Intrinsic ValuePresent value of the operating cash flow stream (Net Operating Profit After Tax minus change in Total Capital) discounted at the company’s Cost of Capital.
Also known as Enterprise Value.
Current Enterprise Market Price
The aggregate market value of all of a company’s or sector’s securities outstanding, including debt, preferred and equity.
Current Equity Market Price
The market value of a company’s or sector’s Common Stock Outstanding.
Free Cash Flow
Net Operating Profit After Tax minus Year-to-Year change in Net Capital.
Net Capital
Net Working Capital plus Long Term Assets.
Valuation Drivers
Factors which determine the course of the company’s (or sector’s) profits for a long time into the future. These include Sales Growth, Profit Margin, Cost of Capital, Capital Turnover and other elements which determine operating cash flows. These are the major, but not the only valuation drivers:
Growth Rate
Growth in Sales or Revenue
Cost of Capital
The weighted-averaged cost of: common equity, preferred equity and debt (after tax) of the individual company or sector. The cost of debt is the average interest rate for all the company’s or sector’s debt instruments over the forecast period. The cost of equity is the average total return demanded by an equity investor to invest in the company or sector. The cost of equity is assumed to be the same for all companies and to be driven by personal income tax rates, inflation expectations and the long-run historical difference in real, after-tax returns between equities and bonds.
Profit Margin
Net Operating Profit After Tax divided by Sales. This is different from EBIT Margin which is EBIT (Earnings Before Interest and Taxes) divided by Sales.
Capital Turnover
Sales divided by Average Net Capital
Current Stock Price per Share
Recent closing price of a share of a company’s or sector’s Common Stock
Current Debt per Share
Total reported debt plus the present value of non-capitalized operating leases divided by current shares of Common Stock outstanding
Current Enterprise Value per Share
The Enterprise or Intrinsic Value divided by current shares of Common Stock outstanding
Intrinsic Value of Equity per Share
The Intrinsic or Enterprise Value minus the market value of total debt, then divided by current shares of Common Stock outstanding.
Adjusted Intrinsic Value of Equity
The Intrinsic Value of Equity adjusted to reflect the impact of dividend payouts and of future stock buybacks presumed by the model to use excess operating cash. The adjusted intrinsic stock value is the net present value of thirty years of cash flows to the equity investor discounted at the cost of equity. The investor cash flows will consist of dividend payouts for the first twenty nine years and the sum of the dividend and warranted stock price per the-then-current number of shares. The adjusted intrinsic value is, therefore, equal to the maximum price an investor should be willing to pay for the stock today in order to receive a total return equal to the cost of equity.
Simple Return
The non-compounded interest rate which an equity purchaser would earn by holding the stock for a specified period of time assuming purchase at the current market price and ending with a future Intrinsic Value of Equity per Share.
Compound Total Return
The interest rate which an equity purchaser would earn by holding the stock for a specified period of time and re-investing dividends annually at the then
Intrinsic Value of Equity per Share.
Equity Investor Internal Rate of Return
The return which an equity purchaser would earn by holding the stock for 30 years, collecting all dividends and selling the stock at the Terminal Q Ratio at the end of thirty years
Free Cash Flow Annuity
The Free Cash Flow Annuity is calculated by taking the most recent annual Free Cash Flow (defined as Net Operating Profit After Tax minus Year-to-Year change in Net Capital) and dividing it by the current Long Term US Treasury Yield. This measure says "Ok, so if I never grow my current Free Cash Flow another nickel for the rest of time, how much is my stock worth using the Treasury yield as the discount rate?" This is a very conservative measure of intrinsic value. Any time you find a stock selling below that price, pay attention.
1y Target Est
The 1-year target price estimate represents the median target price as forecast by analysts covering the stock. Data is provided by Thomsonfn.com. More detailed target estimate data can be found by clicking a company's "research" link.
Avg Vol
Average Daily Volume is the monthly average of the cumulative trading volume during the last 3 months divided by 22 days. It is updated weekly and is provided by Market Guide.
Bid / Ask
The Bid price is the price you get if you sell your stock, and the Ask price is the price you have to pay to buy a stock. Note that the New York Stock Exchange (NYSE) does not permit Bid and Ask prices to be reported for delayed quotes, so this field is always reported as "N/A" (Not Available) for NYSE stocks.
Bid Size / Ask Size
Represents the number of shares a buyer is willing to purchase for the bid or ask price.
Change
The change in price for the day. This is the difference between the last trade and the previous day's closing price (Prev Close). The change is reported as "0" if the stock hasn't traded today.
Div Date
Dividend Pay Date. The date on which the dividend was last paid, or the date on which the next one will be paid.
Dividend (ttm)
All dividends paid out in the last twelve months are added together to create a
"Dividend(ttm)". The trailing dividend is then divided by the most recent closing
price to derive the Yield (see Yield). Depending on the dividend history of a particular company, the dividend(ttm) and yield could produce different results
compared to the company's forward dividend which is calculated by multiplying the payment frequency by the most recent dividend.
EPS Est
Current year analyst consensus EPS estimate from Thomson/First Call. More detailed analyst estimates and consensus data can be found by clicking the "research" link for a symbol.
EPS (ttm)
Earnings Per Share (EPS) is stated for the most recent 12 months (ttm, trailing 12 months). It represents primary earnings from continuing operations attributable
to each share of common stock outstanding, and is calculated by dividing the income from continuing operations by the average number of shares outstanding during the period (in accordance with generally accepted accounting principles, GAAP). The income is the income or loss that remains after excluding income or loss from discontinued operations and extraordinary charges or credits that are reported separately (again, per GAAP). Earnings Per Share is adjusted for stock splits and stock dividends. If data is not available for 12 months or more, "N/A" is displayed for EPS.
Daily updates are received on quarterly EPS data. Most earnings information is received within 48 hours of the company's earnings announcement. Every time a company declares their earnings, a record is sent for that particular earning figure along with a 12-month rolling EPS.
Ex-Div
The Ex-Dividend Date (without dividend). You need to purchase the stock before this date to receive the current quarter's dividend or stock split.
Exchanges
With detailed quotes, the stock exchange is listed along with the stock, such as (Nasdaq:YHOO). These abbreviations are used for the exchanges:
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
Nasdaq - National Association of Securities Dealers Automatic Quotation System
OTC BB - OTC (Over the Counter) Bulletin Board Market.
Toronto - Toronto Stock Exchange
Alberta - Alberta Stock Exchange
Vancouver - Vancouver Stock Exchange
Last Trade
The time and price of the last trade made for the stock. The date is reported in place of the time if the stock hasn't traded today.
Mkt Cap
The Market Capitalization is calculated by multiplying the Last Trade by the current number of shares outstanding. Shares outstanding is updated weekly and is provided by Market Guide.
Open
Opening price for the day; first trade of the day. This is not always close to the previous day's closing price, especially when company news is released after the
stock market closed the previous day.
P/E
Price to Earnings Ratio. This number is the previous closing stock price (see Prev Close) divided by the earnings per share, and reflects the value the market has
placed on a stock.
PEG
PEG stands for price/earnings growth and is calculated by dividing the trailing P/E by the projected earnings growth rate (in this case, the 5 year annualized growth rate). The idea behind the PEG Ratio is to relate price to growth.
P/S
Price to Sales Ratio. This number is the previous closing stock price (see Prev Close) divided by the revenue per share.
Prev Close
The closing price for the trading day prior to the last trade reported.
Yield
The dividend(ttm) per share divided by the previous closing stock price (see Prev Close), as a percentage (multiplied by 100).
Goodwill
A class of intangible assets such as a company's name and reputation.
Goodwill shows up on a company's books when it acquires another company, and naturally has to pay more for it than the listed book value of its assets. The
excess paid is categorized as Goodwill, added to the acquiring company's balance sheet as an asset, and then depreciated over a period of years.
Depreciation: Method to account for assets whose value is considered to decrease over time.
The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement, and also makes up part of the expenses shown
on the income statement. The amount that assets have depreciated to by the end date of the period is shown on the balance sheet.
Gordon Growth Model
Valuation formula holding that the total return of a stock investment will equal its dividend yield plus its dividend growth rate:
R = D/P + G
where D is next year's annual dividend;
P is the current share price;
G is the growth rate.
Stock Valuation based on Earnings
Stock valuation based on earnings starts out with one giant logical leap: you assume that each dollar of earnings per share of a company is really worth one
actual dollar of income to you as a stockholder. This is theoretically because you expect the company to use that dollar in a beneficial way: for example, they
could use it to pay you a dividend; or they could invest it in their own growth, which would cause future earnings to be even greater.
You also generally assume that the company will go through several distinct phases, starting with a "growth" phase where earnings are increasing at a
predictable rate, followed by a "mature" phase where earnings level off to a constant level.
To find the value of a stock, you need to calculate all of these future earnings (out to infinity!), and then use your own desired rate of return as a discount rate to
find their present value. The infinite sum of these present values is the fair market value of the stock; or more accurately, it's the maximum price you should be
willing to pay.
To get the formula, we'll define some variables:
E = this year's Earnings per Share
G = growth rate of earnings (written as a decimal)
N = number of years earnings will grow
We're assuming that earnings will start to grow for N years, and then level off:
Year Earnings
1 E(1 + G)
2 E(1 + G)2
N E(1 + G)N
N + 1 E(1 + G)N
N + 2 E(1 + G)N
Now we'll write R for our desired rate of return, and use it to find the present values of all of these earnings:
Year Present Value of Earnings
1 E(1 + G)/(1 + R)
2 E(1 + G)2/(1 + R)2
N E(1 + G)N/(1 + R)N
N + 1 E(1 + G)N/(1 + R)N+1
N + 2 E(1 + G)N/(1 + R)N+2
What we've got here is two geometric series; one going from 1 to N, and the other going from N + 1 to infinity. The result is basically too ugly to bother writing
out; it's more sensible just to use the formula for the geometric series in a spreadsheet or computer program. When people do write it out, they usually write it
this way:
P = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)
where E2 is the earnings in year 2 (or whatever) and Q is the so-called "discount factor" 1/(1 + R).
Zero-Growth Case
One special case is actually interesting to write out though. If you assume that the stock is already in the "mature", zero-growth years -- ie, that N is zero -- the
geometric series formula will simplify to:
P = E / R
or, equivalently,
P / E = 1 / R
So if you take a desired return of 11%, you find that the theoretical "fair" P/E ratio of the zero-growth stock is 1/.11 = 9.09, which sounds reasonable.
Constant-Growth Case
A second special case that people use is the "constant growth forever" case, meaning N is infinity. The formula in this case simplifies to
P = E1 / (R - G)
where E1 is earnings over the next 12 months.
This approach can be dangerous. Constant growth forever means the company is going to get infinitely big, which is a hard concept to fit into a common sense
understanding of valuation. The formula will give you a number as long as the growth rate G is less than the discount rate R; but you can force it to give you a
ridiculously huge number if you make G very close to R. This graph won't let you try that - the blue bars could blow through the top of your screen and hurt
somebody - but you can see it happen in the discounted cash flows calculator in the stock valuation article.
How much is a share of stock really worth? Not just in terms of analysts' opinions, but logically, based on facts?
In theory, the answer is simple: a company is worth the total amount of cash it will generate over its lifetime, discounted to its present value. (And don't panic if
you don't really understand that last sentence, because the next page explains it. You do not need any background to read this article.)
This is a simple discounted cash flows calculator, along with some popular variations and shortcuts, to make stock valuation make sense. But before we get
started.... When you use any kind of value formula, it's a good idea to remember Warren Buffett's advice, that "it's far better to buy a wonderful company at a fair
price than a fair company at a wonderful price". The idea is to find a company whose prospects you really believe in, and then use a valuation technique as a
reality check, to make sure the purchase price is acceptable. And try to make your valuation estimates realistic and conservative: you're trying to protect yourself
from overpaying, not justify your surplus of enthusiasm.
Gross Domestic Product (GDP)
Total annual output of the U.S. economy, measured by its final purchase price.
GDP is divided into four categories, according to the final purchaser:
GDP = Consumer Spending
+ Business and Residential Investment
+ Government Spending
- Trade Deficit.
(See the interactive GDP Diagram.)
The gross domestic product includes enough sub-components that just looking at trends in the bottom line GDP number can give you a misleading idea of what
the economy is actually doing. One example: if a retailer successfully sells a product, the sale will count toward "consumer spending" at its retail price; if the
retailer fails and the product bloats its inventory, it will count toward "business investment" at its wholesale price (i.e. the price the retailer paid for it). Later,
when the retailer works off the bloat, the decline in inventory will contribute a negative number toward business investment, officially lowering GDP. In other
words, the GDP calculation can make the start of a recession look better, and the recovery stage look weaker, than they really are.
GDP data is available from the Bureau of Economic Analysis (www.bea.gov).
Also see the definition of Gross National Product.
Government Spending
Spending by the federal, state, and local governments, accounting for about 20% of the GDP. See fiscal policy, and the interactive GDP Diagram.
Fiscal Policy
All policy by the government involving the collection and spending of revenue; ie "tax and spend" policy. In particular, fiscal policy refers to efforts by the
government to stimulate the economy directly, through spending. Compare monetary policy.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money to
companies and consumers. Compare fiscal policy.
Components of the Gross Domestic Product
If the word on the street during the late 1990s was that the business cycle was dead, the lesson of the early 2000s is that Economics Happens. So in the spirit of
too little, too late, here is a "big picture" overview of the entire U.S. economy.
Gross National Product (GNP)
Total output of the U.S. economy; see the definition of Gross Domestic Product for details. GNP and GDP tend to be used as synonyms, although GDP is
definitely the preferred measure among economists and is gaining popularity in general conversation as well; the two measures are fairly close numerically.
The difference is that GDP measures all production within the U.S., by whoever happens to be working here; GNP measures the production of all Americans,
wherever they happen to be working. (Maybe you can remember the "N" in GNP stands for "anywhere").
Gross Margin
Ratio of gross profit to sales revenue. (Also sometimes used as a synonym for gross profit).
For a manufacturer, gross margin is a measure of a company's efficiency in turning raw materials into income; for a retailer it measures their markup over
wholesale.
Most companies would like a gross margin that's as large as possible. An exception is the discount retailer; part of their game is to make their operations and
financing so efficient that they can afford to keep their markup tiny.
Gross Profit: Sales revenue minus sales costs. Also called "sales profit".
Gross Revenue
"Raw" sales income; the amount customers actually pay the company when they make their purchases.
When a company sells products, it has to make allowances for some portion of its sales for products expected to be returned, lost in delivery, or otherwise
requiring the company to refund the customers' money. The "official" revenue number, known as sales revenue, equals gross revenue minus these allowances.
Gross revenue is generally not an interesting number for investors. One case where it is interesting is when you're tracking the progress of a startup company. It's
possible that at the very beginning they'll be doing such a tiny amount of business that actual sales will be less than the allowances for refunds, meaning that
sales revenue will technically be a negative number. In this case the company will issue news releases about its gross revenue, so investors will at least know
that a few customers have been showing up and laying out some cash.
Sales Revenue
Income from sales of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Also called "Sales", "Net Sales",
"Net Revenue", and just plain "Revenue".
GOLD AND THE DISINTEGRATION OF U.S. ECONOMIC INFLUENCE
During the 1970's the world watched closely as the Watergate scandal unfolded. As well as the element of human fascination with such high level intrigue, any
event which could de-stabilise the US presidency would necessarily have a major impact on world financial markets. The worldwide concern relating to the US
political troubles at the time was accompanied by an upward spike in the gold price. Although the price of gold is affected by a large number of variables, it is
probable that the price movements which occurred at the height of the Watergate scandal were not coincidental.
In recent years we have observed the U.S. political administration become increasingly tainted with allegations and evidence of corruption and deception, the
most recent of which involve foreign contributions to Democratic campaign funds. In addition to a presidency soaked in scandal, the U.S. is currently
experiencing rates of money supply growth which are the highest in 10 years and a Federal debt which has burgeoned to $5.3 trillion.
Had the current US political and economic situation prevailed 20 years ago, then the resulting worldwide apprehension would almost certainly have caused
the price of gold to soar. Such an escalation in the relative value of gold would likely have occurred irrespective of events elsewhere in the world, due to the
dominant position of the U.S. within the global economy. However, what we have actually witnessed in recent years is a bear market in gold which has seen
the gold price drop to its lowest level in over 20 years when measured in inflation adjusted terms. This, I believe, is symptomatic of America's reduced
economic status in the world.
It is my opinion that there are 2 primary reasons for the reduced ability of events in the U.S. to influence financial decisions made throughout the world. Firstly,
enormous growth has occurred across Asia, catapulting this region into a position of economic leadership. The world now watches Asia with the same intense
interest it once reserved for the U.S. In fact, the two largest Asian economies, Japan and China, are also the largest foreign holders of claims on the U.S.
Treasury and Federal Reserve (by claims I mean dollars, which are a liability of the financial institutions which create them, and U.S. Government debt). This
gives these Asian nations substantial leverage in any dealings with the U.S. The shift in economic power towards Asia will likely continue at an accelerating
pace and will also be a major positive for gold due to the healthy distrust of government promises which many Asians demonstrate when it comes to personal
wealth protection.
U.S. economic influence has dwindled hand in hand with the debasement of its currency.
The emergence of the Asian region as the dominant force in the global economy is not a reflection of any U.S. short-comings, but a naturally occurring
phenomenon based on population dynamics and trade. However, the other primary reason for the reduction in U.S. influence results from America's own
actions. From 1933 until 1971, the U.S. dollar was linked to gold at the official rate of $35 per ounce, which means that during this period the U.S. government
was prepared to provide one ounce of gold in exchange for 35 U.S. dollars, and vice versa (to everyone except its own citizens, that is). This official link to
gold, however, created a problem for the government. It meant that the supply of U.S. dollars could not be arbitrarily increased to suit higher levels of debt and
a short term political agenda. The consequences of fiscal irresponsibility would be the complete depletion of America's gold reserves as the rest of the world
rushed to convert their de-based dollars into gold.
In 1971, President Nixon removed the official link between the U.S. dollar and gold. The U.S. government, no longer restrained by the need to exchange gold
for dollars at a certain rate, embarked on a spending spree which has seen the dollar lose around 90% of its purchasing power in 25 years. It has also reduced
to a small fraction of its former self when measured against most other major currencies.
Continuation of the current U.S. fiscal policies will firstly lead to the loss the dollar's reserve status, and eventually to the complete demise of the dollar as a
useful medium of exchange. (Note that the removal of the official link to gold did not, in itself, cause the collapse of the dollar. The real causes are numerous
and include expansionist-minded banks, a Federal Reserve unwilling to assert its independence from its political masters, and politicians who were/are
prepared to mortgage the future living standards of U.S. citizens to achieve short term political objectives. Nixon's action simply removed the last major
obstacle to the furtherment of financially irresponsible practices on a large scale).
U.S. economic influence has dwindled hand in hand with the debasement of its currency.
In conclusion, evidence of political wrong-doings within the U.S. Government continue to surface. However, for the reasons discussed above, anything short of
a presidential impeachment or resignation is unlikely to significantly affect investment decisions made outside the U.S., including the decision to buy or sell
gold. (Source: Milhouse)
Gold
Gold (pronounced /ˈɡoʊld/) is a chemical element with the symbol Au (Latin: aurum) and atomic number 79. It is a
highly sought-after precious metal, having been used as money, as a store of value, in jewelry, in sculpture, and for
ornamentation since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in
alluvial deposits. Gold is dense, soft, shiny and the most malleable and ductile pure metal known. Pure gold has a
bright yellow color traditionally considered attractive. It is one of the coinage metals and formed the basis for the gold
standard used before the collapse of the Bretton Woods system in 1971. The ISO currency code of gold bullion is XAU.
Modern industrial uses include dentistry and electronics, where gold has traditionally found use because of its good
resistance to oxidative corrosion. Chemically, gold is a transition metal and can form trivalent and univalent cations
upon solvation. At STP it is attacked by aqua regia, forming chloroauric acid and by alkaline solutions of cyanide but
not by hydrochloric, nitric or sulphuric acids. Gold dissolves in mercury, forming amalgam alloys, but does not react
with it. Gold is insoluble in nitric acid, which will dissolve silver and base metals, and is the basis of the gold refining
technique known as "inquartation and parting". Nitric acid has long been used to confirm the presence of gold in items,
and this is the origin of the colloquial term "acid test", referring to a gold standard test for genuine value.
1 Characteristics 1.1 Color of gold 2 Applications 2.1 As the metal 2.1.1 Medium of monetary exchange 2.1.2
Jewelry 2.2 Medicine 2.3 Food and drink 2.4 Industry 2.5 Electronics 2.6 Other 2.7 As gold chemical
compounds 3 History 4 Occurrence 5 Production 6 Price 6.1 Price records 6.2 Long term price trends 7
Compounds 7.1 Less common oxidation states: Au(-I), Au(II), and Au(V) 7.2 Mixed valence compounds 8 Isotopes 9
Symbolism 10 Toxicity
Characteristics
Electron shell diagram of gold.Gold is the most malleable and ductile of all metals; a single gram can be beaten into a
sheet of one square meter, or an ounce into 300 square feet. Gold leaf can be beaten thin enough to become
translucent. The transmitted light appears greenish blue, because gold strongly reflects yellow and red.
Gold readily creates alloys with many other metals. These alloys can be produced to increase the hardness or to create
exotic colors (see below). Gold is a good conductor of heat and electricity, and is not affected by air and most reagents.
Heat, moisture, oxygen, and most corrosive agents have very little chemical effect on gold, making it well-suited for use
in coins and jewelry; conversely, halogens will chemically alter gold, and aqua regia dissolves it via formation of the
chloraurate ion.
Common oxidation states of gold include +1 (gold(I) or aurous compounds) and +3 (gold(III) or auric compounds). Gold
ions in solution are readily reduced and precipitated out as gold metal by adding any other metal as the reducing
agent. The added metal is oxidized and dissolves allowing the gold to be displaced from solution and be recovered as
a solid precipitate.
Doctoral research undertaken by Frank Reith at the Australian National University, and published in 2004, shows that
microbes can play an important role in forming gold deposits, transporting and precipitating gold to form grains and
nuggets that collect in alluvial deposits.
High quality pure metallic gold is tasteless; in keeping with its resistance to corrosion (it is metal ions which confer taste
to metals).
In addition, gold is very dense, a cubic meter weighing 19300 kg. By comparison, the density of lead is 11340 kg/m³,
and that of the densest element, osmium, is 22610 kg/m³.
Color of gold
Mainly, Gold appears to be metallic yellow. Gold, caesium and copper are the only elemental metals with a natural
color other than gray or white. The usual gray color of metals depends on their "electron sea" that is capable of
absorbing and re-emitting photons over a wide range of frequencies. Gold reacts differently, depending on subtle
relativistic effects that affect the orbitals around gold atoms.
Applications As the metal
Medium of monetary exchange
In various countries, gold is used as a standard for monetary exchange, in coinage and in jewelry. Pure gold is too soft
for ordinary use and is typically hardened by alloying with copper or other base metals. The gold content of gold alloys
is measured in carats (k), pure gold being designated as 24k. Gold coins intended for circulation from 1526 into the
1930s were typically a standard 22k alloy called crown gold, for hardness. Modern collector/investment bullion coins
(which do not require good mechanical wear properties) are typically 24k, although the American Gold Eagle and
British gold sovereign continue to be made at 22k, on historical tradition. The special issue Canadian Gold Maple Leaf
coin contains the highest purity gold of any bullion coin, at 99.999% (.99999 fine). The popular issue Canadian Gold
Maple Leaf coin has a purity of 99.99%. Several other 99.99% pure gold coins are currently available, including
Australia's Gold Kangaroos (first appearing in 1986 as the Australian Gold Nugget, with the kangaroo theme appearing
in 1989), the several coins of the Australian Lunar Calendar series, and the Austrian Philharmonic. In 2006, the U.S.
