A Glossary of Mortgage-Backed Securities

**Accrued
interest — **Interest earned but not yet paid.

**Adjustable-Rate
Mortgage**

**(ARM)
— **A** **mortgage loan with an interest rate and payments that change
periodically over the life of the loan.

**Adjustable-Rate
Class — **A** **REMIC class with an interest rate that changes periodically
over the life of the class (see **Floating-Rate Class **and **Inverse
Floating-Rate Class).**

**Amortize
— **To** **repay a debt through a series of periodic payments.

**Average
Life — (**see **Weighted Average Life)**

**Bond
— **In** **the case of Fannie Mae REMICS, an instrument representing
the right to certain payments on the underlying collateral.

**Book
Entry — **An electronic issuance and transfer system for securities transactions,
such as that maintained by the Federal Reserve System. Unless otherwise
stated in the prospectus supplement, Fannie Mae REMICs are issued in book-entry
form.

**Call
Risk — **The possibility that prepayments will increase above an anticipated
rate, causing earlier-than-expected return of principal, usually during
a time of falling interest rates.

**Cap
— **The maximum rate of interest payable on an adjustable-rate security
or mortgage loan.

**CLASS
— (**see **Bond)**

**CMO
(Collateralized Mortgage**

**Obligation)
— **A** **multiple-class mortgage-backed security. The REMIC has replaced
the CMO and, today, all CMOs are issued in the form of REMICS; however,
the terms are often used interchangeably.

**CMT
(Constant Maturity Treasury) — **An index published by the Federal Reserve
Board calculated from the average yield of a range of Treasury securities
adjusted to constant maturities of various time periods (for example, six
months, one year, ten years, etc.).

**COFi
(Cost of Funds index) — **An index of the weighted-average interest rate
paid by savings institutions for sources of funds, usually by members of
the 11th Federal Home Loan Bank District.

**Collateral
— **In the case of Fannie Mae REMICS, assets that back the REMIC.

**Companion
or Support Class — **A REMIC class that absorbs the prepayment variability
removed from reduced volatility classes such as PACs or TACS.

**Coupon
Rate — **The stated annualized percentage of interest paid on an investment.

**CPR
(Constant Prepayment Rate) — **A prepayment measure calculated by assuming
that a constant portion of the outstanding mortgage loans will prepay each
month. (also see **PSA)**

**Credit
Risk — **The possibility that there may be a default by the issuer or
other party in its financial obligations to the investor.

**Current
Face Value — **The current amount of principal outstanding on a security,
which is calculated by multiplying the original face value by the most
recent factor.

**Current
Pay Class — **A term used for any REMIC class that is currently paying
principal and/or interest.

**CUSIP
Number — **A unique, nine-digit number assigned to each publicly traded
security maintained and transferred on the Federal Reserve book-entry system.

**Default
— **Failure to perform an obligation. (In the case of a note or mortgage
loan, usually by nonpayment of principal and interest installments.)

**Discount
— **The amount by which the purchase price of a security is less than
its face value, which has the effect of raising the effective yield of
the security above the coupon rate.

**Distribution
Date — **The date on which payments from a security to an investor are
made (usually the 25th of the month for Fannie Mae REMIC securities).

**Effective
Yield — **The annual return on an investment that is calculated by dividing
the coupon interest rate by the amount invested expressed as a percent
of par.

**Effective
Range — **The range of upper and lower constant prepayment speeds at
which a PAC schedule will hold. The effective range can change over time
depending on the prepayment experience of the securities backing the REMIC
and can widen or narrow in relation to the original stated PAC band. (see
**PAC
Schedule **and **PAC** **Band)**

**Extension
Risk — **The possibility that prepayments will be slower than an anticipated
rate causing later-than expected return of principal. This usually occurs
during times of rising interest rates.

**Face
Value — **The principal amount of a bond.

**Factor
— **The decimal value, calculated monthly, that represents the proportion
of the original principal amount outstanding at a given time.

**Final
Distribution Date or** **Maturity Date — **The latest possible date
on which a REMIC class will receive payment. The actual final payment of
any class will likely occur earlier, and could occur much earlier, than
the final distribution date or maturity. A projected final maturity is
calculated based on an assumed prepayment rate to determine the final maturity
of each class.

**Fixed-Rate
Mortgage — **A mortgage loan with an interest rate and payments that
do not change over the life of the loan.

**Fixed-Rate
Class — **A** **REMIC class with an interest rate that does not change
over the life of the class.

**Floating-Rate
Class (``Floater") — **A REMIC class that pays interest at a rate that
adjusts periodically by a predetermined amount above a specific index.

