 1 Leverage Ratio
Tier 1 leverage ratio measures bank capital against unweighted total assets. 5% is well-capitalized; below 3% is critically undercapitalized.
Uninsured Deposit Ratio
Uninsured deposit ratio measures deposits above FDIC's $250k cap as a share of total. Above 50% indicates elevated funding-flight risk.
Velocity of Money
Velocity of money measures how quickly a note investor cycles capital from acquisition through resolution and back into the next deal.
W-9
IRS Form W-9 collects a taxpayer identification number for payment reporting and is exchanged at every stage of a mortgage note transaction.
Warehouse Line
A warehouse line is a revolving credit facility that note investors and mortgage companies use to fund loan acquisitions before resale.
Articles
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