Mint began production of the American Buffalo gold bullion coin also at 99.99% purity.
Since the abandonment of the gold standard and the confiscation of monetary gold in the 1930s by the United States
Government, gold has not generally been used in daily commerce. Many holders of gold coinage retain their gold in
storage as a hedge against inflation or other economic disruptions.
Jewelry
Because of the softness of pure (24k) gold, it is usually alloyed with base metals for use in jewelry, altering its hardness
and ductility, melting point, color and other properties. Alloys with lower caratage, typically 22k, 18k, 14k or 10k,
contain higher percentages of copper, or other base metals or silver or palladium in the alloy. Copper is the most
commonly used base metal, yielding a redder color. Eighteen carat gold containing 25% copper is found in antique
and Russian jewellery and has a distinct, though not dominant, copper cast, creating rose gold. Fourteen carat
gold-copper alloy is nearly identical in color to certain bronze alloys, and both may be used to produce police and
other badges. Blue gold can be made by alloying with iron and purple gold can be made by alloying with aluminium,
although rarely done except in specialized jewelry. Blue gold is more brittle and therefore more difficult to work with
when making jewelry. Fourteen and eighteen carat gold alloys with silver alone appear greenish-yellow and are referred
to as green gold. White gold alloys can be made with palladium or nickel. White 18 carat gold containing 17.3% nickel,
5.5% zinc and 2.2% copper is silver in appearance. Nickel is toxic, however, and its release from nickel white gold is
controlled by legislation in Europe. Alternative white gold alloys are available based on palladium, silver and other
white metals (World Gold Council), but the palladium alloys are more expensive than those using nickel. High-carat
white gold alloys are far more resistant to corrosion than are either pure silver or sterling silver. The Japanese craft of
Mokume-gane exploits the color contrasts between laminated colored gold alloys to produce decorative wood-grain
effects.
Medicine
In medieval times, gold was often seen as beneficial for the health, in the belief that something that rare and beautiful
could not be anything but healthy.[citation needed] Even some modern esotericists and forms of alternative medicine
assign metallic gold a healing power.[citation needed] Some gold salts do have anti-inflammatory properties and are
used as pharmaceuticals in the treatment of arthritis and other similar conditions. However, only salts and radioisotopes
of gold are of pharmacological value, as elemental (metallic) gold is inert to all chemicals it encounters inside the
body. In modern times injectable gold has been proven to help to reduce the pain and swelling of rheumatoid arthritis.
Dentistry. Gold alloys are used in restorative dentistry, especially in tooth restorations, such as crowns and permanent
bridges. The gold alloys' slight malleability facilitates the creation of a superior molar mating surface with other teeth
and produces results that are generally more satisfactory than those produced by the creation of porcelain crowns. The
use of gold crowns in more prominent teeth such as incisors is favored in some cultures and discouraged in others.
Colloidal gold (colloidal sols of gold nanoparticles) in water are intensely red-colored, and can be made with tightly-
controlled particle sizes up to a few tens of nm across by reduction of gold chloride with citrate or ascorbate ions.
Colloidal gold is used in research applications in medicine, biology and materials science. The technique of
immunogold labeling exploits the ability of the gold particles to adsorb protein molecules onto their surfaces. Colloidal
gold particles coated with specific antibodies can be used as probes for the presence and position of antigens on the
surfaces of cells (Faulk and Taylor 1979). In ultrathin sections of tissues viewed by electron microscopy, the
immunogold labels appear as extremely dense round spots at the position of the antigen (Roth et al. 1980). Colloidal
gold is also the form of gold used as gold paint on ceramics prior to firing. Gold, or alloys of gold and palladium, are
applied as conductive coating to biological specimens and other non-conducting materials such as plastics and glass
to be viewed in a scanning electron microscope. The coating, which is usually applied by sputtering with an argon
plasma, has a triple role in this application. Gold's very high electrical conductivity drains electrical charge to earth,
and its very high density provides stopping power for electrons in the SEM's electron beam, helping to limit the depth to
which the electron beam penetrates the specimen. This improves definition of the position and topography of the
specimen surface and increases the spatial resolution of the image. Gold also produces a high output of secondary
electrons when irradiated by an electron beam, and these low-energy electrons are the most commonly-used signal
source used in the scanning electron microscope. The isotope gold-198, (half-life: 2.7 days) is used in some cancer
treatments and for treating other diseases.
Food and drink
Gold can be used in food and has the E Number 175.
Gold leaf, flake or dust is used on and in some gourmet foodstuffs, notably sweets and drinks as decorative ingredient.[6]
Gold flake was used by the nobility in Medieval Europe as a decoration in foodstuffs and drinks, in the form of leaf,
flakes or dust, either to demonstrate the host's wealth or in the belief that something that valuable and rare must be
beneficial for one's health. Goldwasser (English: Goldwater) is a traditional herbal liqueur produced in Gdańsk, Poland,
and Schwabach, Germany, and contains flakes of gold leaf. There are also some expensive (~$1000) cocktails which
contain flakes of gold leaf[citation needed]. However, since metallic gold is inert to all body chemistry, it adds no taste
nor has it any other nutritional effect and leaves the body unaltered.
Industry
Gold solder is used for joining the components of gold jewelry by high-temperature hard soldering or brazing. If the work
is to be of hallmarking quality, gold solder must match the carat weight of the work, and alloy formulas are
manufactured in most industry-standard carat weights to color match yellow and white gold. Gold solder is usually made
in at least three melting-point ranges referred to as Easy, Medium and Hard. By using the hard, high-melting point solder
first, followed by solders with progressively lower melting points, goldsmiths can assemble complex items with several
separate soldered joints. Gold can be made into thread and used in embroidery. Gold is ductile and malleable,
meaning it can be drawn into very thin wire and can be beaten into very thin sheets known as gold leaf. Gold produces
a deep, intense red color when used as a coloring agent in cranberry glass. In photography, gold toners are used to shift
the color of silver bromide black and white prints towards brown or blue tones, or to increase their stability. Used on
sepia-toned prints, gold toners produce red tones. Kodak published formulas for several types of gold toners, which use
gold as the chloride (Kodak, 2006). As gold is a good reflector of electromagnetic radiation such as infrared and visible
light as well as radio waves, it is used for the protective coatings on many artificial satellites, in infrared protective
faceplates in thermal protection suits and astronauts' helmets and in electronic warfare planes like the EA-6B Prowler.
Gold is used as the reflective layer on some high-end CDs. Automobiles may use gold for heat insulation. McLaren uses
gold foil in the engine compartment of its F1 model.
Electronics
The concentration of free electrons in gold metal is 5.90×1022 cm-3. Gold is highly conductive to electricity, and has
been used for electrical wiring in some high energy applications (silver is even more conductive per volume, but gold
has the advantage of corrosion resistance). For example, gold electrical wires were used during some of the Manhattan
Project's atomic experiments, but large high current silver wires were used in the calutron isotope separator magnets in
the project. Though gold is attacked by free chlorine, its good conductivity and general resistance to oxidation and
corrosion in other environments (including resistance to non-chlorinated acids) has led to its widespread industrial use in
the electronic era as a thin layer coating electrical connectors of all kinds, thereby ensuring good connection. For
example, gold is used in the connectors of the more expensive electronics cables, such as audio, video and USB
cables. The benefit of using gold over other connector metals such as tin in these applications is highly debated. Gold
connectors are often criticized by audio-visual experts as unnecessary for most consumers and seen as simply a
marketing ploy. However, the use of gold in other applications in electronic sliding contacts in highly humid or corrosive
atmospheres, and in use for contacts with a very high failure cost (certain computers, communications equipment,
spacecraft, jet aircraft engines) remains very common, and is unlikely to be replaced in the near future
by any other metal. Besides sliding electrical contacts, gold is also used in electrical contacts because of its resistance
to corrosion, electrical conductivity, ductility and lack of toxicity.[8] Switch contacts are generally subjected to more
intense corrosion stress than are sliding contacts.
Other
Many competitions, and honors, such as the Olympics and the Nobel Prize, award a gold medal to the winner.
As gold chemical compounds
Gold is attacked by and dissolves in alkaline solutions of potassium or sodium cyanide, and gold cyanide is the
electrolyte used in commercial electroplating of gold onto base metals and electroforming. Gold chloride (chloroauric
acid) solutions are used to make colloidal gold by reduction with citrate or ascorbate ions. Gold chloride and gold oxide
are used to make highly-valued cranberry or red-colored glass, which, like colloidal gold sols, contains evenly-sized
spherical gold nanoparticles. Gold has been known and highly valued since prehistoric times. It may have been the first
metal used by humans and was valued for ornamentation and rituals. Egyptian hieroglyphs from as early as 2600 BC
describe gold, which king Tushratta of the Mitanni claimed was "more plentiful than dirt" in Egypt.[9] Egypt and
especially Nubia had the resources to make them major gold-producing areas for much of history. The earliest known
map is known as the Turin papyrus and shows the plan of a gold mine in Nubia together with indications of the local
geology. The primitive working methods are described by Strabo and included fire-setting. Large mines also occurred
across the Red Sea in what is now Saudi Arabia. The legend of the golden fleece may refer to the use of fleeces to trap
gold dust from placer deposits in the ancient world. Gold is mentioned frequently in the Old Testament, starting with
Genesis 2:11 (at Havilah) and is included with the gifts of the magi in the first chapters of Matthew New Testament. The
Book of Revelation 21:21 describes the city of New Jerusalem as having streets "made of pure gold, clear as crystal".
The south-east corner of the Black Sea was famed for its gold. Exploitation is said to date from the time of Midas, and
this gold was important in the establishment of what is probably the world's earliest coinage in Lydia between 643 and
630 BC.
From 6th or 5th century BCE, Chu (state) circulated Ying Yuan, one kind of square gold coin.
Jason returns with the golden fleece on an Apulian red-figure calyx krater, ca. 340–330 BC.The Romans developed new
methods for extracting gold on a large scale using hydraulic mining methods, especially in Spain from 25 BC onwards
and in Romania from 150 AD onwards. One of their largest mines was at Las Medulas in León (Spain), where seven long
aqueducts enabled them to sluice most of a large alluvial deposit. The mines at Roşia Montană in Transylvania were
also very large, and until very recently, still mined by opencast methods. They also exploited smaller deposits in Britain,
such as placer and hard-rock deposits at Dolaucothi. The various methods they used are well described by Pliny the
Elder in his encyclopedia Naturalis Historia written towards the end of the first century AD.
The Mali Empire in Africa was famed throughout the old world for its large amounts of gold. Mansa Musa, ruler of the
empire (1312–1337) became famous throughout the old world for his great hajj to Mecca in 1324. When he passed
through Cairo in July of 1324, he was reportedly accompanied by a camel train that included thousands of people and
nearly a hundred camels. He gave away so much gold that it depressed the price in Egypt for over a decade.[10] A
contemporary Arab historian remarked:
“ Gold was at a high price in Egypt until they came in that year. The mithqal did not go below 25 dirhams and was
generally above, but from that time its value fell and it cheapened in price and has remained cheap till now. The
mithqal does not exceed 22 dirhams or less. This has been the state of affairs for about twelve years until this day by
reason of the large amount of gold which they brought into Egypt and spent there [...] ” —Chihab Al-Umari
The European exploration of the Americas was fueled in no small part by reports of the gold ornaments displayed in
great profusion by Native American peoples, especially in Central America, Peru, Ecuador and Colombia.
Although the price of some platinum group metals can be much higher, gold has long been considered the most
desirable of precious metals, and its value has been used as the standard for many currencies (known as the gold
standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these
properties. Gold as a sign of wealth and prestige was made fun of by Thomas More in his treatise Utopia. On that
imaginary island, gold is so abundant that it is used to make chains for slaves, tableware and lavatory-seats. When
ambassadors from other countries arrive, dressed in ostentatious gold jewels and badges, the Utopians mistake them for
menial servants, paying homage instead to the most modestly-dressed of their party.
There is an age-old tradition of biting gold in order to test its authenticity. Although this is certainly not a professional
way of examining gold, the bite test should score the gold because gold is a soft metal, as indicated by its score on the
Mohs' scale of mineral hardness. The purer the gold the easier it should be to mark it. Painted lead can cheat this test
because lead is softer than gold (and may invite a small risk of lead poisoning if sufficient lead is absorbed by the biting).
This 156-ounce (4.85 kg) nugget was found by an individual prospector in the Southern California Desert using a metal
detector.Gold in antiquity was relatively easy to obtain geologically; however, 75% of all gold ever produced has been
extracted since 1910. It has been estimated that all the gold in the world that has ever been refined would form a single
cube 20 m (66 ft) on a side (equivalent to 8000 m³).
One main goal of the alchemists was to produce gold from other substances, such as lead — presumably by the
interaction with a mythical substance called the philosopher's stone. Although they never succeeded in this attempt,
the alchemists promoted an interest in what can be done with substances, and this laid a foundation for today's
chemistry. Their symbol for gold was the circle with a point at its center (☉), which was also the astrological symbol, and
the ancient Chinese character, for the Sun. For modern creation of artificial gold by neutron capture, see gold
synthesis.
During the 19th century, gold rushes occurred whenever large gold deposits were discovered. The first documented
discovery of gold in the United States was at the Reed Gold Mine near Georgeville, North Carolina in 1803. The first
major gold strike in the United States occurred in a small north Georgia town called Dahlonega.[14] Further gold rushes
occurred in California, Colorado, Otago, Australia, Witwatersrand, Black Hills, and Klondike.
Because of its historically high value, much of the gold mined throughout history is still in circulation in one form or
another.
Occurrence
In nature, gold most often occurs in its native state (that is, as a metal), though usually alloyed with silver. Native gold
contains usually eight to ten percent silver, but often much more —alloys with a silver content over 20% are called
electrum. As the amount of silver increases, the color becomes whiter and the specific gravity becomes lower.
Ores bearing native gold consist of grains or microscopic particles of metallic gold embedded in rock, often in
association with veins of quartz or sulfide minerals like pyrite. These are called "lode" deposits. Native gold is also found
in the form of free flakes, grains or larger nuggets that have been eroded from rocks and end up in alluvial deposits
(called placer deposits). Such free gold is always richer at the surface of gold-bearing veins owing to the oxidation of
accompanying minerals followed by weathering, and washing of the dust into streams and rivers, where it collects and
can be welded by water action to form nuggets.
Gold sometimes occurs combined with tellurium as the minerals calaverite, krennerite, nagyagite, petzite and sylvanite,
and as the rare bismuthide maldonite (Au2Bi) and antimonide aurostibite (AuSb2). Gold also occurs in rare alloys with
copper, lead, and mercury: the minerals auricupride (Cu3Au), novodneprite (AuPb3) and weishanite ((Au,Ag)3Hg2).
Economic gold extraction can be achieved from ore grades as little as 0.5 g/1000 kg (0.5 parts per million, ppm) on
average in large easily mined deposits. Typical ore grades in open-pit mines are 1–5 g/1000 kg (1–5 ppm); ore grades
in underground or hard rock mines are usually at least 3 g/1000 kg (3 ppm). Because ore grades of 30 g/1000 kg (30
ppm) are usually needed before gold is visible to the naked eye, in most gold mines the gold is invisible.
Since the 1880s, South Africa has been the source for a large proportion of the world’s gold supply, with about 50% of
all gold ever produced having come from South Africa. Production in 1970 accounted for 79% of the world supply,
producing about 1,000 tonnes. However by 2007 production was just 272 tonnes. This sharp decline was due to the
increasing difficulty of extraction, changing economic factors affecting the industry, and tightened safety auditing. In
2007 China (with 276 tonnes) overtook South Africa as the world's largest gold producer, the first time since 1905 that
South Africa has not been the largest.
The city of Johannesburg located in South Africa was founded as a result of the Witwatersrand Gold Rush which
resulted in the discovery of some of the largest gold deposits the world has ever seen. Gold fields located within the
basin in the Free State and Gauteng provinces are extensive in strike and dip requiring some of the world's deepest
mines, with the Savuka and TauTona mines being currently the world's deepest gold mine at 3,777 m. The Second
Boer War of 1899–1901 between the British Empire and the Afrikaner Boers was at least partly over the rights of miners
and possession of the gold wealth in South Africa.
Other major producers are the United States, Australia, China, Russia and Peru. Mines in South Dakota and Nevada
supply two-thirds of gold used in the United States. In South America, the controversial project Pascua Lama aims at
exploitation of rich fields in the high mountains of Atacama Desert, at the border between Chile and Argentina. Today
about one-quarter of the world gold output is estimated to originate from artisanal or small scale mining.
After initial production, gold is often subsequently refined industrially by the Wohlwill process or the Miller process.
Other methods of assaying and purifying smaller amounts of gold include parting and inquartation as well as
cuppelation, or refining methods based on the dissolution of gold in aqua regia.
The world's oceans hold a vast amount of gold, but in very low concentrations (perhaps 1–2 parts per 10 billion). A
number of people have claimed to be able to economically recover gold from sea water, but so far they have all been
either mistaken or crooks. Reverend Prescott Jernegan ran a gold-from-seawater swindle in America in the 1890s. A
British fraudster ran the same scam in England in the early 1900s.
Fritz Haber (the German inventor of the Haber process) attempted commercial extraction of gold from sea water in an
effort to help pay Germany's reparations following World War I. Unfortunately, his assessment of the concentration of
gold in sea water was unduly high, probably due to sample contamination. The effort produced little gold and cost the
German government far more than the commercial value of the gold recovered.[citation needed] No commercially
viable mechanism for performing gold extraction from sea water has yet been identified. Gold synthesis is not
economically viable and is unlikely to become so in the foreseeable future.
The average gold mining and extraction costs[when?] are $238 per troy ounce but these can vary widely depending on
mining type and ore quality. In 2001, global mine production amounted to 2,604 tonnes, or 67% of total gold demand
in that year. At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes. This can be
represented by a cube with an edge length of just 20.2 meters.
At current consumption rates, the supply of gold is believed to last 45 years.
Price: Gold as an investment and Gold standard
LBMA USD morning price fixings ($US per troy ounce) since 2001.
Gold price per ounce in USD since 1968, in actual US$ and 2006 US$.Like other precious metals, gold is measured by
troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the amount of
gold present, with 24 karats being pure gold and lower ratings proportionally less. The purity of a gold bar can also be
expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995 being very pure.
The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in
September 1919, provides a daily benchmark figure to the industry. The afternoon fixing appeared in 1968 to fix a price
when US markets are open.
Historically gold coinage was widely used as currency; When paper money was introduced, it typically was a receipt
redeemable for gold coin or bullion. In an economic system known as the gold standard, a certain weight of gold was
given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so
that one troy ounce was equal to $20.67 ($664.56/kg), but in 1934 the dollar was devalued to $35.00 per troy ounce
($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and European banks agreed to
manipulate the market to prevent further currency devaluation against increased gold demand.
On March 17, 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme
was established whereby gold was still used to settle international accounts at the old $35.00 per troy ounce ($1.13/g)
but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in
1975 when the price of gold was left to find its free-market level. Central banks still hold historical gold reserves as a
store of value although the level has generally been declining. The largest gold depository in the world is that of the U.
S. Federal Reserve Bank in New York, which holds about 3%[citation needed] of the gold ever mined, as does the
similarly-laden U.S. Bullion Depository at Fort Knox.
In 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes,
giving a surplus of 105 tonnes.
Price records
Since 1968 the price of gold on the open market has ranged widely, from a high of $850/oz ($27,300/kg) on January 21,
1980, to a low of $252.90/oz ($8,131/kg) on June 21, 1999 (London Gold Fixing).[21] The 1980 high was not overtaken
until January 3, 2008 when a new maximum of $865.35 per troy ounce was set (a.m. London Gold Fixing). The current
annual record price was set on March 17, 2008 at $1023.50/oz (am. London Gold Fixing).
Long term price trends
Since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that this
long secular bear market (or the Great Commodities Depression) has ended and a bull market has returned. In March
2008, the gold price increased above $1000, which in real terms is still well below the $850/oz. peak on January 21,
1980. Indexed for inflation, the 1980 high would equate to a price of around $2400 in 2007 US dollars.
In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis)
lowered the Dow/Gold ratio (which is inherently inflation adjusted) substantially, in most cases to a value well below 4.
During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and
silver.
Compounds
Although gold is a noble metal, it forms many and diverse compounds. The oxidation state of gold in its compound
ranges from −1 to +5 but Au(I) and Au(III) dominate. Gold(I), referred to as the aurous ion, is the most common oxidation
state with “soft” ligands such as thioethers, thiolates, and tertiary phosphines. Au(I) compounds are typically linear. A
good example is Au(CN)2−, which is the soluble form of gold encountered in mining. Curiously, aurous complexes of
water are rare. The binary gold halides, such as AuCl, form zig-zag polymeric chains, again featuring linear
coordination at Au. Most drugs based on gold are Au(I) derivatives.
Gold(III) (“auric”) is a common oxidation state and is illustrated by gold(III) chloride, AuCl3. Its derivative is chloroauric
acid, HAuCl4, which forms when Au dissolves in aqua regia. Au(III) complexes, like other d8 compounds, are typically
square planar.
Less common oxidation states: Au(-I), Au(II), and Au(V)
Compounds containing the Au− anion are called aurides. Caesium auride, CsAu which crystallizes in the caesium
chloride motif. Other aurides include those of Rb+, K+, and tetramethylammonium (CH3)4N+. Gold(II) compounds are
usually diamagnetic with Au-Au bonds such as [Au(CH2)2P(C6H5)2]2Cl2. A noteworthy, legitimate Au(II) complex
contains xenon as a ligand, [AuXe4](Sb2F11)2. Gold pentafluoride is the sole example of Au(V), the highest verified
oxidation state.
Some gold compounds exhibit aurophilic bonding, which describes the tendency of gold ions to interact at distances
that are too long to be a conventional Au-Au bond but shorter that van der Waals bonding. The interaction is estimated
to be comparable in strength to that of a hydrogen bond.
Mixed valence compounds
Well-defined cluster compounds are numerous. In such cases, gold has a fractional oxidation state. A representative
example is the octahedral species {Au(P(C6H5)3)}62+. Gold chalcogenides, e.g. "AuS" feature equal amounts of Au(I)
and Au(III).
Isotopes: Isotopes of gold
Gold has only one stable isotope, 197Au, which is also its only naturally-occurring isotope. 36 radioisotopes have been
synthesized ranging in atomic mass from 169 to 205. The most stable of these is 195Au with a half-life of 186.1 days.
195Au is also the only isotope to decay by electron capture. The least stable is 171Au, which decays by proton
emission with a half-life of 30 µs. Most of gold's radioisotopes with atomic masses below 197 decay by some
combination of proton emission, α decay, and β+ decay. The exceptions are 195Au, which decays by electron
capture, and 196Au, which has a minor β- decay path. All of gold's radioisotopes with atomic masses above 197 decay
by β- decay.
