Prime mortgage: A real estate loan in which the borrower meets the underwriting standards set by federal home loan agencies Fannie Mae and Freddie Mac. Fannie and Freddie buy mortgages from lenders to sell as bundled mortgage bonds, but the lenders have to make sure their mortgages meet the federal underwriting guidelines to be eligible.
Subprime mortgage: Type of loan aimed at giving more buyers a chance to own a home, particularly buyers with less money for a down payment, less income and checkered credit histories. Once the adjustable rates reset, subprime mortgages required substantially higher interest rates than prime mortgages, which made them attractive to investors who bought bundles of these mortgages from lenders.
Alt-A mortgage: Short for “alternative-A.” These loans form a class of mortgage between prime and subprime.
ARM: An adjustable-rate mortgage.
Statement loans: When a buyer didn’t want to bother with documenting income and credit history, some lenders offered statement loans that required nothing more than the buyer’s word that he was good for the loan.
A typical prime mortgage requires a 20 percent down payment. Both mortgages were tax-deductible, which made piggybacks more attractive to buyers than PMI. Many borrowers who took out piggyback mortgages did so without telling the lender making the first mortgage. This compromised the lender’s credit check.
Neg-ams: Negative- amortization mortgages.