At least 32 nuclear isomers have also been characterized, ranging in atomic mass from 170 to 200. Within that range,
only 178Au, 180Au, 181Au, 182Au, and 188Au do not have isomers. Gold's most stable isomer is 198m2Au with a half-
life of 2.27 days. Gold's least stable isomer is 177m2Au with a half-life of only 7 ns. 184m1Au has three decay paths: β+
decay, isomeric transition, and alpha decay. No other isomer or isotope of gold has three decay paths.
Symbolism
Three Gold Sovereigns with a Krugerrand.
Swiss-cast 1 kg gold bar.Gold has been associated with the extremities of utmost evil and great sanctity throughout
history. In the Book of Exodus, the Golden Calf is a symbol of idolatry and rebellion against God. In popular culture, the
golden pocket watch and its fastening golden chain were the characteristic accessories of the capitalists, the rich and
the industrial tycoons. Credit card companies associate their product with wealth by naming and coloring their top-of-
the-range cards “gold” although, in an attempt to out-do each other, platinum has now overtaken gold.
In the Book of Genesis, Abraham was said to be rich in gold and silver, and Moses was instructed to cover the Mercy
Seat of the Ark of the Covenant with pure gold. Eminent orators such as John Chrysostom were said to have a “mouth of
gold with a silver tongue.” Gold is associated with notable anniversaries, particularly in a 50-year cycle, such as a
golden wedding anniversary, golden jubilee, etc.
Great human achievements are frequently rewarded with gold, in the form of medals and decorations. Winners of races
and prizes are usually awarded the gold medal (such as the Olympic Games and the Nobel Prize), while many award
statues are depicted in gold (such as the Academy Awards, the Golden Globe Awards the Emmy Awards, the Palme
d'Or, and the British Academy Film Awards).
Medieval kings were inaugurated under the signs of sacred oil and a golden crown, the latter symbolizing the eternal
shining light of heaven and thus a Christian king's divinely inspired authority. Wedding rings are traditionally made of
gold; since it is long-lasting and unaffected by the passage of time, it is considered a suitable material for everyday
wear as well as a metaphor for the relationship. In Orthodox Christianity, the wedded couple is adorned with a golden
crown during the ceremony, an amalgamation of symbolic rites.
The symbolic value of gold varies greatly around the world, even within geographic regions. For example, gold is quite
common in Turkey but considered a most valuable gift in Sicily.
Toxicity
Pure gold is non-toxic and non-irritating when ingested[33] and is sometimes used as a food decoration in the form of
gold leaf. It is also a component of the alcoholic drinks Goldschläger, Gold Strike, and Goldwasser. Gold is approved as
a food additive in the EU (E175 in the Codex Alimentarius).
Soluble compounds (gold salts) such as potassium gold cyanide, used in gold electroplating, are toxic to the liver and
kidneys. There are rare cases of lethal gold poisoning from potassium gold cyanide.[34][35] Gold toxicity can be
ameliorated with chelating agents such as British anti-Lewisite.
Carat (purity) ChipGold Colloidal gold White gold Rose gold Black gold Gold as an investment Gold coin
Precious metal Digital gold currency Hallmark Altay Mountains Commodity fetishism Fool's Gold Roman
mining Roman engineering Gold fingerprinting Prospecting GPAA
Bibliography
Faulk W, Taylor G (1979) An Immunocolloid Method for the Electron Microscope Immunochemistry 8, 1081–1083.
Kodak (2006) Toning black-and-white materials. Technical Data/Reference sheet G-23, May 2006.
Roth J, Bendayan M, Orci L (1980) FITC-Protein A-Gold Complex for Light and Electron Microscopic
Immunocytochemistry. Journal of Histochemistry and Cytochemistry 28, 55–57.
World Gold Council, Jewellery Technology, Jewellery Alloys
Los Alamos National Laboratory – Gold Gold Look up gold Getting Gold 1898 book
Technical Document on Extraction and Mining of Gold Picture in the Element collection from Heinrich Pniok
WebElements.com — Gold . Source: Wikipedia
GOLD:
THE INTRINSIC VALUE
Intrinsic Value Investing
When it comes to books written about investing in the stock market, two of the classics are "Security Analysis" and "The Intelligent Investor", both of which were
written by Benjamin Graham and published in 1934 and 1949 respectively. Graham was a very successful investor in his own right, but is also well known as the
mentor of Warren Buffett. Buffett built on the foundations provided by Graham's investment philosophy by adding a qualitative dimension to the completely
quantitative approach adopted by his teacher. However, the basis of the success of these stock market legends was essentially the same - the realisation that
the "intrinsic value" of a company was independent of its market price.
According to Graham, the market does not determine value. It is a "voting machine" in which countless people register choices that are the product partly of
reason and partly of emotion. For most stocks the market tells you every minute of every day what it thinks those stocks are worth. The price that the market
assigns may be much higher, much lower, or approximately equal to the intrinsic value. It is this difference between market price and intrinsic value which
provides opportunities to investors astute enough to recognise it - the greater the difference the greater the opportunity. However, an investor who allows himself
to become so concerned by a falling market price that he sells out has blown any advantage he may have had. "You are neither right nor wrong because the
crowd disagrees with you".
The above thinking has been shown to work with phenomenal success when applied to stock market investment, but can it also be applied to investing in gold
? The intrinsic value of a stock can be determined using quantitative measures such as profit, net working capital, cashflow, and net tangible assets, and
qualitative considerations such as the strength of the company's management. However, does gold have an intrinsic value which can be different from its
market price and, if so, how could we go about calculating it ?
The Intrinsic Value of Gold
Supply Considerations
With such an enormous number of variables affecting its price, including the emotional response of individuals and the whims of politicians throughout the
world, how can we possibly forecast a future dollars per ounce gold price?
When there is an imbalance in supply versus demand, prices adjust to correct that imbalance. For example, if demand exceeds supply then prices will
increase to the point where demand reduces or supply increases, thus correcting the imbalance. Because the "load" is forever changing, prices are continually
adjusting. Vronsky's essay on gold's supply/demand dynamics in the "Analysis" section of the Gold Eagle website discusses the imbalance which has existed in
the gold market for some time, with commercial demand greatly outstripping worldwide production. Had a similar situation prevailed with any other commodity
then soaring prices would undoubtedly result. However, the fundamental difference between gold and all other commodities is that gold is not consumed, it is
accumulated. Nearly 100% of all the gold mined in the history of the world forms part of today's aboveground gold stock. The total amount of this aboveground
stock (currently around 120,000 tonnes) is an available source of supply at any time. During the past few weeks we have had some news regarding gold supply
which has supposedly caused some fluctuations in the gold price. Firstly, Switzerland announced that it would sell some of its gold reserves (about 400 tonnes
over a 10 year period). Secondly, the Busang gold deposit, which had been reported to contain up to 200 million ounces of gold, is now thought to be
worthless. One event added future gold supply to the market whilst the other removed it. In my opinion both events were just "noise" as the amount of gold
involved was trivial in comparison to the total aboveground supply of gold.
Another important point to note regarding the aboveground gold stock is that it increases at a fairly constant rate of around 1.7% per annum (during the last 50
years the largest annual increase was 2.1% whilst the smallest was 1.4%). Irrespective of what technological and political changes occur in the future, or how
many more Busangs (real or otherwise) are discovered, it is reasonable to assume that the total supply of gold will continue to grow at an average rate of 1.7%
per annum. In fact, technological improvements and vast new discoveries will be needed to maintain this growth rate.
Estimating a Future Gold Price
In other words, confidence in US dollars is currently at a historic high or, put another way, gold is at its lowest levels in 25 years relative to the US dollar.
Further to the above we should be able to estimate, with a fair degree of accuracy, what the aboveground gold stock will be at some time in the future. It
should also be possible to estimate the future commercial (fashion jewelry, industry, etc.) demand for gold. However, these considerations are only a small part
of the equation. Much of the aboveground gold stock is held for monetary purposes and the willingness of the owners of this gold to sell at a particular price is
dependent upon countless economic, political and psychological concerns. The willingness of others to purchase gold for monetary reasons at a certain price
is dependent upon similar considerations. With such an enormous number of variables affecting its price, including the emotional response of individuals and
the whims of politicians throughout the world, how can we possibly forecast a future dollars per ounce gold price? Yet another problem, in fact the very heart of
the problem in forecasting a future gold price, is that we measure the price in terms of something which is constantly changing, that is, the US dollar (or any
other national currency). Every day the US dollar changes its character due to changes in its quantity and quality, with its true value linked to something as
fragile and fluctuating as faith in the financial and political system.
Although we cannot reliably estimate a future gold price, what we can do is calculate the relative values of gold and US dollars using the Fear Index. The Fear
Index was developed by James Turk as a means of numerically expressing the competitive relationship between gold and dollars, and is calculated as follows :
Fear Index = (US Gold Reserve) X (Market Price of Gold)
M3
Currently, with the gold price around $350 per ounce, M3 (total US money supply) of $5024.5 billion as of weekend 3rd March 1997, and a US gold reserve of
261.8 million ounces, we can calculate the Fear Index to be 1.82%.
The lower the Fear Index the higher the value of dollars relative to gold, that is, the higher the level of confidence (or the lower the level of fear) in paper
currency. To put the above calculated figure of 1.82% into perspective, this is the lowest value for the Fear Index since 1972. In fact, the last 3 months have
seen the Fear Index move below 2% for the first time since 1972. In other words, confidence in US dollars is currently at a historic high or, put another way,
gold is at its lowest levels in 25 years relative to the US dollar.
I would also be interested in calculating a modified Fear Index where the total above ground stock of gold is substituted for the US Gold Reserve. However, this
will have to be the subject of a separate discussion.
Gold Investment Based On Value
The above discussion suggests that although we cannot estimate a future gold price with any degree of accuracy, we can at least determine that gold is
currently very cheap and should be purchased by investors seeking value. However, I believe that many people who identify that gold currently represents
excellent value will lose money in their attempts to profit from this realisation. This is because they will attempt to profit from their well-founded conclusion via
short term trading. The following quote from Benjamin Graham was written about stock speculation, but it can be equally well applied to the short term trading
of commodities : "....speculation is largely a matter of A trying to decide what B, C and D are likely to think - with B, C and D trying to do the same". It is likely
that many of the investors who purchase gold or gold related investments based on sound fundamental reasoning will sell out at a loss because they were
unable to predict what others would do in the short term.
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Lowest Risk. Secrecy. Separate Accounts For H.N.W. Investors. No Management Fee. Minimum 1 Million USD. Very High Potential Profit. A Limited Liability
Company Per Account. High Net Worth Investors. No Management Fee. Minimum 1 Million USD. Up To 300 % Profit In The Holding Period. Minimum 1
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Growth Stock
A stock that appears attractive because of potential earnings growth by its company.
A stock may be considered a "buy" as a growth stock if it's P.E.G. ratio is relatively low among companies in its industry.
Compare value stock.
High Net Worth Individual - HNWI
A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how
rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by
financial institution and region. The categorization is relevant because high net worth individuals generally qualify for separately managed investment
accounts instead of regular mutual funds.
The most commonly quoted figure for membership in the high net worth "club" is $1 million in liquid financial assets. An investor with less than $1 million but
more than $100,000 is considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5 million, at which point the client is then
referred to as "very HNWI". More than $50 million in wealth classifies a person as "ultra HNWI".
HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These
individuals generally demand (and can justify) personalized services in investment management, estate planning, tax planning, and so on. High net worth
individual
In private banking, a high-net-worth individual (HNWI) is a person with a high net worth. Typically these individuals are defined as having investable assets
(financial assets not including primary residence) in excess of US$1 million. [1][2] The number of high net worth individuals worldwide is estimated at 9.5
million. HNWI wealth totals US$37.2 trillion, representing an 11.4% gain since 2005.[1]
UHNWI
Banking and Finance
Retail
UHNWI refers to Ultra-High-Net-Worth Individuals, individuals or families who have at least US$30 million[1][2] in investable assets. The number of ultra high net
worth individuals worldwide is estimated at about 95,000.[1] The exact dividing lines depend on how a bank wishes to segment its market; for example, the term
Very High Net Worth Individuals [3] can refer to those with assets between $5 million and $50 million, with Ultra High Net Worth Individuals only those with
above $50 million.
Banking and Finance
Most global banks, such as Credit Suisse, Deutsche Bank or UBS, have a separate Business Unit with designated teams consisting of client advisors and product
specialists exclusively for UHNWI. Because of their extreme high net worth and the way their assets were generated, these clients are often considered to have
semi-institutional or institutional like characteristics.
Retail
Brands in various sectors, such as Bentley, Maybach and Rolls-Royce in motoring, actively target UHNWI and HNWI to sell their products. Figures gathered by
Rolls-Royce suggest there are 80,000 people in the UHNWI category around the world.[4] They have, on average, eight cars and three or four homes. Three-
quarters own a jet aircraft and most have a yacht.
Source: Wikipedia . High Net Worth Investors. Due Diligence For High Net Worth Investors
I just found a resource on conducting hedge fund due diligence for high net worth portfolios. It is not a complete guide to conducting this type of due
diligence but I think they brought up many good points within this article. A hedge fund investment should be utilized to improve the efficient frontier of an
accredited investor’s portfolio and protect against downside risk by the allocation of a segment of the portfolio appropriate to the client’s risk tolerance. Both
quantitative and qualitative due diligence are essential to protect a client’s investment against fraud, divergence from stated strategy, and/or poor investing.
A fund of hedge funds investment can offer diversification, and innate due diligence, within the hedge fund investment by limiting the allocation that any
single fund can hold. A fund of funds
downside comes from the layering of fees and the more apparent lack of transparency that’s prevalent with many funds. In addition, the preeminent hedge
funds are often hard to locate because they are often available by referral only.
The correlation of a hedge fund with traditional benchmarks is a vital component in due diligence. One must also be aware that although stated pre-tax returns
of a fund may be appealing, short-term trading can destroy the tax efficiency which is critical to high net worth investors. Research into the operation of the
hedge fund manager and their performance in varying markets and well as tactical ongoing analysis of the fund’s performance are imperative to quality due
diligence. Hedge Fund Due Diligence. Hedge Fund Due Diligence Guide
New hedge funds are launched daily, which is constantly increasing the importance of conducting formal hedge fund due diligence and determining which
hedge funds are appropriate for you or your firm to invest in becomes increasingly important. Every person or company is going to have different investment
horizons, risk tolerances, strategy preferences, etc. so it is usually more valuable to know the basics of how to evaluate a hedge fund then it is to hear someone
say which hedge funds are "the best." I think giving hedge fund recommendations even to the degree of suggesting exactly how to evaluate a hedge fund is too
close to finance advice to put online but the SEC website does provide this advice in conducting a minimum level of hedge fund due diligence before
investing:
Read a fund's prospectus or offering memorandum and related materials
Understand how a fund's assets are valued
Ask questions about fees
Understand any limitations on your right to redeem your shares
Research the backgrounds of hedge fund managers
Don't be afraid to ask questions
Hedge Funds Due Diligence Articles, Guides & Tools
I have been collecting the hedge fund due diligence resources below over the past 18 months and I'm posting them here in hopes that they will a few people
construct a relatively holistic view of what hedge fund due diligence is about along with provide a few example RFPs and tools to use while conducting due
diligence on hedge fund managers. This is not an exhaustive list and the information anywhere on this blog or within the linked sites should not be treated as
investment advice or a substitute for financial advice of any type. This is simply an aggregation of online hedge fund due diligence resources. I have only
listed 21 resources here so far, I hope to make this more robust, if you have something you think should be added here please email me at
Richard@RichardCWilson.com.
Hedge Fund Due Diligence Articles
Hedge Fund Regulation Corner | Compliance & Law Notes
SEC on Hedge Fund Regulation
Hedge Fund Risk Analysis
Hedge Fund Fraud | SEC & Hedge Funds Fraud Case
Hedge Fund Due Diligence Tips
The Importance of RFPs in conducting hedge fund due diligence
Hedge Fund Manager Due Diligence
Due Diligence for High Net Worth Clients
Investment Due Diligence
Risks of hedge fund investing & portfolio management
How long should hedge fund due diligence take?
Institutional Hedge Fund Risk Controls
Hedge Fund Due Diligence Questions
Importance of transparency and hedge fund due diligence
Hedge Fund Due Diligence Whitepapers & PowerPoints
Whitepaper on Hedge Fund Operational Risk & Transparency
Alpha through rigorous hedge fund due diligence
In-depth hedge fund risk & due diligence PowerPoint
White Paper on Mitigating Operational Risk During Hedge Fund Due Diligence
Hedge Fund Due Diligence Tools
FINRA Broker Check
Hedge Fund of Fund RFP Example - Used in Institutional Due Diligence Processes
HFN's Guide to Hedge Fund Due Diligence
Book on Hedge Fund Due Diligence
Fund of Fund Due Diligence
Additional Hedge Fund Guide Sections
Hedge Fund Strategy
Hedge Fund Marketing
Hedge Fund Terms
Articles Related to "Hedge Fund Due Diligence"
1. Guide to Investing
2. Hedge Fund Risk Management
3. Hedge Funds FAQ
4. Request for Proposal
Permanent Link: Hedge Fund Due Diligence
Tags: Hedge Fund Due Diligence, Hedge Funds Due Diligence, Hedge Fund Manager Due Diligence, Hedge Fund RFP, Hedge Fund Operational Due
Diligence, Hedge Fund Due Diligence
Questionnaire
Link to This Resource: Hedge Fund Due Diligence http://richard-wilson.blogspot.com/2008/03/hedge-fund-due-diligence.html
Hedge Fund Strategy
Hedge Funds Strategy Guide
The 10-15,000 hedge funds now being managed throughout the world use between 200-400 different hedge fund strategies. How can you keep these all
straight? The short answer is you can't,
but I have started compilining a list of hedge fund strategy definitions here below. Let me know if you are looking for something and can't find it here.
Hedge Fund Strategy Explanations
Emerging Markets
Equity Long Short
Fixed Income Arbitrage Investment Strategy | 1 Page Guide
130/30 Hedge Fund Resources
Global Macro
Global Macro Hedge Funds
Multi Strategy Hedge Fund
Sustainable Investing
Event Driven Hedge Funds
Green Hedge Funds
Art Investment Strategy
African Hedge Funds
130/30 Hedge Funds See Rapid Growth
Top 5 Hedge Fund Strategies
Hedge Fund Investment Strategies
Litigation Funding Hedge Fund Strategy
Short Selling
Emerging Markets Hedge Funds
Risk Arbitrage Hedge Fund Strategy
Hedge Fund Litigation Funding List
Warrant Arbitrage
Arbitrage Investment Strategy
More Hedge Fund Guides
Hedge Fund Terms
Hedge Fund Marketing
Hedge Fund Due Diligence
Articles Related to Hedge Fund Strategy:
1. Hedge Fund Investment Strategies
2. Multi Strategy Hedge Fund
3. Top 5 Hedge Fund Strategies
4. Hedge Fund Jobs
5. Hedge Fund Managers
6. Hedge Fund Research
Permanent Link: Hedge Fund Strategy
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information, guide to hedge fund
strategies, hedge fund manager strategy, hedge fund investing strategy, information on hedge fund strategy, hedge fund strategy research, hedge fund strategy
due diligence
Link to This Resource: Hedge Fund Strategy
Fund of Hedge Funds Fund of Hedge Funds Update
There has been a lot of talk over the last 2 years and 2 quarters particularly about the death of fund of hedge funds (fofs). Like much other doomsday
discussions regarding the hedge funds I don't see these fund of fund groups going anywhere. In fact, I still think there is room for further growth in the fund of
fund arena as demand from internationally-based investors is increasing as most fund of funds are still currently designed for U.S or EU investors.
The main reason why I think hedge fund of funds will be always be around is that many investors have just enough assets to play around in hedge funds. This
requires them to either allocate their funds to a friend or close business partner who runs a single strategy fund or diversify their entry to the hedge fund market
by investing in 3-12 hedge funds at one time. Some of the most popular retail products these days are all in one portfolios whether they be lifestyle portfolios,
all cap separate managed account products, or retirement focussed growth & income mutual funds. Many investors would rather pay an extra layer of 1% fees
in return for a no hassles lower risk exposure to the hedge fund industry.
Another reason why fund of hedge funds will be around for a long time is that 55% of all fof assets are from institutions. The percentage of fund of funds used in
a institutions total portfolio is on
the rise, not the decline. This class of investors generally takes a longer view than high net worth individuals or family offices. It would take several catastrophic
events in consecutive quarters or years to stall or create a small decline in the institutional use of hedge fund of funds.
Read dozens of additional articles like this within the guide to Hedge Fund Terms and Definitions.
- Fund of Hedge Funds
Articles Related to "Fund of Hedge Funds":
Fund of Funds
Hedge Fund Due Diligence
Hedge Fund Performance
9 Hedge Fund Database Tips
Preqin's Hedge Fund Resources
Hedge Fund Employment
CTA Directory
Hedge Fund Database
Fund of Fund Database
Hedge Funds
Related Terms: Fund of Hedge Funds, FoF, Hedge Fund of Fund, Hedge Fund of Funds, Fund of Hedge Funds, Hedge Fund Portfolio, Portfolio of Hedge Funds,
fund of funds hedge funds, fund
of funds hedge fund, a hedge fund of funds, funds of hedge funds portfolio, top hedge fund of funds, best fund of hedge funds, top fund of hedge funds, best
hedge fund of funds, fof, fund of
hedge fund managers, fund of hedge funds
Below are a collection of useful and interesting news pieces, articles and videos related to hedge funds:
Link 1: Assets of a Brazilian hedge fund sharply drops: Ciano Investimentos Gestao de Recursos Ltda.‘s flagship hedge fund lost 95 percent of its assets to
withdrawals after founder Ilan Goldfajn, a former central bank director, left the company.
Investors withdrew 197.4 million reais ($85 million) Ciano 60 Hedge Fundo de Investimento Multimercado since Nov. 11, a day after Goldfajn departed. The
fund’s value plunged to 10.3 million reais as of Nov. 21, according to the Web site of Brazil’s securities regulator, CVM.
“Some investors withdrew funds because of my decision to leave Ciano,” Goldfajn, 42, said in a telephone interview from Rio de Janeiro. “Because of my
departure, we waived a 10 percent redemption fee.” Source
Link 2: Hedge Funds Search for Assets in Japan. Japan's Ashiya city has been home to the nation's industrial titans since samurai ruled the land more than a
century ago. Now it's a feeding ground for hedge funds tapping the wealth of new multi-millionaires like Kunihisa Sagami.
Sagami, founder of mail-order cosmetics and jewelry supplier Epix, is one of the residents of the gated enclave overlooking the port city of Kobe who are
among the highest taxpayers in Japan. They're the elite in a nation where households hold a combined $15 trillion in financial assets -- more than the annual
gross domestic product of the U.S. Source
Link 3: Texas Hedge Fund Being Liquidated. Parkcentral Capital Management, an investment firm that manages money for the family of Ross Perot, is
liquidating a fixed-income hedge fund because it is “no longer viable.”
This year through October, Parkcentral Global Hub’s assets fell as much as 40 percent, to $1.5 billion. The fund is selling its remaining holdings to pay
creditors, Eddie Reeves, a spokesman, said Tuesday. Mr. Perot and members of his family were the fund’s biggest investors.
“Parkcentral Global has been impacted dramatically by the unprecedented upheaval of the capital markets in general and the freezing of credit markets in
particular,” Mr. Reeves said. ”The fund is no longer viable.” Source
Link 4: Spitzer's wife to join a hedge fund. The wife of former New York Gov. (and Sheriff of Wall Street) Eliot Spitzer is going to work on Wall Street.
Silda Wall Spitzer, who endured the humiliation of her husband’s resignation amidst a prostitution scandal in March, has joined hedge fund Metropolitan
Capital Advisors (which is technically on Madison Avenue), New York Magazine reports. The $300 million firm is run by CNBC personality Karen Finerman,
whose husband, Lawrence Golub, is a longtime friend of Eliot Spitzer and contributor to his campaigns.
Silda Spitzer will help “recruit new investors” in her new job, which she started last month. Source
Link 5: Hedge Fund Pacificor Sued. Pacificor has been sued by the former owners of a mortgage lender the California hedge fund bought.
John and Kitty Gaiser have sued the Santa Barbara-based firm and the estate of its former manager, Michael Klein, seeking $30 million. The Gaisers’ lawsuit
says that Pacificor “misused a position of trust and control in order to attempt to take control of and acquire—without compensation—John and Kitty Gaiser’s
ownership of Quality Home Loans,” the Gaisers’ law firm said in a statement. Source
Link 6: Hedge fund assets stuck within Lehman. Several companies reliant on four US hedge funds face collapse because the funds cannot access shares and
loans held at the London arm of Lehman Brothers, the collapsed bank.
The four funds – whose names were kept secret in a High Court ruling this week – claimed that they were likely to close in mid-December if they failed to get
access to information about their assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners, to
give them details of their assets and how much they owe to Lehman.
Source
Related to Thanksgiving Hedge Fund Linkfest Roundup
Free Online Hedge Fund Videos
Careers & Employment Guide
Hedge Fund Tracker Tool
Fund Marketing and Sales Advice
Top Hedge Fund Managers
Hedge Fund Holdings & Securities Analysis
Hedge Fund Terminology
Geographical Guides
Hedge Fund Startup Tools
Tags: hedge fund, hedge funds, Thanksgiving, Thanksgiving Day, Thanksgiving 2008, Thanksgiving News, hedge Fund Thanksgiving, Investment Thanksgiving,
Thanks Giving
Link to This Resource: Hedge Fund
GLG Partners Hedge Fund Update
GLG Partners Fund
GLG Partners Hedge Fund Update
Just a quick note to let you know that our team has updated the Hedge Fund Tracker notes for GLG Partners.
To read the updated profiles see this link: GLG Partners Hedge Fund Tracker Profile Notes
Related to GLG Partners Hedge Fund Update
Hedge Fund Tracker Tool
Fund Marketing and Sales Advice
Top Hedge Fund Managers
Free Online Hedge Fund Videos
Careers & Employment Guide
Tags: GLG Partners, Hedge Fund Notes, GLG Funds, GLG Fund, GLG Partners New York, GLG Partners Assets, GLG Partners AUM, GLG Hedge Fund manager,
GLG Europe, GLG Australia
Link to This Resource: GLG Partners Hedge Fund Update
Top 4 Hedge Fund Industry Fears | Market Insights
Hedge Fund Fears
The Top 4 Hedge Fund Fears
Over the last 3 months and a series of conversations with hedge fund managers, prime brokerage professionals, administrators and marketers it seems there are 4
big fears in the industry right now.
Top 4 Hedge Fund Fears
A flat or highly volatile market for a period of more than 18-24 months - effectively wiping out those hedge funds which were hanging on for those greener
pastures of another bull market.
Long-term deterioration of leverage of almost any type. While many hedge funds already use no or close to no leverage many others use large amounts of it
and many funds would be hampered if new regulations are put into place which severely limit their access to it. Read an article on this topic here.
Desperate hedge fund managers committing enough fraud to scare off a large percentage of the High net worth and ultra high net worth investor base. There is
article on my site on ethics
located here.
Overbearing regulation which pushes hedge fund activity into Canada, over to London and across the world away from New York. The industry is already
suffering large redemption losses and regulation done the wrong way could stifle further innovation or at least push even more of it offshore. As the recently
hedge fund testimony showed, many hedge funds are open to some forms of regulation or over-sight but these must be done in ways which are sensitive to the
intellectual knowledge and security disclosure concerns specific to this industry. Listen to the recent congressional testimony by hedge fund managers by
clicking here.
Other interesting points that have come out of talking to hedge funds - most expect the markets to stay flat or negative for an additional 6-9 months and the
majority see this to be a huge opportunity for positioning their fund for explosive growth in 2010 and 2011.
Related to Top 4 Hedge Fund Industry Fears | Market Insights
Hedge Fund Tracker Tool
Fund Marketing and Sales Advice
Top Hedge Fund Managers
Hedge Fund Startup Tools
Tags: Hedge Fund Fears, Hedge Fund Market, Hedge Fund Markets, Hedge Fund Market performance, Hedge Fund Frauds, Hedge Fund leverage, Use of
Leverage By Hedge Funds
Link to This Resource: Top 4 Hedge Fund Industry Fears | Market Insights
Managers | Hedging Skills
Japanese Hedge Funds
Japanese Hedge Fund Managers| Notes
It would seem that choppy markets in Japan over the past several years is now helping hedge funds in this region navigate the current financial crisis. Most of
the funds I know which run funds focusing on Japanese securities also run diversified Asia or China funds which have done very poorly, I would be curious to
see if those managers who run both Japan-specific funds as well as China funds faired better than the average fund in China. Here is the article excerpt:
Japan's hedge fund industry, dominated by so-called long-short funds that bet on rising and falling stock prices, will attract capital on signs they are starting to
outperform peers, Credit Suisse Group AG said.
The 81-fund Eurekahedge Japan Long-Short Equities Index fell 11 percent this year through October, compared with a 21 percent drop for an index that tracks
more than 1,000 global long-short hedge funds and a 40 percent slide by the MSCI World Index, a global benchmark.
``Japanese long-short strategies have weathered reasonably well the market turmoil,'' Boris Arabadjiev, head of alpha strategies at Zurich-based Credit Suisse's
asset management unit, said in an interview in Tokyo yesterday. ``That relative performance has already started to attract capital, and we believe that it will
continue to attract capital. We continue to be favorably disposed to managers investing in Japan.''
This year has been the worst on record for hedge funds, an estimated $1.56 trillion industry, with the average fund losing 16 percent through October,
according to data compiled by Chicago- based Hedge Fund Research Inc. The industry saw net withdrawals of $62.7 billion in October, according to
Eurekahedge Pte., a Singapore-based industry data provider. Read more...
Related to Japenese Hedge Fund Managers | Hedging Skills
Hedge Fund Tracker Tool
Fund Marketing and Sales Advice
Denmark Hedge Funds
Dubai Hedge Fund Guide
European Hedge Funds
France Hedge Fund Industry
Germany Hedge Fund Managers
Hong Kong
Indonesia
Japan Hedge Fund Industry
Tags: Japanese hedge Funds, Japanese Hedge Fund Managers, Japan Hedge Fund Industry, Japanese Managers, Japanese funds, Money management japan,
long short funds in Japan
Link
Hedge Fund Marketing Tools Tools for Hedge Fund Marketers & 3PMs
I have created this page to list a collection of online hedge fund marketing tools available to professionals within the hedge fund marketing space. If you have
a favorite tool or run a firm which offers a tool for third party marketers please email me at Richard@HedgeFundGroup.org to discuss having it posted here.
Master Contact Database: The industry's leading master contact database containing details on over 20,700 alternative investment funds, CTAs fund of funds,
etc.
Fund of Hedge Fund Database Fund of Hedge Funds Database which profiles 2,585 funds and is the most comprehensive database of its kind
Fund of Hedge Fund Directory: Directory of Funds of Hedge Funds
profiles 1,032 carefully selected funds of hedge funds and funds of CTAs
Preqin Hedge Fund Investor Databases: A complete investor database solution for hedge funds looking to raise capital across several distribution channels.
Capital Hedge Investor Databases: A complete investor database solution for hedge funds looking to raise capital across several distribution channels.
Email Newsletter Creation Tool: Aweber is the #1 provider of email newsletter creation and management services. Creating an email newsletter keeps you in
front of your prospects and loyal customers. Aweber offers a suite of low cost professional email newsletter templates and their how-to guides, quick online
support and email tips make them a favorite of thousands of firms. Click here now to see what Aweber offers.
Hedge Fund Database: Thorough database which contains comprehensive information on 3,169 single manager hedge funds.
Hedge Fund Directory: A less expensive and lighter collection of single hedge fund manager contact details.
CTA Database A source for managed futures data for the past 20 years and contains comprehensive data on 864 CTA programs.
CTA Directory A less expensive lighter version of the database above
Hedge Fund Asset Flow Reports Order reports to dig into where asset flows are coming and going within the hedge fund industry. Monthly reports available.
Articles related to Hedge Fund Marketing Tools:
1. Hedge Fund Marketing Guide
2. Marketing to Institutional Investors
3. Financial Public Relations
4. Email Newsletter Creation Tool
5. Sales Details
6. Third Party Marketing
7. Capital Introductions
8. Hedge Fund Seed Capital
9. Hedge Fund Media Exposure
10. Financial Advisor Marketing
Tags: Hedge Fund Marketing Tools,Hedge Fund Marketing Aides, Hedge Fund Sales Tools, Third Party Marketing Tools, Help with Hedge Fund Marketing,
Hedge Fund Marketing Consultant
Link to This Resource: Hedge Fund Marketing Tools
Hound Dog
See the main articles on continuously compounded interest and dollar cost averaging.
Periodically and Continuously Compounded Interest
Back when Elvis was King and computers were scarce (and could that really be just a coincidence?) banks used to compound interest quarterly. That meant
that four times a year they would have an "interest day", when everybody's balance got bumped up by one fourth of the going interest rate... and bank
employees would have to work late, going home all sweaty and covered with ink. If you held an account in those days, every year your balance would increase
by a factor of (1 + r/4)4.
Today it's possible to compound interest monthly, daily, and in the limiting case, continuously, meaning that your balance grows by a small amount every
instant.
To get the formula we'll start out with interest compounded n times per year:
FVn = P(1 + r/n)Yn
where P is the starting principal and FV is the future value after Y years.
To get to the continuous case we take the limit as the time slices get tiny:
FV =
limit P(1 + r/n)Yn
n
We can simplify the right side by introducing a new variable, defining m = n/r
FV =
limit P(1 + 1/m)Ymr
m
=
P
[limit (1 + 1/m)m]Yr
m
The limit in the square brackets converges to the number e = 2.71828.... (In fact, Leonhard Euler may have thought of this limit as the definition of e, right
around the time he named it "e" after himself). So the formula becomes
FV = PeYr
This calculator lets you see how fast the formula converges.
Inputs
Starting Principal: $
Interest Rate: %
Years:
Future Value
Periodic compounding: P(1 + r/n)Yn for n equal to...
1 $
$
12 $
365 $
365 x 24 $
Continuous compounding:
PeYr $
Incidentally, if you know calculus then the continuous compounding formula has a natural interpretation. First let's replace the clunky "FV" notation, and write
f(t) for the balance at time t (with t measured in years). So
f(t) = Petr
Taking the derivative
d
dt
f(t) = d
dt
(Petr)
= rPetr
= r f(t)
In words, this is saying that
"at any instant the balance is changing at a rate that equals r times the current balance"
which of course is the definition of continuous compounding.
Does Dollar Cost Averaging Work?
Dollar cost averaging means investing a fixed amount at fixed intervals of time. That's a sensible approach, for example, if it means committing yourself to
investing a fixed amount of your salary every month toward your retirement.
However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund,
they would tell you to invest $1000 per month over a year, rather than investing the whole amount immediately. The rationale is that market volatility should
then work in your favor, because you will automatically be purchasing more shares when the price is low, and fewer shares when the price is high.
As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump
sum investing for the start date you specify.
Assumptions
$10,000 will be invested in a market investment, following two different strategies:
(a) the whole amount will be invested on the start date; and
(b) equal amounts will be invested at the start of every month for a year, during which the remaining cash will stay invested in a bank account at a guaranteed
interest rate.
The market investment is an S&P 500 index fund with annual fees of 0.2%.
The bank account interest rate is %
Select Start Date
January
February
March
April
May
June
July
August
September
October
November
December
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982
1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955
1954 1953 1952 1951 1950
Results
Investment Value After 12 Months
(a) Using Lump Sum Method: $
(b) Using Dollar Cost Averaging: $
Each strategy wins at least some of the time, but after a few runs you'll see that DCA is the statistical "dog", losing about two times out of three.
Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like
most of 2000). But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an
advantage.
So why do so many people persist in believing that this old dog really knows how to hunt? Maybe because it has a psychological appeal: if the market dips,
people will be happy because DCA will be saving them money; and if the market goes up, people will be happy regardless.
IRA
Individual Retirement Account. One of several specific retirement accounts allowed by the IRS to provide tax-deferral or other tax advantage. The three types
of IRAs available are:
Deductible IRA Tax-deferred contributions and growth
Non-deductible IRA Tax-deferred growth only
Roth IRA Tax-free growth
Income Statement
Financial document showing a company's income and expenses over a given period (like one fiscal year). Also known as the Earnings Statement or Statement
of Operations.
The "bottom line" of the income statement is the company's earnings for the period.
See the main article for a sample income statement.
Income Statement
Stock investors like to look at the income statement (a.k.a. "earnings statement" or "statement of operations") because it shows the company's "bottom line": its
earnings, or profit. Most of the income statement details the company's operations: the yellow zone back in the diagram.
Consolidated Financial Statements
Income Statement
(click on highlighted text for more information)
(dollar figures are in thousands) 1997 1996
Sales Revenue
Widget Sales $ 12,347 $ 9,746
Services 6,912 5,688
Total Sales Revenue 19,259 15,434
Sales Costs
Widget Sales 5,649 4,688
Services 3,166 2,712
Total Sales Costs 8,815 7,400
Gross Profit 10,444 8,034
Gross Margin 54 % 52 %
Operating Expenses
Sales & Marketing 4,078 3,132
General & Administrative 916 705
Research & Development 2,364 1,831
Total Operating Expenses 7,358 5,668
Operating Income 3,086 2,366
Operating Margin 16 % 15 %
Interest Payments to Bondholders 147 253
Earnings Before Taxes 2,939 2,113
Provision for Taxes 1,028 739
Earnings ("net income") 1,911 1,374
Profit Margin 10 % 9 %
Dividends paid to Shareholders 10 -
Earnings available to Shareholders 1,901 1,374
Introduction / Diagram
Income Statement
Cash Flow Statement
Balance Sheet
Books & Links
Notes
This company is showing positive earnings. In fact, if you compare the earnings between the two years shown, you'll find that earnings "grew" by 39%. As you
might expect, the figures for sales costs and operating expenses are also higher, so the company is probably growing physically as well: in order to make more
money, it's increasing its capacity to produce more of whatever it sells.
One important thing that the income statement doesn't show is how the company is paying for this growth. To find that, you need to look at the cash flow
statement. Another shortcoming of the income statement is that expense items are only shown "by department" and not "by type". For example, employee
salaries make up part of sales cost and part of all items listed under operating expenses; but you can't tell from here how big a part.
Index Fund
Mutual fund holding a portfolio of securities that closely matches an established index (like the S&P 500). Index funds offer diversification and low
management fees (since the decision of which securities to invest in is mainly automatic, being predetermined by the index itself). See the index funds
overview and the page on index funds and optimal portfolios.
Index funds allow average people to participate intelligently in the stock market, by offering diversification and low fees. The "why" of index investing is widely
available. (In a nutshell, actively managed mutual funds only do about as well as index funds but charge higher fees; and individual stock investors can do
even worse, mainly because they keep stumbling over bum advice - which is also widely available.) So this article covers the basics on the "what" of index
investing: exactly what indexes and index funds are, how they select and weight stocks, and how different index families divide up the market. That's followed
with some simple suggestions on building portfolios with index funds and ETFs.
Index Basics
A stock index is a hypothetical portfolio of stocks - a list of names and numbers of shares - selected according to some established criteria. An index fund is a
real mutual fund that buys stocks and holds them in a portfolio that approximates the index.
The most widely followed index is the S&P 500, consisting of 500 hand picked large companies selected by Standard & Poor's. The best known index fund is
the Vanguard 500 from The Vanguard Group, which tracks the S&P 500.
The performance of an index fund won't exactly match that of the index, for at least two reasons. First, the fund needs to charge a management fee to cover
the expenses of running a "real" mutual fund, including salaries of brokers and admin people who keep the customers' accounts straight. Second, the fund has
some flexibility in exactly how closely they track the index. (That can actually be a good thing: some well-known funds consistently show some skill and
frequently manage to beat their index, even after fees.)
Most modern indexes weight stocks according to their market capitalization. That means that if A and B are two companies in the S&P 500 and the market
capitalization of A is twice that of B, then if you invest in an S&P 500 index fund your proportional ownership of A will be twice that of B, dollar-wise. That's the
same as saying that you'll be allocating your money in the same proportions as the whole market is. That's a good thing if you believe in market efficiency,
because you'll be passively benefiting from whatever logic the market used to make its allocation decisions. If you don't particularly believe in market
efficiency, that's still okay - the index is still a diversified bunch of stocks.
(The Dow Jones Industrial Average doesn't weight its companies this way, because it's a throwback to olden times. It really is just "a bunch of stocks", where the
weighting of each stock within the index has no particular significance.)
Index Funds and Optimal Portfolios
The portfolio demo was easy to use because it assumes that the investment universe consists only of two market securities, plus riskless cash. But of course the
real investment universe is a lot bigger than that, with thousands of choices among U.S. stocks alone. In theory you could find the optimal point on the
efficient frontier generated by this many securities, but doing that wouldn't be practical. For one thing, you'd have to calculate the covariance between every
pair of securities: thousands of securities means millions of covariance calculations. But even if you could do all those calculations, you wouldn't really want
to. That's because the efficient frontier is based on an idealized model of the way investments work; and when you apply a huge number of calculations to a
model you tend to amplify the error between the model and reality, leaving you with more "noise" than anything else.
So as a practical matter, putting portfolio theory to work means reducing the problem to something about as simple as the portfolio demo, and investing in a
small number of index funds rather than a huge number of individual stocks and bonds.
Index investing is where portfolio theory starts to rely on the efficient market hypothesis. When you buy an index you're allocating your money the same way the
whole market is - which is a good thing if you believe the market has a plan. This is why portfolio theory really is a branch of economics rather than finance:
instead of studying financial statements you study the aggregate behavior of investors, some of whom presumably have studied financial statements so that
market valuations will reflect their due diligence.
(This viewpoint also gives rise to some bad blood that's pretty entertaining if you aren't involved. The economists see business analysts as necessary to market
efficiency, but otherwise rather beneath them as a life form, like the bacteria that make yogurt: they're useful, but they're basically germs. The "germs" respond
that the economists are delusional eggheads whose theories collapse whenever real money is involved.)
Tobin Separation Theorem
The pioneering result that helped popularize index investing was Tobin's "separation theorem", which Bill Sharpe summarized this way in an interview:
James Tobin ... in a 1958 paper said if you hold risky securities and are able to borrow - buying stocks on margin - or lend - buying risk-free assets - and you do
so at the same rate, then the efficient frontier is a single portfolio of risky securities plus borrowing and lending....
Tobin's Separation Theorem says you can separate the problem into first finding that optimal combination of risky securities and then deciding whether to lend
or borrow, depending on your attitude toward risk. It then showed that if there's only one portfolio plus borrowing and lending, it's got to be the market.
The reasoning behind this is easy to understand from the same kind of diagram we have already been looking at:
As usual you're trying to build an optimal portfolio for your risk tolerance; and as before, it will lie somewhere on the straight line joining the cash rate Rf to
some optimal mix on the efficient frontier. We're specifically assuming what Sharpe said, that high risk investors can and will buy on margin, with money
borrowed at the low rate Rf. That's why there is just one straight line in the picture, and one unique optimal mix on the efficient frontier; so the problem of
building an optimal portfolio is "separated" into somehow finding the optimal mix and then combining it with cash to give you your desired risk tolerance.
Now for the part that's really interesting. Assume that everybody is facing the same efficient frontier that you are, and that the market is efficient in the specific
sense that it behaves in the aggregate as if everybody is trying to build an efficient portfolio this way. That means it behaves as if everybody is on your straight
line, with the same optimal mix as you. So the mix that the market is holding - the index - is guaranteed to be your own personal optimal mix.
That's an incredibly elegant result... but it requires you to accept some really strong hypotheses. (Two quick jabs: real investors can't afford to be so cavalier
about the special risks of margin buying; and different tax brackets mean different people face different efficient frontiers. Goodbye single straight line; so long
universal optimal mix.)
Probably due to problems like those, results about index investing have trended away from proofs that index funds are optimal toward statistical models
confirming that index funds are hard to beat. That's a trend we'll be following on the next three pages, with CAPM (a theoretical model that looks like a
statistical model) and the three factor model (a pure statistical model with a little theory suggested as an afterthought).
Next: how CAPM relates individual securities to the index.
Inflation
The tendency for prices and wages to become more expensive.
Investors tend to pay attention to inflation mainly out of fear that the Federal Reserve will try to fight it by tightening the money supply.
See the inflation calculator; also the Bureau of Labor Statistics (www.bls.gov) for a monthly report on changes in the Consumer Price Index and Producer Price
Index, along with another inflation calculator.
Inflation
Inflation is usually calculated as the annual change in the Consumer Price Index, available from the Bureau of Labor Statistics. This first calculator uses CPI
data to show how things have been going.
Date Range
January 1 through December 31
Results
Annualized Inflation Rate: %
$1.00 at the beginning of 1900 had the same purchasing power as $26.61 at the end of 2008.
Data: BLS Pre 1913: Robert Shiller
Inflation averaged about 3% annually during the 20th century. It was briefly much higher than that right after both world wars (probably due to pent-up demand
versus used-up supply) and also during the late 1970s (probably due to the government's policy of "printing press financing" - see the government spending
diagram for details). Inflation remained low during the boom of the 1990s, which is very encouraging: it shows how a hot economy can create growth in both
demand and supply, so that the price level remains stable.
(Note that the early 1890s had very sharp deflation - it was a great time to have money, but a disaster for farmers and anyone else in debt. 1896 is when William
Jennings Bryan made his famous "cross of gold" speech, pleading for a looser monetary policy.)
What the Fed Does
People expect that, by regulating the money supply, the Federal Reserve will be able to keep consumer prices stable... and also to keep the economy growing
at a reasonable rate and to keep unemployment low. That's already more "goals" than "controls", which would result in some pretty schizophrenic marching
orders. For example, if OPEC announces that they plan to cut oil output in order to drive prices up, should the Fed raise interest rates to fight inflation... or see
the higher oil prices as a recessionary factor, and maybe even think about lowering interest rates?
To see the answer, just notice that this isn't really a monetary problem: the higher oil prices aren't the result of too much easy money. That means that
restricting the money supply wouldn't be a fix, so the Fed won't raise interest rates.
This example shows why energy prices are one of the special indices that get excluded from the Core CPI numbers: energy prices are volatile enough that
when they change it doesn't tell you very much about the rate of inflation overall.
Food and beverages
Housing
Apparel
Transportation
Medical care
Recreation
Education and communication
Other goods and services Total CPI
- Energy
- Food Special Indexes
Total CPI minus Special Indexes Core CPI
(Oh by the way: Irving Fisher, who developed the monetary theory that forms the basis of the Fed's operations, is the same person who predicted that the stock
market had reached a permanently high plateau... just weeks before the Crash of 1929. These guys are very good, but they aren't wizards.)
Inflation Calculator
One place most people will feel the effects of inflation is in their retirement accounts; so this calculator shows what inflation does to the buying power of an
investment.
Inputs
Current Principal: $
Years to grow:
Growth Rate: %
Inflation Rate: %
Results
Future Value: $
Buying Power in Today's Dollars: $
(Also see the portfolio guidelines page in the index funds article, for some calculators that combine inflation with historical stock market returns.)
Inventory
Finished product that's ready for sale, but hasn't been sold yet.
Inventory is considered a current asset, and shown on the balance sheet, generally at cost.
On the scale of the national economy, changes in inventory levels can have confusing effects on the GDP.
Investment
On the cash flow statement and in economics, investment means spending that results in an increase in assets. This includes capital spending on plant and
equipment, i.e. a real increase in the means of production; but it also includes any swelling of unsold inventory, which can indicate a problem with consumer
demand. Residential investment mainly refers to the purchase of homes.
Annual business and residential investment respectively make up about 12% and 4% of the GDP; see the interactive GDP Diagram.
Investment Strategy
1-The most important tales of success have been related with great business opportunities: Bill Gates and Paul Allen ( Microsoft ), Warren Buffet "The Oracle of
Omaha" (Berkshire Hathaway ), the Walton Family ( Wal-Mart ), etc. Someone with knowledge enough and business's sense, who, with the required timing,
acquired a piece of such potential success, today is a member of the limited Billionaire's Club. Unfortunately, the best time for success on Microsoft, Berkshire
Hathaway, Wal-Mart, etc, has gone. However, never is too late. There are present opportunities for new tales of success. Less than one percent, among the
thousands of companies which try to prevail in the competitive present global market, are ranked among such that have an important opportunity for success.
Part of DHC' wealth is the acquired knowledge, during the last ten years, and the creation of a system to first detect and after fully investigate, coals with
potential enough to be transformed to diamonds, together with the use of all available, legal, and safe tools.
2- Many companies which half a century ago were among the most important, among the strongest, today are almost insignificant when compared with
leaders. The U.S. automotive and steel companies, all together, are far from the market capitalization of Microsoft, a postindustrial enterprise. Some of such
postindustrial enterprises began in a room of the founder's house. Many individuals who half a century ago were among the wealthiest, today are almost
insignificant when compared with Bill Gates. Thus, DHC' system seek a multiplying effect, using all available tools at the same time, to first surpass the
wealthiest, and after continue being ahead. The key to detect potential diamonds is to seek for companies with strong fundamentals and fuel enough to
substantially accelerate present growth trends, together with the required timing, strength progression, and market conditions.
3- DHC' strategy is supported by fundamental analysis seeking quality, combined with technical analysis seeking timing. The market conditions are
continuously observed, seeking all available information concerning macros, and watching S&P 500 Index, NYSE Composite Index, NASDAQ Composite
Index, Nikkei, DAX, FTSE, etc. DHC' proprietary test includes: (A) Liquidity progression enough to build the holding or to sell positions under average
conditions; (B) Intrinsic Value progression enough to avoid a "bubble's burst"; (C) Strength progression enough to provide a performance of at least 1000 % on
a long term basis. (D) Confidence Level enough to minimize investment risk on a long term basis; (E) Uniqueness to provide specialties; (F) Avoidance of
companies which rely solely on a commodity or a regulated service.
4- DHC' bonds are issued, on a private basis, in a jurisdiction where government charges no tax on interest earned, with a face value of ONE MILLION U.S.D.,
and a coupon of 14 %, payable on an annual basis ( one year maturity, 14 % APR ). A legally defensible operation of bond's buyer, in a more favorable
business environment, could be beneficiary of a DHC' loan up to half a million U.S.D. Bond's buyer will have the benefit of a tax free income from interest ( ? ),
and additionally, the opportunity to start over again. Using such proceeds bond's buyer could have the opportunity to joint DHC in a legally defensible high
return joint venture.
5- DHC invest, on a long term and global basis, in equity of the companies of the world with the highest earnings growth for the next five to ten years, which
previously pass DHC' proprietary tests. Companies provide the highest quality and a predictable value improvement of at least 1000 % for the next five to ten
years. Companies provide the strongest return on equity, income per employee, profit margin, financial health and earnings growth for the next five to ten
years. Likewise companies provide high confidence level and mean recommendation of buy or strong buy by all renowned analysts, as well as low risk
expectation, no risk of bubble's burst, very high return expectation, low volatility, high liquidity progression, very high strength progression and uniqueness.
Investment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Usually the
strategy will be designed around the investor's risk-return tradeoff: some investors will prefer to maximize expected returns by investing in risky assets, others will
prefer to minimize risk, but most will select a strategy somewhere in between.
Passive strategies are often used to minimize transaction costs, and active strategies such as market timing are an attempt to maximize returns.
One of the better known investment strategies is buy and hold. Buy and hold is a long term investment strategy, based on the concept that in the long run
equity markets give a good rate of return despite periods of volatility or decline. A purely passive variant of this strategy is indexing where an investor buys a
small proportion of all the shares in a market index such as the S&P 500, or more likely, in a mutual fund called an index fund.
This viewpoint also holds that market timing, that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors,
so it is better to simply buy and hold. The smaller, retail investor more typically uses the buy and hold investment strategy in real estate investment where the
holding period is typically the lifespan of their mortgage.
Algorithmic trading
Buy and hold
CANSLIM
Contrarian
Liability driven investment strategy
Market timing
Trading strategy
Trend following
MoneyWeek Investment Advice
Wheel of fortune Design and test your investment strategy for a virtual wheel of fortune, optimize your strategies using different utility functions.
Virtual stock market Design and test your investment strategy for a virtual stock market, where three stocks and a bank account are available for investing.
Category: Investment (Source: Wikipedia)
Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring
consumption.
Investment is the choice by the individual to risk his savings with the hope of gain. Rather than store the good produced, or its money equivalent, the investor
chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or
a share of the profits.
In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual
becomes an entrepreneur using the resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and
the fourth describes an investor in a share of the business.
In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both
prices and interest rates change, the value of the asset and liability also change.
An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin
"vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. See Invest. The basic meaning of
the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se.
Types of investments
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial
economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business management
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment
value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible
(such as patents, software, goodwill), or financial (see below). Assets are used to produce streams of revenue that often are associated with particular costs or
outflows. All together, the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of
capital that is associated with the particular area of business.
In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times the
goal of the investment is for producing future cash flows, while at others it may be for purposes of gaining access to more assets by establishing control or
influence over the operation of a second company (the investee).
Economics
In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include
tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and
output, gross investment (represented by the variable I) is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX,
where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of production after consumption,
government spending, and exports are subtracted.
Both non-residential investment (such as factories) and residential investment (new houses) combine to make up I. Net investment deducts depreciation from
gross investment. It is the value of the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock,
that is, an accumulation measurable at a point in time (say December 31st).
Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment,
whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an
investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.
Finance
In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly
liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on
investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets
are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly
speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often
studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment
schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many
individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital
risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as
investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled
as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash
then it is savings, if its value can fluctuate then it is investment.
Real estate
In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital
risk. Unlike other economic or financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.
Residential real estate
The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the
full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the
lender stands to gain returns from it. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the
purchase price. Against other types of real estate, residential real estate is the least risky.
Commercial real estate
Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of
Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50-70%.
Junk Bond
A bond with a credit rating below investment grade. These bonds typically offer a higher interest rate than investment grade corporate bonds.
Keogh Plan
A retirement account offering tax-deferred growth, designed for people who are self-employed or employees of non-incorporated businesses.
Liability
An obligation to pay. These include accounts payable, and bond and bank debt.
Liabilities are shown on the balance sheet.
Note that a liability is not necessarily an evil thing for a company. Technically it's just an asset that they have temporary control over but don't own. If it's a
useful asset and if the cost of "borrowing" it is cheap, then a liability can be a positive thing.
One example: if a retailer sells a gift certificate, they have to show a liability for the value of the merchandise they will be obligated to hand over when the
giftee shows up to redeem it; but in the meantime they already have the cash the gifter paid, and they can use it any way they want -- this liability is really an
interest-free loan.
LIBOR
LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London
money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate
futures, swaps and Eurodollars. Due to London's importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major
currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being
offered by its membership. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary
continuously throughout the day, LIBOR is fixed for the 24 hour period. Generally, the difference between the instantaneous rate and LIBOR is very small,
especially for short durations.
The most important financial derivatives related to LIBOR are Eurodollar futures. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US
dollars deposited at banks outside the United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal
Reserve margin requirements, allowing higher leverage of the funds. The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar
futures provide a way of betting on or hedging against future interest rate changes.
Interest rate swaps are another significant financial derivative dependent on LIBOR. In an interest rate swap, two parties exchange sets of interest payments on
a given amount of capital. Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream
is often defined in terms of LIBOR. Interest rate swaps, and by extension LIBOR, are extremely important in providing a liquid secondary market for residential
mortgages, which in turn allows lower interest rates on US mortgages.
While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually
similar to the LIBOR, the Euribor benchmark is defined and maintained by the European Banking Federation. Source: Wisegeek
The London Interbank Offered Rate (or LIBOR, pronounced /ˈlaɪbɔr/) is a daily reference rate based on the interest rates at which banks borrow unsecured
funds from banks in the London wholesale money market (or interbank market). It is roughly comparable to the U.S. Federal funds rate.
Introduction
During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest
rate swaps, foreign currency options and forward rate agreements. Whilst recognizing that such instruments brought more business and greater depth to the
London Interbank market, it was felt that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984 the British Bankers'
Association working with other parties such as the Bank of England established various working parties, which eventually culminated in the production of the
BBAIRS terms – the BBA standard for interest swap rates. Part of this standard included the fixing of BBA interest settlement rates, the predecessor of BBA
LIBOR. From 2 September 1985 the BBAIRS terms became standard market practice.
BBA LIBOR fixings did not commence officially before 1 January 1986, although before that some rates have been fixed for a trial period commencing in
December 1984.
It should be noted that member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated
professional firms (as of 2008).
Scope
LIBOR rates are widely used as a reference rate for financial instruments such as:
forward rate agreements
short-term interest rate futures contracts
interest rate swaps
inflation swaps
floating rate notes
syndicated loans
variable rate mortgages[1]
currencies, especially the US dollar (see also Eurodollar).
They thus provide the basis for some of the world's most liquid and active interest rate markets.
For the Euro, however, the usual reference rates are the Euribor rates compiled by the European Banking Federation, from a larger bank panel. A Euro LIBOR
does exist, but mainly for continuity purposes in swap contracts dating back to pre-EMU times.
Technical features
LIBOR is published by the British Bankers' Association (BBA) after 11:00 am (and generally around 11:45 am) each day (London time). It is a trimmed average
of inter-bank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. LIBOR is calculated for 10 currencies.
There are either eight, twelve or sixteen contributor banks on each currency panel and the reported interest is the mean of the middle values (the interquartile
mean). The rates are a benchmark rather than a tradable rate, the actual rate at which banks will lend to one another continues to vary throughout the day.
LIBOR is often used as a rate of reference for Pound Sterling and other currencies, including US dollar, Euro, Japanese Yen, Swiss Franc, Canadian dollar,
Australian Dollar, Swedish Krona,
Danish Krone and New Zealand dollar.[2]
In the 1990s, Yen LIBOR rates were influenced by credit problems affecting some of the contributor banks.
For a precise definition of BBA LIBOR, see: The BBA LIBOR fixing & definition.
Six-month LIBOR is used as an index for some US mortgages. In the UK, the three-month LIBOR is used for some mortgages—especially for those with adverse
credit history.
Definition of LIBOR. LIBOR is defined as:
“The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable
market size, just prior to 11.00 London time.”
This definition is amplified as follows:-
• The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.
• Contributions must represent rates formed in London and not elsewhere.
• Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required
currency via the foreign exchange markets.
• The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.
• The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.
LIBOR-based derivatives
Eurodollar contracts
The Chicago Mercantile Exchange's Eurodollar contracts are based on three-month US dollar LIBOR rates. They are the world's most heavily traded short term
interest rate futures contracts and extend up to ten years. Shorter maturities trade on the Singapore Exchange in Asian time.
Interest rate swaps
Interest rate swaps based on short LIBOR rates currently trade on the interbank market for maturities up to 50 years. A "five year LIBOR" rate refers to the 5 year
swap rate vs 3 or 6 month LIBOR. "LIBOR + x basis points", when talking about a bond, means that the bond's cash flows have to be discounted on the swaps'
zero-coupon yield curve shifted by x basis points in order to equal the bond's actual market price. The day count convention for LIBOR rates in interest rate
swaps is Actual/360.
Reliability
On Thursday, 29 May 2008 the Wall Street Journal released a controversial study suggesting that banks may have understated borrowing costs they reported
for LIBOR during the 2008 credit crunch.[3] Such underreporting could have created an impression that banks could borrow from other banks more cheaply
than they could in reality. It could also have made the banking system appear healthier than it was during the 2008 credit crunch.
For example, the study found that rates at which one major bank "said it could borrow dollars for three months were about 0.87 percentage point lower than
the rate calculated using default- insurance data."
In response to the study released by the WSJ, the British Bankers' Association announced that LIBOR continues to be reliable even in times of financial crisis.
According to the British Bankers' Association, other proxies for financial health such as the default credit insurance market, are not necessarily more sound
than LIBOR at times of financial crisis, though more widely used in Latin America, especially the Ecuadorian and Bolivian markets.
Additionally, other authorities have contradicted the Wall Street Journal article. In their March 2008 Quarterly Review The Bank for International Settlements
have stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings".
Further, In October 2008 the International Monetary Fund published their regular Global Financial Stability Review which also found that "Although the
integrity of the U.S. dollar LIBOR fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar LIBOR
remains an accurate measure of a typical creditworthy bank’s marginal cost of unsecured U.S. dollar term funding"
Euribor
TIBOR
Leverage (finance)
Margin (finance)
Prime rate
British Bankers' Association Source: Wikipedia. What is LIBOR?
Libor stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from each other, in marketable size, in the London
interbank market.
What is BBA LIBOR?
BBA LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the BBA in conjunction with Reuters and
released to the market shortly after 11.00 am London time each day.
Where is the BBA LIBOR standard used?
BBA LIBOR is the primary benchmark for short term interest rates globally. It is used as the basis for settlement of interest rate contracts on many of the world’s
major futures and options exchanges (including LIFFE, Deutsche Term Börse, Euronext, SIMEX and TIFFE) as well as most Over the Counter (OTC) and
lending transactions.
How is BBA LIBOR produced? And published?
The British Bankers' Association (BBA), advised by senior market practitioners, maintains a reference panel of at least 8 contributor banks. For a full current list
of which banks are contributing to each panel please see link at the bottom of the page.
The aim is to produce a reference panel of banks which reflects the balance of the market – by country and by type of institution. Individual banks are
selected within this guiding principle on the basis of reputation, scale of market activity and perceived expertise in the currency concerned.
The BBA surveys the panel’s market activity and publishes their market quotes on–screen. The top quartile and bottom quartile market quotes are disregarded
and the middle two quartiles are averaged: the resulting "spot fixing" is the BBA LIBOR rate.
The quotes from all panel banks are published on–screen to ensure transparency. For a full description of the process please see the link at the bottom of the
page.
BBA LIBOR fixings are provided in ten currencies:
BBA Libor fixing currencies table Currency Name ISO 4217 currency code (* see note)
Pound Sterling GBP
US Dollar USD
Japanese Yen JPY
Swiss Franc CHF
Canadian Dollar CAD
Australian Dollar AUD
Euro (** see note) EUR
Danish Kroner DKK
Swedish Krona SEK
New Zealand Dollar NZD
Note:
(*) This is an international standard describing three letter codes to define the names of currencies established by the International Organization for
Standardization (ISO).
(**) BBA EUR LIBOR is the successor BBA LIBOR fixing for the eurozone legacy currencies, which ceased to be fixed at the beginning of 1999.
Where can I find BBA LIBOR data?
BBA LIBOR is compiled each London Business day by Reuters and distributed live via a number of data vendors including Reuters, Thomson Financial,
Bloomberg, Quick, Infotec, Class Editori, IDC, Proquote and Telekurs.
Many websites operated by financial services and media outlets are licensed to display BBA LIBOR data at the end of the day (that is, after 5pm London
Time). Additionally, the financial press, including the Wall Street Journal and Financial Times publish BBA LIBOR data from the previous day.
All BBA LIBOR is posted on our website, with a rolling 7 day delay, please see link at the bottom of the page.
Why is the BBA LIBOR standard important?
BBA LIBOR is important because:
it is long established
it offers the largest range of international rates
it is a truly international reference rate
it has a wide commercial use
it enjoys wide international dissemination
its mechanism is transparent
it provides a robust settlement rate
the banks represented on the panels are the most active in the cash markets and have the highest credit ratings
BBA LIBOR’s London base is significant: well over 20% of all international bank lending and more than 30% of all foreign exchange transactions take place
through the offices of banks in London and represents a unique snapshot of competitive funding costs.
London has representation from close to 500 banks, and many other major financial institutions actively trade in the euromarkets which are based primarily in
London. In addition, no reserve requirements are applied in London.
Can you provide a forecast on what BBA LIBOR rates will be in the future?
BBA LIBOR is extremely market sensitive and affected by a number of factors such as liquidity in the London cash markets, constitution of the contributor
panels and local interest rate policy.
The BBA therefore is not able to provide any forecasts for the future.
Long-term BBA LIBOR
BBA LIBOR is a short–term interest rate deposit rate and is only calculated up to a maturity of 12 months. We have never calculated BBA LIBOR rates beyond
this nor do we have any intention of doing so as the liquidity in the London interbank cash market dries up after a one year maturity.
Some people use interest rates swap rates as approximation for longer periods but please be aware that the methodology is likely to be quite different for BBA
LIBOR.
What do the abbreviations s/n, o/n and 1 w, 1 month mean?
These abbreviations stand for the maturities for which BBA LIBOR is fixed. There are 15 different maturities for each currency and day of fixing. The shortest
maturity is overnight (O/N) for Euro, US Dollar, Pound Sterling, and Canadian Dollar and spot/next (s/n) for all other currencies. 1 w stands for 1 week and 1m
stands for 1 month. The longest maturity for which BBA LIBOR is fixed is 12 months.
An "overnight" rate that you see quoted today will value today and mature tomorrow.
A "spot / next" rate that you see quoted today will value in 2 days (i.e. the day after tomorrow) and mature the day after that.
BBA LIBOR Historic rates
The BBA have posted all rates we hold on our website. Please see a link to the historic BBA LIBOR at the bottom of the page. BBA LIBOR fixings did not
commence officially before 1 January 1986, although before that some rates have been fixed for a trial period commencing in December 1984.
Due to the specific methodology of calculating BBA LIBOR it is not possible to reconstruct rates before the official fixings commenced.
There are a few websites that purport to be showing BBA LIBOR rates before the mid-80s but these are in no way affiliated with the BBA, who is the sole
supplier of BBA LIBOR, and so we would not vouch for their accuracy.
Is there was any specific reason for why BBA LIBOR started in 1984. What was the historical impetus?
During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably Interest
Rate Swaps, Foreign Currency Options and Forward Rate Agreements.
Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be
inhibited unless a measure of uniformity was introduced.
In October 1984 the BBA working with other parties such as the Bank of England established various working parties, which eventually culminated in the
production of the BBAIRS terms – the BBA standard for Interest Swap rates.
Part of this standard included the fixing of BBA Interest Settlement rates, the predecessor of BBA LIBOR. From 2 September 1985 the BBAIRS terms became
standard market practice.
Factors that influence BBA LIBOR rates
BBA LIBOR rates are dependent on a number of factors, including local interest rates, banks expectations of future rate movements, the profile of contributor
banks (contributor panels are changed annually), liquidity in the London markets in the currency concerned etc.
Does BBA EUR LIBOR follow Target or London business days?
BBA Euro LIBOR follows the Target calendar – as set by the European Central Bank. So on days in which Target is open but London is closed, only the EUR
BBA LIBOR rate will be fixed. If Target is closed but London is trading we will fix EUR BBA LIBOR with the exception of the s/n maturity.
BBA LIBOR calculation basis
BBA LIBOR is not a compounded rate but is calculated on the basis of actual days in funding period/360. Therefore the formula is as follows: interest due =
principal x (libor rate/100) x (actual no of days in interest period/360). Please note that for GBP) the calculation basis is 365 days.
It is also important to work out the exact/actual number of days in the funding period which is not always 90 days for a 3 month deposit but could e.g. be 89 or
91 days.
If you have a funding period of, for example, 45 days you could extrapolate between the 1 and the 2 month rate to arrive at the correct BBA LIBOR rate.
Relationship between different currencies
BBA LIBOR is set entirely independently for each currency by a different panel of banks and the rates are not interrelated via a currency conversion or any
other means. In fact BBA LIBOR gives an idea at which interest rates banks can borrow funds in the currency concerned in the London cash market.
For instance, borrowings in USD are sometimes referred to as Eurodollar interest rates. The factor that has most impact on each of the rates is the domestic
interest, which for USD rates will be the Fed fund rates.
How can I obtain BBA LIBOR rates on the day of calculation?
In order to receive this data you must get a licence from the BBA, for which there may be a charge. Please contact BBA LIBOR Manager John Ewan for more
details.
What Is Libor ?
Libor is short for the London InterBank Offered Rate, the interest rate offered for U.S. dollar deposits by a group of large London banks. There are actually
several Libors corresponding to different deposit maturities. Rates are quoted for 1-month, 3-month, 6-month and 12-month deposits.
What Is a Libor Mortgage?
A Libor mortgage is an adjustable rate mortgage (ARM) on which the interest rate is tied to a specified Libor. After an initial period during which the rate is
fixed, it is adjusted to equal the most recent value of the Libor plus a margin, subject to any adjustment cap.
For example, on April 26, 2004, one lender was offering a 6-month Libor ARM at 3%, zero points, and a margin of 1.625%. The new rate 6 months later will
be 1.625% plus the 6-month Libor at that time. If that is (say) 2.625%, the new rate will be 1.625% + 2.625% = 4.25%. If the adjustment cap that limits the size
of rate changes is 1%, however, the new rate will be only 3% + 1% = 4%.
Special Features of Libor Mortgages
Low Margins for A-Quality Borrowers: Libor ARMs were developed to meet the needs of foreign investors looking to minimize their interest rate risk on dollar-
denominated investments. A foreign bank that buys the 6-month Libor ARM containing a 1.625% margin can borrow the funds it needs in the inter-bank market
for 6 months at the 6-month Libor. The bank pays the depositor Libor, and it earns Libor + 1.625% on the ARM. The margin is locked in, except to the extent
that changes in Libor are not fully matched by changes in the ARM rate because of rate caps.
Because of the reduced risk, investors in Libor ARMs are willing to accept a smaller margin than is common on other ARMs. On April 26, 2004, for example,
the Libor margin available to A-quality borrowers was as low as 1.50%, compared to 2.25 – 2.75% on ARMs indexed to other series.
But not everyone can benefit from the low margin. On the same day that the lender cited above was offering a 6-month Libor ARM at 3% with a 1.625%
margin, a sub-prime lender was offering a 6-month Libor ARM to borrowers with D-credit at 10% with a 7% margin!
Attractive Buydowns: On 30-year fixed-rate mortgages, borrowers can usually "buy down" the rate by ¼% by paying about 1.5 points. I have seen 30-year Libor
ARMs that allow the borrower to buy down the rate and margin by ¼% for only 3/8 of a point. This is an incredible bargain, but the Libors that offer it may have
an unusually high maximum rate.
No Negative Amortization: Libor ARMs don’t offer the payment flexibility, nor the associated risks, of negative amortization ARMs.
High Index Volatility: Libor is about as volatile as rates on short-term US Government securities, and more volatile than the COFI, CODI and MTA indexes.
Common Features of Libor Mortgages
The remaining features of Libor ARMs are very similar to those of other ARMs.
Initial rate period. This is the period during which the initial rate holds. Initial rate periods on Libor ARMs range from 6 months to 10 years.
Subsequent adjustment period. This is period between rate adjustments after the first adjustment. For example, an ARM on which the initial rate holds for 3
years and is then adjusted every year is a "3/1". Most Libor ARMs adjust every 6 or 12 months.
Rate Adjustment Caps: Rate adjustment caps that limit the size of a rate change are generally 1% on 6-month Libors, and 2% on 1-year and 3-year Libors. On
7 and 10-year Libors, the cap is usually 5% on the first adjustment and 2% on subsequent (annual) adjustments. On some 5-year Libors, however, the
adjustment cap is the same as that on 1-year and 3-year Libors, while on others it is the same as on 7-year and 10-year Libors.
Maximum Interest Rate: This is the highest interest rate allowed on the ARM over its life. The maximum rate on some Libor ARMs is set at 5% or 6% above the
initial rate. On others it is set at an absolute level – 11%, for example, regardless of the initial rate.
Why Select a Libor Mortgage?
You select a Libor loan not because it uses Libor but because it has a combination of other features that in combination add up to an attractive ARM for you.
An ARM is attractive if, during the period you expect to have the mortgage, the interest savings early in that period (relative to a FRM or an ARM with a longer
initial rate period) outweigh the risk of interest rate and payment increases later on.
The best way to make such a judgment is by using interest rate scenario analysis. An interest rate scenario is an assumption about what will happen to rates in
the future. Usually, we focus on rising rate scenarios, because those are the ones we worry about.
For any given scenario, we can calculate exactly how high the rate and payment will go, and when it will get there. Using the same scenario, we can
compare different ARMs, as well as ARMs against an FRM. We can also calculate the cost of an ARM or FRM over any period specified by the borrower.
Because their margins can be small, borrowers who take Libor ARMs may find it attractive to reduce the risk of future rate increases by adopting the FRM
payment strategy. This involves making the payment they would have had to make had they chosen an FRM, for as long as the FRM payment remains above
the Libor ARM payment.
To see a sample of rates/payments and costs on an ARM and an FRM under different scenarios, including results for an FRM payment strategy, click on
Sample Rates/Payments and Costs .
Information Needed to Assess a Libor Mortgage
You get it in two steps. In step 1, you have your loan officer or mortgage broker provide the essential data on the features of each loan you are considering. To
make it as easy as possible for them, print out and give them Worksheet of ARM Features. In Step 2, you transfer the data on ARM features into the ARM
Tables calculator which will generate your tables. Have your data in hand before clicking on ARM Tables calculator above or selecting the ARM Tables
calculator on the Tutorials Menu.
Load
Sales charge on a mutual fund, usually paid at time of purchase. The NASD allows loads up to 8.5% of the value of the investment.
Load Funds up to 8.5%
Low-Load Funds 3% or below
No-Load Funds 0
No-load funds can still charge 12b-1 fees.
Long-term Debt
Debt due to be paid at a date more than one year in the future.
Market Capitalization
Total value of a company's stock; equal to the number of shares times the price per share.
Modern Portfolio Theory
Investment approach that tries to construct a portfolio offering maximum expected returns for a given level of risk tolerance.
See beta and Sharpe Ratio; also the article on modern portfolio theory.
Beta
A measure of an investment's volatility, relative to an appropriate asset class. For stocks, the asset class is usually taken to be the S&P 500 index.
The formula is:
beta = [ Cov(r, Km) ] / [ StdDev(Km) ]2
where
r is the return rate of the investment;
Km is the return rate of the asset class.
If the asset class is well chosen so that the return fluctuations of the investment and the class are highly correlated, then the formula approximates "the
volatility of the investment divided by the volatility of the class."
Beta is used in modern portfolio theory as a measure of risk; it's specifically used in the Capital Asset Pricing Model. See the main pages on CAPM and CAPM
regression.
Sharpe Ratio
A number measuring the reward-to-risk efficiency of an investment, used to create risk-efficient portfolios.
The definition of the Sharpe Ratio is:
S(x) = (rx - Rf) / StdDev(x)
where
x is some investment
rx is the average annual rate of return of x
Rf is the best available rate of return of a "riskless" security (ie cash)
StdDev(x) is the standard deviation of rx
See the main article on the Sharpe Ratio for more information.
Modern Portfolio Theory - Introduction
Modern portfolio theory is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole,
rather than business analysts, who look for what makes each investment opportunity unique. Investments are described statistically, in terms of their expected
long-term return rate and their expected short-term volatility. The volatility is equated with "risk", measuring how much worse than average an investment's bad
years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to find a portfolio with the maximum expected return for that
level of risk.
This article covers the highlights of modern portfolio theory, describing how risk and its effects are measured, and how planning and asset allocation can help
you do something about it.
Momentum
Property that allows moving things to overcome resistance and keep moving in the same direction. Works well with physical objects like cars and bowling
balls. But does it work with stock prices ...? . See technical analysis.
Monetary Policy
Actions by the Federal Reserve to control the money supply.
In particular, monetary policy refers to efforts to fight inflation or otherwise control or stimulate the economy by controlling the availability of spending money
to companies and consumers. Compare fiscal policy.
Monte Carlo Simulation
A computer simulation with a built-in random process, allowing you to see the probabilities of different possible outcomes of an investment strategy.
See the main article on Monte Carlo retirement planning.
Monte Carlo Retirement Planning
All simple retirement calculators work like the chart below. They divide your life into an "accumulation phase" when you're working and making contributions,
and a "distribution phase" which begins when you retire and lasts as long as you think you will. The idea is to see how much annual income your investments
will yield when you're retired.
What's missing here is volatility: fluctuations in the return rates that raise the risk that your account won't peak as high, or last as long, as this "smooth" picture
suggests.
This article is an introduction to investment volatility: how to understand its effects, and how to use an improved style of retirement calculator to include
volatility in your planning.
(Note: if you prefer, you can skip ahead to the Monte Carlo retirement calculator and then read the "theory" pages later.)
Mortgage
A mortgage is the transfer of an interest in property (or in law the equivalent - a charge) to a lender as a security for a debt - usually a loan of money. While a
mortgage in itself is not a debt, it is lender's security for a debt. It is a transfer of an interest in land (or the equivalent), from the owner to the mortgage lender,
on the condition that this interest will be returned to the owner of the real estate when the terms of the mortgage have been satisfied or performed. In other
words, the mortgage is a security for the loan that the lender makes to the borrower.
The term comes from the Old French "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is
taken through foreclosure.[1]
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some jurisdictions only
land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial
real estate without the need to pay the full value immediately. See mortgage loan for residential mortgage lending, and commercial mortgage for lending
against commercial property.
The measurement of a mortgage with regards to cost to the borrower can be measured by Annual Percentage Rate (APR) or many other formulas for true cost
such as Lender Police Effective Annual Rate (LPEAR).
In many countries it is normal for home purchases to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic
markets have developed, notably in Spain, the United Kingdom, Australia and the United States.
1 Participants and variant terminology
2 Mortgage lender
3 Borrower
3.1 Borrowing for investment purposes
4 Other participants
5 Default on Subdivided Property
6 Legal aspects
6.1 Mortgage by demise
6.2 Mortgage by legal charge
6.3 Equitable mortgage
7 History
8 Foreclosure and non-recourse lending
9 Mortgages in the United States
9.1 Types of mortgage instruments
9.1.1 The mortgage
9.1.2 Security Deed
9.1.3 The deed of trust
9.2 Mortgage lien priority
10 Further reading
11 See also
12 Notes and references
Participants and variant terminology
Legal systems, while having some concepts in common, employ different terminology. However, in general, a mortgage of property involves the following
parties.
Mortgage lender
Mortgagee is the legal term for the mortgage lender. The main function of the mortgage is to provide security to the lender. Given the large sum of money
involved in financing a property, a mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence
over other creditors. A mortgage accomplishes this security.
The lender loans the money and registers the mortgage against the title to the property. The borrower gives the lender the mortgage as security for the loan,
receives the funds, makes the
required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If
the mortgagor fails to repay the loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.
Borrower
Mortgagor is the legal term for the borrower, who owes the obligation secured by the mortgage, and may be multiple parties. Generally, the debtor must meet
the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the
mortgage by the creditor to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their
property by way of a loan.
Most buyers of real property would have difficulty saving enough money to make an outright purchase of real estate. The use of debt increases a buyer's ability
to buy through a combination of down payment and debt. As a result a real estate transaction seldom occurs without borrowers relying on borrowed funds.
Borrowing for investment purposes
Aside from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds.
Some of these include:
To diversify investments and reduce overall risk by using only part of the available funds for any one investment
To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% and
used to invest in a project that returns 10%
To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing
only in land and buildings.
To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.
Other participants
Because of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation.
The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor,
typically by finding the most competitive loan.
The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.
Default on Subdivided Property
When a tract of land is purchased with a mortgage and then split up and sold off, then the "inverse order of alienation rule" applies to find out who will be
liable for the default.
Basically, when a mortgaged tract of land is split up and sold off, then upon default, the mortgagee forecloses and proceeds against lands still owned by the
mortgagor, then liability attaches in a backward fashion, or in an 'inverse order' as they were sold. So if A acquires a 3-acre (12,000 m2) lot by mortgage then
splits up the lot into three 1 acre lots (A, B, and C), and sells lot B to X, and then lot C to Y, retaining lot A for himself then, upon default, the mortgagee will go
after lot A, the mortgagor, and if that sale does not satisfy the default, then the owner of lot C will be liable, then the owner of lot B. The idea is that the first
purchaser should have more equity and subsequent purchasers receive a diluted share.
Legal aspects
Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal structures, the availability of which will depend on
the jurisdiction under which the mortgage is made. Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the
mortgage by legal charge.
Mortgage by demise
In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the loan is repaid or other mortgage obligation
fulfilled in full, a process known as "redemption". This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the
property will be returned on redemption.
Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and in a small minority of states in the United States.
Many other common law jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales this type of
mortgage is no longer available, by virtue of the Land Registration Act 2002.
Mortgage by legal charge
In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",[2] the debtor remains the legal owner of the
property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor,
banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property
which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank
will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is most common in the United States and, since the Law of Property Act 1925,[2] it has been the usual form of mortgage in England and
Wales (it is now the only form – see above).
In Scotland, the mortgage by legal charge is also known as standard security.
In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing.[citation needed] It is also known as registered
mortgage. After registration of legal charge, the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold
without obtaining an NOC (No Objection Certificate) from the bank.
Equitable mortgage
See also: Security interest#Types of security
In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrower's signing a
Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank
with his own wish and will, in order to secure the financing obtained from the bank.
History
At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and
would be of no effect if certain conditions were met – usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word
"mortgage" (a legal term in French meaning "dead pledge"). The debt was absolute in form, and unlike a "live pledge" was not conditionally dependent on its
repayment solely from raising and selling crops or livestock or simply giving the crops and livestock raised on the mortgaged land. The mortgage debt
remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be
taken by the creditor, such as acceptance of crops and livestock in repayment.
The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in
a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on
reconveyance on redemption. This right of the borrower is known as the "equity of redemption".
This arrangement, whereby the lender was in theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many
jurisdictions as being awkwardly artificial. By statute the common law's position was altered so that the mortgagor would retain ownership, but the mortgagee's
rights, such as foreclosure, the power of sale, and the right to take possession, would be protected.
In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and
Wales by the Law of Property
Act 1925, which abolished mortgages by the conveyance of a fee simple.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions – principally, non-payment of the mortgage loan – apply. Subject
to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt.
In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the
outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining
debt, through a deficiency judgment.
Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government. In some
jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of
lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
At the start of 2008, 5.6% of all mortgages in the United States were delinquent.[3] By the end of the first quarter that rate had risen, encompassing 6.4% of
residential properties. This number did not include the 2.5% of homes in foreclosure.[4]
Mortgages in the United States
Types of mortgage instruments
Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.[5]
The mortgage
In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding
declaring the debt to be due and in default and ordering a sale of the property to pay the debt.[citation needed]
Security Deed
The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, however, a security deed is an actual conveyance of real
property in security of a debt.
Upon the execution if such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and
enjoy the conveyed land subjectto compliance with debt obligations.
Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure
to timely record the deed to secure debt may affect priority and therefore the ability to enforce the debt against the subject property.[6]
The deed of trust
The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a
title transfer, regardless of its terms.
It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.[7] It is also possible to foreclose them through
a judicial proceeding.
Most "mortgages" in California are actually deeds of trust.[8] The effective difference is that the foreclosure process can be much faster for a deed of trust than
for a mortgage, on the order of 3 months rather than a year. Because the foreclosure does not require actions by the court the transaction costs can be quite a
bit less.
Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create
trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of
debts do not create true trust arrangements.[citation needed]
Mortgage lien priority
Except in those few states in the United States that adhere to the title theory of mortgages,[9] either a mortgage or a deed of trust will create a mortgage lien
upon the title to the real property being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the
mortgagee and the mortgagor receives the funds whose repayment the mortgage secures. Subject to the requirements of the recording laws of the state in
which the land is located, this attachment establishes the priority of the mortgage lien with respect to most other liens[10] on the property's title.[11] Liens that
have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching afterward are said to be junior or
subordinate.[12] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their
debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up
in priority and become the new first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the
paid off loan.
Further reading
Rhodes, Trevor. American Mortgage: Everything U Need to Know... about Financing a Home. 444 pages. McGraw-Hill, June, 2008. ISBN 0-07-159054-4
Look up Mortgage in
Wiktionary, the free dictionary.Trust deed
Bridge financing
Financing
Fixed rate mortgage
Promissory note
Loan origination
Subprime lending
Mortgage calculator
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Americans for Fairness in Lending
National Mortgage News
Mortgage insurance
collateralized mortgage obligation - CMO
Subprime mortgage crisis
Notes and references
^ Coke, Edward. Commentaries on the Laws of England. "[I]f he doth not pay, then the Land which is put in pledge upon condition for the payment of the
money, is taken from him for ever, and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant"
^ a b "Law of Property Act 1925 (c.20) Part III Mortgages, Rentcharges, and Powers of Attorney". Ministry of Justice. Retrieved on 2008-01-30.
^ Can the World Stop the Slide?, TIME, February 4, 2008, page 27.
^ Kemp, Carolyn. Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey. MortgageBankers.org. 5 June 2008. Mortgage
Bankers Association. 19 June 2008
^ Kratovil, Robert; Werner, R. (1988). Real Estate Law, 9th, Prentice-Hall, Inc., Sec 20.09. ISBN 0-13-763343-2.
^ Security Interests in Georgia, By Steven M. Mills of Steven M. Mills, P.C.[1] (1999).
^ Kratovil, Robert; Werner, R. (1988). Real Estate Law, 9th, Prentice-Hall, Inc., Sec 20.09(b). ISBN 0-13-763343-2.
^ See the discussion of background principles of California real property law in Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226, 1235-1238 (1995).
^ Kratovil, Robert; Werner, R. (1981). Modern Mortgage Law and Practice, 2nd, Prentice-Hall, Inc., Sec 1.6. ISBN 9780135957448.
^ Exceptions include real estate tax liens and, in most states, mechanic's liens.
^ The failure to record a previously made mortgage may, under some circumstances, allow a subsequent mortgagee's mortgage to be recognized as prior in
right to the otherwise prior mortgage.
^ Of course, the lienholders can agree among themselves to a different priority arrangement through subordination arrangements. See, R. Kratovil and R.
Werner Modern Mortgage Law and Practice Chs. 30 & 38 (2nd Ed. Prentice-Hall, Inc.)
Retrieved from "http://en.wikipedia.org/wiki/Mortgage"
Category: Mortgage
Hidden categories: All articles with unsourced statements | Articles with unsourced statements since August 2008 | Articles with unsourced statements since
August 2007. Source: Wikipedia
Mortgage and real estate Glossary
Abstract of Title
A summary of public records relating to the title of a particular parcel of land.
Acceleration
The right of the mortgage (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgager (borrower), or by
using the right vested in the Due-on-Sale Clause.
Acknowledgement
A formal declaration, usually before a notary, that the person has executed a document.
Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a pre selected index. Also sometimes known as the renegotiable rate mortgage, the
variable mortgage or the Canadian roll over mortgage.
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the
index.
Administrator
Person appointed by the court to take possession of a person who died intestate, without leaving a will, pay their debts and distribute the balance of the
property to those entitled to it by law.
Adverse Possession
Physical possession of real estate inconsistent with the rights of the true owner. In many states, a party in adverse possession, after satisfying the requirements
of the statutes, can then acquire
the title to the land. These requirements may include the payment of property taxes on the real estate as well as the passing of a number of years.
Affiant
One who swears to or affirms the statement in an affidavit.
Affirmative Coverage
Provision in title policy where the title insurer insures against risks and losses not usually covered. For example: insurance against loss caused by violation of
truth in lending laws. As you may imagine, title insurers very rarely offer this coverage.
All Inclusive Rate
A quote for title insurance that includes the cost of title search, title examination and the policy.
ALTA
American Land Title Association.
Amortization
Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding
balance. Comes from the French
word, "mort", literally to kill the loan owing.
Annual Percentage Rate (APR)
Is a interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage,
because it takes into account points and other credit cost. The APR allows home buyers to compare different types of mortgages based on the annual cost for
each loan.
Appraisal
An estimate of the value of property, made by a qualified professional called an "appraiser". There are different types of qualified appraisers. The highest
qualification is considered to be the MAI.
Approved Attorney
An attorney approved by a title insurance company as one whose opinion of title will be accepted and relied upon by the company for the issuance of title
insurance policies.
Appurtenances
Rights that pass with the title to the land. These rights may affect other, usually adjoining lands, such as a access easement.
Assessment
A local tax levied the County usually against a property for a specific purpose, such as a sewer or street lights. Also can mean the assessed value of the
property. Similar, but not the same as an "appraisal" see above. Typically the property tax assessment amount is less than the fair market value.
Assignment
A transfer of a right and/or interest in land. Often used for transferring the rights of a lender, buyer or tenant. The person who assigns rights is the Assignor, the
person who acquires those rights is the Assignee.
Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save
the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will
apply. Most mortgages today are unassumable as Lenders have found that assumed loans tend to have a far higher rate of default.
FHA loans closed before 12/15/89 and VA loans closed before 3/1/88 are freely assumable with no qualifying.
Note that the original borrower is still just as liable for the loan as the new home buyer unless the previous borrower gets a release from the Lender. This is
called "novation".
Attorney in Fact
A person who holds a power of attorney from another to execute documents on behalf of the giver (or grantor) of that power. A power of attorney can be
restricted or unrestricted. All powers of attorney can be withdrawn by notice in writing.
Balloon payment
A balloon mortgage is one where a lump sum, the balance of the loan principal, becomes payable at the end of the term. A mortgage can be interest only
with the whole principal due at the end of the term or it may be calculated to amortize over a longer period, say 30 years, but with the outstanding principal
balance payable at the end of, say, 10 years.
Base Title or Basic Title
Title to an area or tract of land out of which other parts are later conveyed or a subdivision is made.
Binder or commitment
An enforacable agreement from a title company that states that if the requirements outlined are satisfied, the title company will issue title insurance subject to
any named exceptions.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage. This provides greater security for the Lender. It may be possible to
get a "partial" release so the Borrower can sell one of the properties provided a suitable principal reduction is made.
Bond
An insurance agreement under which the insurer agrees to pay, subject to agreed limits, compensation for financial loss caused to another by specified acts
or defaults of a third party OR a long term interest bearing security instrument, issued by a goverment or corporation.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full. The mortgage is not actually the loan, it just
creates the security interest in the property. It is the promissory note that spells out the repayment terms and interest.
Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually
charge a fee or receive a commission for their services.
Building setback
An invisible line from the front, sides and rear of the outside boundaries of the property beyond which no permanent structure may extend. This could be
found in city zoning ordinances, the subdivision deed or other restrictive covenants.
Caps (interest)
A limit on the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. For example a 4/1 cap would mean a
maximum interest increase of 4% over the life of the loan and no more than 1% each year.
Caps (payments)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Mortgage may change per year and/or the life
of the loan.
Certificate of title
A written opinion by an attorney that ownership of a parcel of property is as stated in the certificate OR a deed issued by the court as a result of a foreclosure.
Chain of title
The successive transfers of ownership over the history of a parcel of land. Each deed that transfers ownership is a link in the chain.
Chain and links
An old method of land measurement. Surveyors used to use a chain of a length of 66 feet = 22 yards.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally changes hands. Also called settlement. Closing costs
usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording, credit report charge and other
costs assessed at settlement. The cost of closing usually are about three to six percent of the mortgage amount. Commitment and agreement, often in writing,
between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Cloud on title
An outstanding claim or encumbrance revealed by a title search that adversely affects the marketability of the property. For example: a mechanic's lien, lis
pendens recorded option to purchase etc.
Coinsurance
An insurance agreement where more than one company shares a part of a single risk. This applies only to large risks and each fractional part is covered by a
separate insurance contract.
Collateral
Security for a loan. In the case of a mortgage this would be the real property. But stocks and personal property can also be used as collateral for a loan.
Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender
with specific terms or conditions.
Construction loan (interim loan) - A loan to provide the funds necessary to pay for the construction of buildings or homes. These are usually designed to
provide periodic disbursements to the builder as it progresses.
Community property. A category of property, existing in some states, in which all property (except property specifically acquired by husband or wife as
separate property) acquired by a husband and wife, or either, during marriage, is owned in common by the husband and wife.
Condemnation. (1) The lawful taking of private land for public use by a government under its right of eminent domain. (2) A declaration by a governmental
agency that a building is unfit for use.
Condominium. A system of real estate ownership wherein there is separate ownership of units in a multi-unit project with each separate unit ownership being
coupled with an undivided share in the entire project less all of the units.
Condominium declaration. The document which establishes a condominium and describes the most important property rights of the unit owners. Special
statutes in each state prescribe the contents of this document, known in some states as a "master deed."
Construction disbursement service. A direct payment plan for disbursement of construction loan and equity funds through the title company as an
independent escrow agent to subcontractors and suppliers upon approval of the owner, general contractor, and lender.
Construction loan. A loan which is made to finance the actual construction or improvement on land. It is often the practice to make disbursements in
increments as the construction progresses.
Contract for deed (Agreement for deed, land contract)
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale. It may be
recordable or non-recordable. It creates a legal interest in real estate however the buyer cannot obtain secondary financing.
Contract of sale. Agreement by one person to buy and another person to sell a specified parcel of land at a specified price.
Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA.
Conveyance. (1) A document which transfers an interest in real property from one person to another; e.g., a deed. (2) The act of executing and delivering a
deed or mortgage.
Cooperative (apartment). An apartment building which is owned by a corporation and in which tenancy in an apartment unit is obtained by purchase of the
pertinent number of shares of the stock of the corporation and where the owner of such shares is entitled to occupy a specific apartment in the building.
Cotenancy. Ownership of the same interest in a particular parcel of land by more than one person; e.g., tenancy in common, joint tenancy, tenancy by the
entireties.
Covenant. An agreement between the parties in a deed whereby one party promises either (1) the performance or non-performance of certain acts with
respect to the land or (2) that a given state of things with respect to the land are so; e.g., covenant that the land will be used only for residential purposes.
Credit Report
A report documenting the credit history and current status of a borrower's credit standing. Credit is rated for mortgage purposes from A, excellent, down to D,
very poor. To obtain a conforming loan that can be resold to Fannie Mae, the Borrower usually needs A grade credit.
Cross Default
Language often in a second mortgage that states that a failure to pay or a default on the first mortgage is a default on the second mortgage.
Also that if the borrower has more than one mortgage with the same lender, then a default on just one of the mortgages puts ALL the other mortgages into
default.
Curtesy.
A husband's life estate in the property of his deceased wife. By statute in most states, it is a life estate in one third of the land she owned during their
marriage. Curtesy has been abolished by statute in some states.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective
income (FHA/VA) or gross monthly income (conventional). See Housing expenses-to-income ratio.
Dedication. The granting of land by the owner for some public use and its acceptance for such use by authorized public officials.
Deed. A written instrument duly executed and de-livered by which the title to land is transferred from one person to another.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note. It involves a third party, the trustee, who holds the deed to the
property.
Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. This can also mean failure to pay property
taxes, maintain insurance on the property or even to maintain the interior and exterior of the property.
Deferred Interest
see Negative Amortization
Deficiency judgment. A judgment against a person liable for the debt secured by a mortgage in an amount by which the funds derived from a foreclosure or
trustee's sale are less than the amount due on the debt. Not legal in every state, for example California.
Delinquency
Failure to make payments on time. This can lead to foreclosure. See default.
Devise. A gift of land by will or to give land by will. A devisee is the person to whom property is given by a will.
Discount Point
see Point
Dower. An estate for life to which a married woman by statute is entitled on the death of her husband. In most states it is a life estate of one third of the value
of all land which the husband owned during their marriage. Dower has been abolished by statute in some states. The reason for requiring a wife's joining in
the deed of any land by her husband is the release of her dower right.
Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 10 to 20 percent of the sales price
on a conventional loan. VA loans have no downpayment but are only available to Veterans who have not used up their VA entitlement. FHA loans are often
as low as 3% downpayment.
When the down payment is less than 20% the Lender will usually require PMI (Private Mortgage Insurance) on a conventional loan, or MIP (Mortgage
Insurance Premium) on an FHA loan.
Draw. Disbursement of a portion of the mortgage loan. Usually applies to construction loans when partial advances are made as improvements to the property
progress.
Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells
the home.
Earnest Money
Money given by a buyer when making an offer to a seller as part of the purchase price to bind a transaction or assure payment. It should be held in escrow by
the real estate company, a title company or an attorney. This is usually returnable if the contract does not go through for valid reasons. It may not be
returnable if the buyer just changes his mind.
Easement. A privilege or right of use or enjoyment which one person may have in the lands of another; for example, a right of way to install, operate, and
maintain utility lines.
Eminent domain. The right of a government to appropriate private property for a public use by making reasonable payment to the owner of such property.
Encroachment. The intrusion of any improvement partly or entirely on the land of another.
Encumbrance. Any right or interest in land held by persons other than the fee owner which right or interest lessens the value of the fee title. Examples are
judgment liens, easements, mortgages, restrictions.
Endorsement. A form issued by the insurer at the request of the insured which changes term(s) or item(s) in an issued policy or commitment.
Equity. (1) The interest or value which an owner has in real estate over and above the debts against it. (2) A type of court of record.
Equity participation. A type of mortgage transaction in which the lender, in addition to receiving a fixed rate of interest on the loan, acquires an interest in the
borrower's land and shares in the profits derived from the land.
Escheat. The transfer of title of property to the state if the owner dies intestate and without heirs.
Escrow
Refers to a neutral third party who carries out the instruction of both the buyer and seller to handle all the paperwork of settlement or closing. Escrow may also
refer to an account held by the lender into which the home buyer pays money for tax or insurance payments.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin,
sex, marital status, handicap status or receipt income from public assistance programs.
Equity
The difference between the fair market value and current indebtedness, also referred to as the owner's interest.
Estate. The degree, quantity, nature, and extent of interest which a person has in land.
Et ux. And wife.
Examination of title. The review of the chain of tide as revealed by an abstract of the tide or public records.
Exceptions. Those matters affecting title to the particular parcel of realty which matters are excluded from coverage of the particular title insurance policy.
Exclusion. Those general matters affecting title to real property excluded from coverage of a title insurance policy.
Executor. A person named in a will to administer the estate. Executrix is the feminine form.
FHLMC
The federal Home Loan Mortgage Corporation provides a secondary market for saving and loans by purchasing their conventional loans. Also known as
"Freddie Mac."
Fee simple. An estate in which the owner is entitled to the entire property, with unconditional power of disposition during the owner's life, and which descends
to the heirs upon the owner's death if the owner dies without a will.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
FNMA
The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States.
FHMA buys VA, FHA and conventional mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also
known as a repossession of property.
Fannie Mae
see FNMA.
Federal Home Loan Bank Board (FHLBB)
A regulatory and supervisory agency for federally chartered savings institutions.
Federal Home Loan Mortgage Corporation (FHLMC)
also referred to as "Freddie Mac", is a quasi-government agency that purchases conventional mortgages from insured depository institutions and HUD
approved mortgage bankers.
Federal National Mortgage Association (FNMA)
also know as "Fannie Mae" a taxpaying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured
by FHA or guaranteed by VA.
This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA. Federal Housing Administration, an agency of the federal government which insures private loans for financing of new and existing housing and for
home repairs under government approved programs.
Fixture. Personal property that by state law becomes real property upon being attached to real estate.
Foreclosure. Legal process by which a mortgagor of real property is deprived of interest in that property due to failure to comply with terms and conditions of
the mortgage.
Freddie Mac
see Federal Home Loan Mortgage Corporation
Ginnie Mae
see Government National Mortgage Association
General warranty deed. A deed containing a covenant whereby the seller agrees to protect the buyer against being dispossessed because of any adverse
claim against the land.
Government National Mortgage Association (GNMA)
also known as "Ginnie Mae", provides sources of funds for residential mortgage, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible-payment where the payments increase for a specified period of time and then level off. This type of mortgage may have negative
amortization built into it.
Grantee. In a deed, the person to whom the land is transferred.
Grantor. In a deed, the person who transfers the land.
Guaranty
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hard Money Lender
Equity lenders who base their funding decisions on the unencumbered property value and its salability. They do not calculate debt ratio and usually do not
take into account the borrower's credit and income. The combined loan-to-value ratio is usually less than 65%. Funding can be very fast. Sometime in 2 days
or less.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire windstorm and the like.
Heir. The person who, at the death of the owner of land, is entitled to the land if the owner has died with-out a will.
Homestead (exemption). A person's dwelling and that part of the land which is about and contiguous to the dwelling. Many states by statute give special
privileges to such lands, such as exemptions from remedies of creditors.
Housing Expenses-to-Income Ratio
The ratio expressed as a percentage, which results when a borrower's housing expenses are divided by his and/or her net effective income (FHA / VA loans) or
gross monthly income (conventional loans). Also see Debt-to-Income Ratio.
HUD. The Department of Housing and Urban Development. It is responsible for the implementation and administration of U.S. government housing and urban
development programs.
Impound
That portion of a borrower's monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other
items as they become due. Also known as Reserves.
Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by
other investments (such as one, three and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan
institutions, and the monthly average costs of funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up
or down. The rate must be one that is outside the influence of the lender.
Indemnity agreement. An agreement by the maker of the document to repay the addressee of the agreement up to the limit stated for any loss due to the
contingency stated on the agreement.
Insurable title. A land title which a title insurance company is willing to insure.
Insured closing service. An agreement by the insurer to indemnify the insured for any loss in settlement funds caused by (1) the failure of the company's
policy issuing agents or approved attorneys to conform to closing instructions of the insured, or (2) fraud or dishonesty of the issuing agent or approved
attorney. This service is offered by the insurer to certain large lenders, developers, etc.
Interval ownership. A form of time share owner-ship. See Time share ownership.
Intestate. Without having made a valid will or one who dies without having made a will.
Investor
A money source for a lender. Or someone who purchases real estate as a short or long term investment.
Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Jumbo Loan
A loan which is larger (more than $203,250) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. Because jumbo loans can not be funded by these two agencies, they usually carry a higher interest rate.
Joint protection policy. A title insurance policy in form suitable to insure the owner and/or lender.
Joint tenants. Persons who are co-owners of interests in the same land. At common law and in some states today, upon the death of a joint tenant, interest
automatically passes to the surviving joint tenant(s). This survivorship feature, when it exists, is the principal distinction between a joint tenancy and a
tenancy in common.
Judgment. The formal expression and evidence of the decision of a court in a specific lawsuit. Where the judgment decrees that one party (the judgment
debtor) pay another party (the judgment creditor) a certain sum of money, the recording of that judgment creates a lien upon all land of the judgment debtor
in that jurisdiction.
Junior mortgage. A mortgage, the lien of which is subordinate to that of another mortgage. Second and third mortgages are both junior mortgages.
Lien
A claim upon a piece of property for the payment of a debt or obligation.
Leasehold. The right to possession and use of land for a fixed period of time. The lease is the agreement which creates the right. The person who has the
lease-hold is the tenant or lessee.
The person who grants the leasehold is the lessor or landlord.
Legal description. A property description which by law is sufficient to locate and identify the parcel of real property.
Lien. A claim or charge on property of another for payment of some debt, obligation, or duty.
Lien waiver or waiver of liens. A document signed by the general contractor, each subcontractor, and each materialman of a construction project whereby
the signators waive their right to mechanics' liens on the land involved in that particular project.
Life estate. An individual's right to the use and occupancy of real property for life.
Link. See Chain of title.
Links. See Chains and links.
Lis Pendens. A legal notice that there is litigation pending relating to the land and a warning that anyone obtaining an interest subsequent to the date of the
notice may be bound by the judgment.
Loan policy or mortgage policy or mortgagee policy. A title insurance policy in which the insurer insures the mortgagee against loss it may suffer because the
tide is not vested as stated in the policy and insures the validity and priority of the mortgage lien over any other lien not excepted to in the policy.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and appraised value of the property expressed as a percentage.
Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Marketable title. A title which a reasonable purchaser, well informed as to the facts and their legal meaning, would be willing to accept.
Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property
could actually be sold for at a given time.
Master deed. See Condominium declaration.
Mechanics' and materialmen's lien or mechanics' lien or M&M lien. The lien which by statute a laborer or materialman may have against the land by reason
of furnishing labor or material for the improvement of the property. The priority of such lien varies among the states; in some states M&M liens take priority over
prerecorded mortgages.
Mechanics' liens surety bond. A bond in which an approved surety company agrees to indemnify the title insurance company for any loss it may suffer due to
the insurer's issuing a specific policy without mechanics' lien exception.
Metes and bounds. A description of a parcel of land by describing the boundary lines in length and direction.
MIP: Mortgage Insurance Premium
MIP is the one-half percent borrowers pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss due to
the borrower's default. On September 1, 1983 the MIP was changed to a one time charge to the borrowers.
Mortgage. An instrument whereby an owner conditionally transfers title of property to another as security for payment of a debt. The owner retains possession
and use of the land and, upon the payment of the debt, the mortgage becomes void.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. see Private Mortgage Insurance, FHA Mortgage Insurance.
Mortgagee
The lender.
Mortgagor
The borrower or home owner.
Mortgage policy. See Loan policy.
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid principal
balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Net Effective Income
The borrower's gross income minus federal tax.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a
debt, as a mortgage note.
Negotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. see Adjustable Rate Mortgage.
Note. A written promise to pay a certain amount of money, at a certain time, or in a certain number of installments. It usually provides for payment of interest
and its payment is at times secured by a mortgage.
Open-end mortgage. A mortgage or deed of trust written so as to secure and permit advancing of funds in addition to the amount originally loaned.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage
of the face value of the loan.
Option. The right, acquired for a consideration, to buy, sell, or lease land at a fixed price within a specified time.
Oversize policies.
Policies in which the amount (limit of risk) exceeds that which the agent is authorized to write without specific approval.
Owner's policy.
A title insurance policy insuring the owner against loss due to any defect of title not excepted to or excluded from the policy.
Partition.
Division of land, usually by a legal proceeding, among the parties who were formerly co-owners.
Payment Constant
The total annual payments divided by the mortgage balance expressed as a percentage.
Permanent Loan
A long term mortgage, usually ten years or more.
PITI
Principal, Interest, Taxes and Insurance. Also called monthly housing expense.
Planned unit development (PUD).
A project consisting of individually owned parcels of land together with common areas and facilities that are owned by an association of which the owners of
all the parcels are members.
Plat (of survey).
A map of land made by a surveyor showing boundary lines, buildings, and other improvements on the land.
Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each point is equal to one percent of the loan amount.
Power of Attorney
A legal document authorizing one person to act on behalf of another. It does not mean that the other person IS an attorney or that they can represent them in
court as an attorney.
Prepaid Expenses
Necessary to create an escrow account or to adjust the seller's existing account. Can include taxes, hazard insurance, private mortgage insurance and special
assessments.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date. This can enable the mortgage to be paid off much more
quickly, with a major savings in
total interest costs.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form in 36 states and the District of Columbia.
Prepayment Risk
This is the risk to the Lender that the loan will be paid off before the end of the term. It is considered to be a risk because loans are often refinanced when
interest rates drop. This means the Lender gets their capital back but have to lend it out at a lower rate.
Prescription.
The doctrine by which easements are acquired by long, continuous, and exclusive use and possession of property.
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's such as savings and loan association, commercial banks and mortgage companies. These lenders
usually sell their mortgages into the secondary mortgage markets such as FNMA of GNMA, etc. The original lender will usually still service the loan, that is,
send the payment coupons or statements to the Borrower.
Principal
The amount of debt, not counting interest left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment (as low as five percent in some cases). With the
smaller down payment loans, however, borrower's are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial
premium payment of one to five percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure.
Public records.
Records which by law impart constructive notice of matters relating to land.
Purchase money mortgage.
A mortgage given by the purchaser to the seller simultaneously with the purchase of real estate to secure the unpaid balance of the purchase price.
Quieting title.
The removal of a cloud on title by proper action in a court.
Quit Claim Deed
Type of deed that transfers all the rights that grantor (giver) may have, which might be none. Example, you could legally give someone a quit claim deed of
your rights in the Brooklyn Bridge. That does not mean that the person you give the deed to now owns the Brooklyn Bridge.
Realtor ©
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Recession
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once
it is signed if the transaction uses equity in the home as security. This means the money for refinance is not disbursed till after the 3 days are up. The only
exception would be an emergency.
Recording. The noting in the designated public office of the details of a properly executed legal document, such as a deed or mortgage, thereby making it a
part of the public record, and thus by law imparting constructive notice of that document.
Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. The record is given a official
records book and page number making it easy to find.
Redemption. The right of the owner in some states to reclaim title to property if the owner pays the debt to the mortgagee within a stipulated time after
foreclosure.
Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Reinsurance. The act of an insurer transferring a portion of the risk to other insurers. The original insurer is sole insurer for a portion of the risk and shares the
risk in the excess amount with the reinsurers. The first portion of the loss risk retained by the ceding company as its sole liability is called the "primary liability."
Reissue rate. A reduced rate of title insurance premium applicable in cases where the owner of the land has been previously insured in an owner's policy by
the insurer within a certain time.
REIT. Real Estate Investment Trust, a business trust which deals principally with interest in land. REITs generally are strictly organized to conform to the
requirements of provisions of the Internal Revenue Code which give tax advantages to conforming REITs.
Release. A deed from the mortgagee or trustee of a deed of trust which releases specific property from the lien of the mortgage or deed of trust.
Remainder. An interest or estate in land in a person other than the grantor in which the right of possession and enjoyment of the land is postponed until the
termination of some other interest or estate in that land.
Renegotiable rate mortgage. A loan secured by a long-term mortgage of up to 30 years, which provides for renegotiation at equal stated intervals of the
interest rate for a maximum variation of 5 percent over the life of the mortgage.
Reserve. The portion of the title insurance company's retained earnings set aside for some specific purpose.
Liability reserve. A segregated or earmarked portion of retained earnings established to show the estimated amount of a known or potential future liability.
Reserve for undetermined title losses. The liability reserve established and maintained against unpaid losses and expenses related to every specific claim
presented to the title insurance company by a policyholder. The amount of reserve is established by careful estimates of probable liability. It is re-viewed
periodically and changed when warranted.
Statutory reserve. The reserve requirement established by state statutes as the minimum which must be maintained by a title insurance company, either (1) by
a company incorporated under the laws of that state or (2) as a qualification for a company incorporated in another state to do business in the state.
RESPA
Short for the Real Estate Settlement Procedures Act.
(12 U.S.C. 2601) which, together with Regulation X promulgated pursuant to the Act, regulate real estate transfers involving a "federally related mortgage
loan" by requiring, among other things, certain disclosures to borrowers.
RESPA is a federal law that allows consumers to review information known or estimated settlement cost once after application and once prior to or at a
settlement. The law requires lenders to furnish the information after application only.
Restriction. Provision in deed or will or in a "Declaration of Condition, Reservations and Restrictions" which limits in some way the right to use land or convey
its title. Examples are building setback lines and limitations to residential uses.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using using the borrower's equity in the home as Satisfaction of Mortgage
(The document issued by the mortgagee when the mortgage loan is paid in full.
Reversion. Provision in conveyance by which, upon the happening of an event or contingency, title to the land will return to the grantor or the successor in
interest in the land.
Right of way. See Easement.
Riparian. Pertaining to the banks of a watercourse. The owner of land adjacent to a watercourse is called a riparian owner and the rights of the riparian owner
related to that watercourse are called riparian rights.
Sale and leaseback. A financial device which an owner of land may employ to raise money and still have the use of the land by selling the land to the
financier and immediately leasing it back for the period the owner wishes to use it.
Seasoned Mortgage
A mortgage that payments have been made on. The longer the seasoning and payment history of the mortgage, the greater the likelihood it will be paid in
the future.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one. If the borrower does not make payments on the first mortgage, they can
foreclose it and wipe out the interest of the second mortgage holder.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders
security.
Separate property. Property a husband or wife owns independently of the other.
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes insurance, property
inspections and the like.
Service charge. A charge paid by the borrower to the lender for the lender's expenses in processing the loan.
Setback. See Building line.
Settlement / Settlement Costs
see Closing / Closing Costs
Shared appreciation mortgage. A loan having a fixed interest rate set below the market rate for the term of the loan which provides for contingent interest
based upon a percentage of the appreciation in the value of the security at the sale or transfer of the property, or the payment of the loan.
Simple Interest
Interest which is computed only on the principal balance.
Simultaneous issue. Simultaneous issuance of an owner's policy and a mortgagee policy, or an owner's policy and a leasehold policy, or owner's policy to
different insureds. A reduced premium rate is applicable in such cases.
Special warranty deed. A deed containing a covenant whereby the seller agrees to protect the buyer against being dispossessed because of any adverse
claims to the land by the seller, or anyone claiming through the seller.
Standard coverage policy. A form of title insurance which contains certain standard printed exceptions not included in the ALTA policies. This form of
policy is used primarily in some of the western states.
Starter. See Back title letter.
Subdivision. A tract of land surveyed and divided into lots for purposes of sale.
Subordination. The act of a creditor acknowledging in writing that the lien of the debt due from a debtor shall be inferior to the lien of the debt due another
creditor from the same debtor.
Subrogation. The substitution of one person in the place of another with reference to a claim, demand, or right, so that the individual who is substituted
succeeds to the rights of the other in relation to the debt or claim and its rights, remedies, or securities.
Substitution loan and substitution rate. A loan made to the same borrower on the same land, or by the same lender on the same land, the title to which was
insured by the insurer in connection with the original loan. A reduced rate for premium is given in such cases.
Survey
A measure of land, land prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions and the
location and dimensions of any buildings.
Sweat Equity
Equity created by a purchasers work on a property purchased.
Take out loan. A permanent mortgage loan which a lender agrees to make to a borrower upon completion of improvements on the borrower's land. The
proceeds of the loan are used principally to pay off the construction loan.
Tandem plan. The purchase by the Government National Mortgage Association of certain mortgages at par for subsequent resale at market prices to the
Federal National Mortgage Association.
Tax deed. The deed given to a purchaser at a public sale of land for non-payment of taxes. It conveys to the purchaser only such title as the defaulting
taxpayer had and does not convey good title to that extent unless statutory procedures for the sale were strictly followed.
Tenancy by the entirety or entireties. A form of ownership existing in many states where husband and wife together are treated as an entity.
Tenant. One who has right of possession of land by any kind of title. The word "tenant" used alone in modern times is used almost exclusively in the limited
meaning of a tenant of a leasehold estate.
Tenants in common. Persons who are co-owners of residential interest in the same land. At death of a co-tenant, interest passes by will or by laws of intestate
succession.
Testate. Having made a will. One who makes a will is known as the testator or testatrix.
Time share ownership. A technique for dividing the title to a commercial property or a vacation home among many different owners, with each owner
acquiring the right to occupy the premises during a specified portion of each year.
Time share unit. An interest in a residential or commercial property which by contract or by conveyance of a real property interest allows a purchaser to
occupy the unit during a particular week or weeks for a stated number of years. There are two major forms of time share estate:
(a) Interval ownership. A time share estate where the unit purchaser is deeded an estate for years, giving a right to occupy the unit for a particular week
during a stated number of years with a remainder interest in fee as a tenant in common with all other purchasers of the unit.
(b) Time span ownership. A time share estate where the unit purchaser is deeded an undivided percentage interest in the unit as a tenant in common with all
other purchasers and the right to occupy the unit for a particular time period is governed by contractual provisions of the time share declaration.
Title
A document that gives evidence of an individual's ownership of property
Title Insurance
A policy, usually issued by a title insurance company which insures a home buyer or lender against errors in the title search. The cost of the policy is usually a
function of the value of property, and is often borne by the purchaser and /or seller.
Title plant. A compilation of records maintained by tide companies and containing information about specific parcels of land. This information would be
ascertained otherwise only by a search of the public records.
Title Search
An examination of municipal records to determine the legal ownership of the property. Usually is performed by a title company
Torrens system. A governmental title registration system wherein tide to land is evidenced by a certificate of title issued by a public official known as the
registrar of title.
Truth-in-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for a the loan.
Turnkey housing. Housing initially financed and built by private sponsors and purchased by housing authorities for use by low-income families under the
public housing program.
Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets and other factors and the matching of this risk to an
appropriate rate and term or loan amount.
Usury
Interest charged in excess of the legal rate established by law.
VA loan. A loan for purchase of land in which the Veteran's Administration guarantees the lender payment of a home mortgage by a qualified veteran.
Variable Rate Mortgage
see Adjustable Rate Mortgage
Vendor. Seller.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his or her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower's employer verifying his or her position and salary.
Vest. To become owned by.
Waiver of liens. See Lien waiver.
Warranty deed. A deed in which the grantor war-rants or guarantees that good title is being conveyed.
Wraparound mortgage. A mortgage which secures a debt which includes the balance due on an existing senior mortgage and an additional amount
advanced by the wraparound mortgagee.
The wraparound mortgagee thereafter makes the amortizing payments on the senior mortgage. An example: A landowner has a mortgage securing a debt
with an outstanding balance of $2,000,000. A lender now advances the same mortgagor a new $1,000,000 and undertakes to make the remaining payments
due on the $2,000,000 debt. A $3,000,000 wraparound mortgage on the land is taken to secure this new $3,000,000 wraparound note.
Hard money lenders are lending companies offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans (also called a
bridge loan) that provide funding based on the value of real estate that has been collateralized for the loan. Hard money lenders typically have much higher
interest rates than banks because they fund deals that do not conform to bank standards.
Hard money lenders will offer a range of requirements on the loan-to-value percentage, type of real estate and minimum loan size for a hard money loan.
Hard money risk
Hard money loans are more expensive because they are not based upon traditional credit guidelines which protect investors and banks from high default rates.
As hard money lenders may not require the income verification that typical lenders require, they experience higher default rates (and, thus, charge a higher
rate of interest). Individuals and companies may opt to take a hard money loan when they cannot obtain typical mortgage financing because they do not have
acceptable credit or other necessary documentation.
Hard money collateral
Hard money collateral is typically the real estate loaned on. However it can and does sometimes include other assets of the individual or business borrowing
the hard money. In many cases a hard money lender will offer a smaller loan size based upon a lower "Loan To Value Ratio". This means they may opt to loan
no more than 65% of the property value. Therefore it is common for real estate investors to offer additional real estate as collateral in order to obtain a larger
loan amount. This is known as cross-collateralization.
Market
Hard money lenders may serve a regional market, or may offer loans nationwide. Some hard money lenders are represented by brokers who may take a
percentage of the loan (called points) in exchange for preparing and submitting the loan documentation (as well as finding a direct lender). Other hard money
lenders deal directly with applicants. Other ways hard money lenders may vary include: charging application fees (some charge, others charge fees only when
closing); prepayment penalties (some or none); and a focus on investment properties or a willingness to finance owner occupied property as well.
Several online directories offer links to multiple hard money lenders for brokers or borrowers seeking a lender.
Regulation
Several states' usury laws, including Tennessee and New Jersey, prevent hard money lenders from operating with their usual practices. Regulation of hard
money not only differs by state, it differs by the status of the borrower in terms of whether or not the loan is made to a business or to a consumer. Consumers
generally have additional protections in individual states. They also have more lending oversight and regulation benefits federally when the loan is issued by a
commercial bank, that is federally chartered by the FDIC. Some of the most aggressive loan terms are issued by commercial hard money lenders.
Commercial hard money lender
Commercial hard money is issued to a business entity or individual signing on behalf of a business entity or corporation. It can be secured against a
commercial property or residential investment property. It can also be secured against a residence in conjunction with a business property as a means of
obtaining additional collateral for the lender. That type of additional security is referred to as a blanket mortgage. The sources of asset based commercial hard
money loans are generally the following:
1. Private Individuals
2. Mortgage Companies
3. Federal Banks
4. SBA Lenders
These commercial hard money lenders all have varying degrees of benefits as well as downfalls in terms of choosing a commercial hard money loan lender.
For example, a private individual may offer special terms, however may be unwilling to offer a work out plan as a matter of procedure, in the event the loan
becomes delinquent. A federally-chartered bank may offer a competitive loan rate in comparison to an individual, however may demand a high pre-payment
penalty fee, costing the borrower more money if they decide to sell or refinance the loan within one to five years.
Source: Wikepedia
Commercial hard money is a term describing a commercial loan that is generally non bankable. The company usually does not meet the standard banking
criteria, but has real estate and or assets that are sufficient to collateralize the loan to the investors/lenders.
Commercial hard money rates
Commercial hard money rates are generally higher than other rates. The industry standard range is between 11% and 16%. Typically borrowers pay between 3
and 6 points (percent of the loan amount borrowed).
Commercial hard money collateral
Commercial hard money collateral is generally real estate. It can be more than one property and it can also include other assets. When there is not sufficient
equity in the property to meet the lenders loan to value ratio criteria, the borrower may pledge other real estate and "cross collateralize" the loan. Most
commercial hard money lenders will not lend beyond 65% of the property value. Cross collateral loans allow loans to be made at higher amounts when the
owner has more than one property to be pledged.
Property value will usually be determined by the lender, who may use a conservative approach to valuation of the property. For instance they may determine
the value based on the ability to sell it in thirty days or less.
Commercial Hard Money Lenders
There are various commercial lenders that are willing to make loans against real estate collateral regardless of the credit history of the borrower. They are asset
based loans and depend primarily on real estate value. Only a very few banks will make a commercial hard money loan. Mostly private investment groups and
finance companies are making commercial hard money loans.
A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. After the Great Depression,
the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. As the two no
longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing
with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never
applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many
banks offer both commercial and retail banking services.
Possible meanings
Commercial bank has two possible meanings:
Commercial bank is the term used for a normal bank to distinguish it from an investment bank.
This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Since the two types of banks no longer
have to be separate companies, some have used the term "commercial bank" to refer to banks which focus mainly on companies. In some English-speaking
countries outside North America, the term "trading bank" was and is used to denote a commercial bank. During the great depression and after the stock market
crash of 1929, the U.S. Congress passed the Glass-Steagall Act 1933-35 (Khambata 1996) requiring that commercial banks only engage in banking activities
(accepting deposits and making loans, as well as other fee based services), whereas investment banks were limited to capital markets activities. This separation
is no longer mandatory.
It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It makes loans to
businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.
Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed
to normal individual members of the public (retail banking).
Origin of the word
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions
above a desk covered by a green tablecloth.[1] However, there are traces of banking activity even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called
macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much
invest money as merely convert the foreign currency into the only legal tender in Rome- that of the Imperial Mint. [2]
The role of commercial banks
Commercial banks engaged in the following activities:
processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means
issuing bank drafts and bank cheques
accepting money on term deposit
lending money by way of overdraft, installment loan or otherwise
providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet
exposures
safekeeping of documents and other items in safe deposit boxes
currency exchange
sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”
Types of loans granted by commercial banks
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral (i.e., security) for the loan.
Mortgage loan
A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase property.
Commercial banks, however, are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the
bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in
mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of
home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real
estate, these institutions follow two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to
compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm
mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers.
In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden
their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both
commercial banks and savings and loan associations. Service companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all
bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved). These may be available from financial
institutions under many different guises or marketing packages:
credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit, corporate bonds
A Corporate Bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least
a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)
Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. Strictly speaking, however, it
only applies to those issued by corporations. The bonds of local authorities and supranational organizations do not fit in either category.
Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) and ECNs like MarketAxess, and the coupon (i.e. interest payment)
is usually taxable. Sometimes this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading
volume in corporate bonds in most developed markets takes place in decentralized, dealer-based, over-the-counter markets.
Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible
bonds, allow investors to convert the bond into equity.
One can obtain an unfunded synthetic exposure to corporate bonds via credit default swaps.
Types
Corporate debt falls into several broad categories:
secured debt vs unsecured debt
senior debt vs subordinated debt
Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default.
Risk analysis
Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing
the bond, the current market conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders
are compensated for this risk by receiving a higher yield than government bonds.
Consequently, this default risk can be quantified using spread analysis, which seeks to determine the difference in yield between a given corporate bond and a
risk-free treasury bond of the same maturity. Common statistics used include Z-spread and option adjusted spread (OAS).
A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). However, the word mortgage alone, in everyday usage,
is most often used to mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either
directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off
the loan, and other characteristics can vary considerably.
Mortgage loan basics
Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or
collateral for a loan. Therefore, a mortgage is an encumbrance on property just as an easement would be, but because most mortgages occur as a condition
for new loan money, the word mortgage has become the generic term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time; typically 30 years. All types of real
property can, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property. For commercial mortgages see the
separate article. Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:
Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are
possible.
Mortgage: the security created on the property by the lender, which will usually include certain restrictions on the use or disposal of the property (such as
paying any outstanding debt before
selling the property). Borrower: the person borrowing who either has or is creating an ownership interest in the property.
Lender: any lender, but usually a bank or other financial institution.
Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
Interest: a financial charge for use of the lender's money.
Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a
mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.
Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of
mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as
the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other
aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time
value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local
conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants
are possible and common worldwide and within each country.
Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds).
The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other
parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). In the
United States, the largest firms securitizing loans are Fannie Mae and Freddie Mac, which are government sponsored enterprises.
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually
considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its
original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.
Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local
regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or
lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may
have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the
borrower may have the option to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for
prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate
mortgage). In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are
typically considered "standard." Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and
vary after the end of that period.
Historical U.S. Prime RatesIn a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the U.S.,
the term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate
mortgage, payments for principal and interest should not change over the life of the loan, although ancillary costs (such as property taxes and insurance) can
and do change.
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust
up or down to some market index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-
Bill"); other indices are in use but are less popular.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or
prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate;
the size of the price differential will be related to debt market conditions, including the yield curve.
Additionally, lenders in many markets rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is
assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be
charged to reflect the (expected) higher default rates.
A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding
principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment" or bullet payment. The interest rate for
a balloon loan can be either fixed or floating. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of
years over which the loan is amortized, and Y is the year in which the principal balance is due.
Other loan types:
Assumed mortgage
Balloon mortgage
Blanket loan
Bridge loan
Budget loan
Buydown mortgage
Commercial loan
Endowment mortgage
Equity loan
Flexible mortgage
Foreign National mortgage
Graduated payment mortgage loan
Hard money loan
Jumbo mortgages
Offset mortgage
Package loan
Participation mortgage
Reverse mortgage
Repayment mortgage
Seasoned mortgage
Term loan or Interest-only loan
Wraparound mortgage
Negative amortization loan
Non-conforming mortgage
Loan to value and downpayments
Upon making a mortgage loan for purchase of a property, lenders usually require that the borrower make a downpayment, that is, contribute a portion of the
cost of the property. This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value
ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan where the purchaser has made a downpayment of 20% has a
loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated
value of the property.
The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the
property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.
Value: appraised, estimated, and actual
Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The
value may be determined in various ways, but the most common are:
Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this
information may not be available.
Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for
the lender to obtain an official appraisal.
Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also
in some other circumstances.
Equity or homeowner's equity
The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property.
Therefore, a borrower who owns a property whose estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's
equity of $100,000.
Payment and debt ratios
In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage
payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various
net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of
the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from location to location. Many countries have lower requirements for
certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances.
Standard or conforming mortgages
Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may
be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80%
LTV and no more than one-third of gross income going to mortgage debt.
A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may
affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major
government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming
loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or
agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard
mortgages. For example, banks in Canada face restrictions on lending more than 75% of the property value; beyond this level, mortgage insurance is generally
required (as of April 2007, there is a proposal to raise this limit to 80%).
Repaying the capital
There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.
Capital and interest
The most common way to repay a loan is to make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred
to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the
calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be
calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and
other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.
Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to
30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made
monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term
of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly
capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the
future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.
Interest only
The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage
is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate
investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is
often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual
Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages,
although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient
return to clear the debt.
Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property
market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest
rate).
No capital or interest
For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up
with the capital, increasing the debt each year.
These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically
not repaid until the borrowers die, hence the age restriction. For further details, see equity release.
Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the
outstanding capital balance is due at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original
mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - obtain. Subject to
local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some
jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt,
the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt. In virtually
all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government; in
some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the
ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
Mortgage lending: United States
United States mortgage process
In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and
documentation related to his/her financial history and/or credit history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the
borrower is required to submit only minimal financial information. These loans carry a higher interest rate and are available only to borrowers with excellent
credit. Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting
the ones that will best meet the needs of the consumer.
Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy
investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They
often offer niche loans at higher prices that the investor does not wish to originate.
If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called
stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the
information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will
repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.
The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical
models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan
Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no
documentation of income or assets required at all. Many of these documents are also not required for no- doc and low-doc loans.
Credit Report
1003 — Uniform Residential Loan Application
1004 — Uniform Residential Appraisal Report
1005 — Verification Of Employment (VOE)
1006 — Verification Of Deposit (VOD)
1007 — Single Family Comparable Rent Schedule
1008 — Transmittal Summary
Copy of deed of current home
Federal income tax records for last two years
Verification of Mortgage (VOM) or Verification of Payment (VOP)
Borrower's Authorization
Purchase Sales Agreement
1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed
Predatory mortgage lending
There is concern in the U.S. that consumers are often victims of predatory mortgage lending [2]. The main concern is that mortgage brokers and lenders,
operating legally, are finding loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the
borrower. The borrower makes a number of interest and principal payments, and then defaults. The lender then takes the property and recovers the amount of
the loan, and also keeps the interest and principal payments, as well as loan origination fees.
Option ARM
An option ARM provides the option to pay as little as the equivalent of an amortized payment based on a 1% interest rate, (please note this is not the actual
interest rate). As a result, the difference between the monthly payment and the interest on the loan is added to the loan principal; the loan at this point has
negative amortization. In this respect, an option ARM provides a form of equity withdrawal (as in a cash-out refinancing) but over a period of time.
The option ARM gives a number of payment choices each month (for example, the equivalent of an amortized payment where the interest rate 1%, interest
only based on actual interest rate, actual 30 year amortized payment, actual 15 year amortized payment). The interest rate may adjust every month in
accordance with the index to which the loan is tied and the terms of the specific loan. These loans may be useful for people who have a lot of equity in their
home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment to make every month; or for those with irregular
incomes (such as those working on commission or for whom bonuses comprise a large portion of income).
One of the important features of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum
payment may rise each year a little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for
year 1 may be $1,000 per month each month all year long. In year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase
in the minimum payment. The interest rate may fluctuate each month, which means that the extent of any negative amortization cannot be predicted beyond
worst-case scenario as dictated by the terms of the loan.
Option ARM mortgages have been criticized on the basis that some borrowers are not aware of the implications of negative amortization; that eventually
option ARMs reset to higher payment levels (an event called "recast" to amortize the loan), and borrowers may not be capable of making the higher monthly
payments; and that option ARMs have been used to qualify mortgages for individuals whose incomes cannot support payments higher than the minimum level.
Costs
Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage
insurance. There are also settlement fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan, it may charge other
fees as well.
The United States mortgage finance industry
Mortgage lending is a major category of the business of finance in the United States. Mortgages are commercial paper and can be conveyed and assigned
freely to other holders. In the U.S., the Federal government created several programs, or government sponsored entities, to foster mortgage lending,
construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal
National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by
buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as
mortgage-backed securities (MBS).
This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks
could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to
encourage. The investors, meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than
they could gain from most other bonds.
Securitization is a momentous change in the way that mortgage bond markets function, and has grown rapidly in the last 10 years as a result of the wider
dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps
rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow
of capital from investors to borrowers without as many personal business ties as the past.
The greatly increased rate of lending led (among other factors) to the United States housing bubble of 2000-2006. The growth of lightly regulated derivative
instruments based on mortgage- backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative
factor behind the 2007 subprime mortgage financial crisis.
Second-layer lenders in the US
A group called second-layer lenders became an important force in the residential mortgage market in the latter half of the 1960s. These federal credit
agencies, which include the Federal Home Loan Mortgage Corp., the Federal National Mortgage Association, and the Government National Mortgage
Association, conduct secondary market activities in the buying and selling of loans and provide credit to primary lenders in the form of borrowed money. They
do not have direct contact with the individual consumer.
Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation, sometimes known as Freddie Mac, was established in 1970. This corporation is designed to promote the flow
of capital into the housing market by establishing an active secondary market in mortgages[1]. It may by law deal only with government-supervised lenders
such as savings and loan associations, savings banks, and commercial banks; its programs cover conventional whole mortgage loans, participations in
conventional loans, and FHA and VA loans.
Federal National Mortgage Association
The Federal National Mortgage Association, known in financial circles as Fannie Mae, was chartered as a government corporation in 1938, rechartered as a
federal agency in 1954, and became a government-sponsored, stockholder-owned corporation in 1968[1]. Fannie Mae, which has been described as "a private
corporation with a public purpose", basically provides a secondary market for residential loans. It fulfills this function by buying, servicing, and selling loans
that, since 1970, have included FHA-insured, VA-guaranteed, and conventional loans. However, purchases outrun sales by such a wide margin that some
observers view this association as a lender with a permanent loan portfolio rather than a powerful secondary market
corporation.
Government National Mortgage Association
The Government National Mortgage Association, which is often referred to as Ginnie Mae, operates within the Department of Housing and Urban
Development. In addition to performing the special assistance, management, and liquidation functions that once belonged to Fannie Mae, Ginnie Mae has
an important additional function — that of issuing guarantees of securities backed by government-insured or guaranteed mortgages. Such mortgage-backed
securities are fully guaranteed by the U.S. government as to timely payment of both principal and interest[1].
Competition among US lenders for loanable funds
To be able to provide homebuyers and builders with the funds needed, financial institutions must compete for deposits. Consumer lending institutions compete
for loanable funds not only among themselves but also with the federal government and private corporations. Called disintermediation, this process involves
the movement of dollars from savings accounts into direct market instruments: U.S. Treasury obligations, agency securities, and corporate debt. One of the
greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer
deposits.[2]
To compete for deposits, US savings institutions offer many different types of plans[2]:
Passbook or ordinary accounts — permit any amount to be added to or withdrawn from the account at any time.
NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
Individual retirement accounts (IRAs) and Keogh accounts—a form of retirement savings in which the funds deposited and interest earned are exempt from
income tax until after withdrawal.
Checking accounts — offered by some institutions under definite restrictions.
Club accounts and other savings accounts—designed to help people save regularly to meet certain goals.
Mortgages in the UK
Main article: UK mortgage terminology
The mortgage loans industry and market
There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain. The major lenders include
building societies, banks, specialized mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans
market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from
3% to 36%. The banks and other institutions that made major inroads into the mortgage market during this period were helped by such factors as:
relative managerial efficiency;
advanced technology, organizational capabilities, and expertise in marketing; extensive branch networks; and capacities to tap cheaper international sources
of funds for lending.[3]
By the early 1990s, UK building societies had succeeded in greatly slowing if not reversing the decline in their market share. In 1990, the societies held over
60% of all mortgage loans but took over 75% of the new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building
societies also increased their share of the personal savings deposits market in the early 1990s at the expense of the banks – attracting 51% of this market in
1990 compared with 42% in 1989.[4] One study found that in the five years 1987-1992, the building societies collectively outperformed the UK clearing banks
on practically all the major growth and performance measures. The societies' share of the new mortgage loans market of 75% in 1990-91 was similar to the
share level achieved in 1985. Profitability as measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for the big
four banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20 societies compared with 2.8% for the four banks.[5]
Though the building societies did subsequently recover a significant amount of the mortgage lending business lost to the banks, they still only had about two-
thirds of the total market at the end of the 1980s. However, banks and building societies were by now becoming increasingly similar in terms of their structures
and functions. When the Abbey National building society converted into a bank in 1989, this could be regarded either as a major diversification of a building
society into retail banking – or as significantly increasing the presence of banks in the residential mortgage loans market. Research organization Industrial
Systems Research has observed that trends towards the increased integration of the financial services sector have made comparison and analysis of the market
shares of different types of institution increasingly problematical. It identifies as major factors making for consistently higher levels of growth and performance
on the part of some mortgage lenders in the UK over the years:
the introduction of new technologies, mergers, structural reorganization and the realization of economies of scale, and generally increased efficiency in
production and marketing operations
– insofar as these things enable lenders to reduce their costs and offer more price-competitive and innovative loans and savings products;
buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets for funds (especially when interest rates generally are being
maintained at high levels internationally);
lower levels of arrears, possessions, bad debts, and provisioning than competitors;
increased flexibility and earnings from secondary sources and activities as a result of political-legal deregulation; and
being specialized or concentrating on traditional core, relatively profitable mortgage lending and savings deposit operations.[6]
Mortgage types
The UK mortgage market is one of the most innovative and competitive in the world. Unlike some other countries, there is little intervention in the market by
the state or state funded entities and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders
(typically banks). Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed
by lenders to attract borrowers. This has led to a wide range of mortgage types.
As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lender's standard variable rate
or a tracker rate, which will tend to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an
incentive deal to attract new borrowers. This may be:
A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available,
tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated
with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the
discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year
2, 1% in year three).
A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.
To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate plus 0.89%.
With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower
repays the loan within the incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a redemption penalty or tie-
in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.
Self Cert Mortgage
Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the
borrower's annual income. Self Certification Mortgages, informally known as "self cert" mortgages, are available to employed and self employed people who
have a deposit to buy a house but lack the sufficient documentation to prove their income.
This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or
bonuses, or whose accounts may not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually
higher than for normal mortgages and the loan to value ratio is usually lower.
100% Mortgages
Normally when a bank lends a customer money they want to protect their money as much as possible; they do this by asking the borrower to fund a certain
percentage of the property purchase in the form of a deposit.
100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher
interest rate on the loan.
Together/Plus Mortgages
A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which have been launched by a number of lenders in recent
years.
Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans are normally (but not
universally) structured as a package of a 95% mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by lenders'
capital requirements which require additional capital for loans of 100% or more of the property value.
UK mortgage process
UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage
amount. This is not a full survey so it may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between
the surveyor and the buyer, so the buyer has no right to sue if the survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a
building survey or a (cheaper) "homebuyers survey" at the same time.[7]
Mortgage insurance
Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in
loans with a loan-to-value ratio over 80%, and employed in the event of foreclosure and repossession.
This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized
component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent
assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%.
In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to
dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing
authority recover less than full and fair market value for any hard asset.
Islamic mortgages
Main article: Islamic economic jurisprudence
The Sharia law of Islam prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real
estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one
variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the
purchase of the property. When the last payment is made, the property changes hands.[citation needed]
Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty
which is a tax charged by the government on a change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged
twice. Many other jurisdictions have similar transaction taxes on change of ownership which may be levied. In the United Kingdom, the dual application of
Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate Islamic mortgages.[8]
An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price.
All of these methods are still compensating the lender as if they were charging interest, but the loans are structured in a way that in name they are not, but they
share the financial risks involved in the transaction with the homebuyer.[citation needed]
Other terminologies
Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it
may be related to the legal mortgage rather than to the loan.
Advance This is the money you have borrowed plus all the additional fees.
Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the
Discount Rate.
Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.
Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.
Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money due if the mortgage is paid in full before the time finished.
equity This is the market value of the property minus all loans outstanding on it.
First time buyer This is the term given to a person buying property for the first time.
Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.
Sealing fee This is a fee made when the lender releases the legal charge over the property.
Subject to contract This is an agreement between seller and buyer before the actual contract is made.
General, or related to more than one nation
Commercial mortgage
Nonrecourse debt
Refinancing
Shared appreciation mortgage
No Income No Asset (NINA)
Annual percentage rate
Foreign currency mortgage
Related to the United Kingdom
Buy to let
Remortgage
UK mortgage terminology
Related to the United States
Commercial lender (US) - a term for a lender collateralizing non-residential properties.
Fixed rate mortgage calculations (USA)
pre-qualification - U.S. mortgage terminology
pre-approval - U.S. mortgage terminology
FHA loan - Relating to the U.S. Federal Housing Administration
VA loan - Relating to the U.S. Veterans Administration.
eMortgages
Location Efficient Mortgage - a type of mortgage for urban areas
Predatory mortgage lending
Other nations
Danish mortgage market
Legal details
Deed - legal aspects
Mechanics lien - a legal concept
Perfection - applicable legal filing requirements
Money-C