**Floor
— **The minimum rate of interest payable on an adjustable-rate class
or mortgage.

**Index
— **A published interest rate used to determine the interest rate payable
on an adjustable-rate mortgage or class.

**Interest
— **The amount paid for the use of money, usually expressed as an annual
percentage rate.

**Inverse
Floating — Rate Class**

**(``Inverse
Floater")-A **REMIC class that pays an interest rate that adjusts periodically
in the opposite direction of a specific index. Inverse floater adjustments
may also be based on a multiple of the index.

**10
(Interest Only) Class — **A REMIC class that pays the investor some or
all of the interest payments on the underlying securities and little or
no principal. IO classes have either a nominal or notional principal balance.
A nominal principal balance represents the actual but relatively small
amount of principal that will be paid to the class. A notional principal
balance is the amount used as a reference to calculate the amount of interest
due on an IO class not entitled to receive any principal. Declining interest
rates have an adverse effect on IOs.

**Issue
Date — **The date as of which a security is originally formed.

**LIBOR
(London Interbank Offered** **Rate) — **The interest rate charged
among banks for short-term Eurodollar loans. A common index for adjustable-rate
mortgages and securities.

**Liquidity
— **The capability of ready conversion of an asset or investment to cash.

**Market
Price — **The current price of the security in the market.

**Market
Risk — **The possibility that the price of the security will change over
time.

**Maturity
Date — (see Final Distribution Date)**

**MBS
(Mortgage-Backed Securities) — **An investment instrument that represents
ownership of an undivided interest in a group of mortgages. Principal and
interest from the individual mortgages are used to pay principal and interest
on the MBS.

**Mortgage
— **A pledge of real property as security for the repayment of a debt;
the document that creates and represents the lien upon the real property
that secures the debt.

**Option
Risk — **The possibility that a borrower may prepay a mortgage in a time
frame that adversely affects the investor's yield.

**Original
Face Value — **The original principal amount of a security on its issue
date.

**PAC
(Planned Amortization Class)-A **REMIC class designed to pay investors
scheduled payments over a range of constant prepayment speeds.

**PAC
Band or Range — **A range of constant prepayment speeds defined by a
minimum and maximum under which the PACs scheduled repayment will remain
unchanged. There can be multiple levels of PACs in a REMIC, each having
successively narrower PAC bands. The widest band PACs are PAC Is; the next
are PAC IIs.

**PAC
Schedule — **The planned monthly principal balances of a PAC class in
which the underlying securities prepay at a constant prepayment rate within
the stated PAC band.

**PAC
Window — **The time period during which a PAC class is scheduled to receive
principal payments.

**Par
— **100 percent of face value.

**Plain
Vanilla — (see Sequential Class)**

**PO
(Principal Only) Class — **A REMIC class that does not bear interest
and is entitled to receive only payments of principal. Rising interest
rates will have an adverse effect on POs.

**Pool
— **A group of mortgages backing an individual MBS issue.

**Premium
— **A price in excess of 100 percent of face value.

**Prepayment
— **The unscheduled payment of all or part of the outstanding principal
of a mortgage loan, including payments by the borrower as well as liquidations
from foreclosures, condemnations, or casualty.

**Prepayment
Risk — **The possibility that the mortgages underlying the security are
repaid faster or more slowly than expected.

**Price
— **The amount paid for a security, usually stated as a percentage of
its face value. A par price is 100 percent, a premium price is higher than
par, while a discount price is lower than par.

**Principal
— **The remaining balance of a security or loan, exclusive of accrued
interest.

**Private
Label — **A** **mortgage security not issued or guaranteed by a U.S.
government agency (such as Ginnie Mae) or a U.S. government-sponsored enterprise
(such as Fannie Mae or Freddie Mac).

**Prospectus
and Prospectus Supplement — **The legal documents that outline all details
of an investment.

**PSA
(Public Securities Association) — **The national trade association of
banks, dealers, and brokers that underwrite, trade, and distribute mortgage-backed
securities, U.S. government and federal agency securities, and municipal
securities.

**PSA
prepayment speed — **A measure of the rate of prepayment of mortgage
loans developed by the PSA. This model represents an assumed rate of prepayment
each month of the then outstanding principal balance of a pool of new mortgage
loans. A 100 percent PSA assumes prepayment rates of 0.2 percent per annum
of the then unpaid principal balance of mortgage loans in the first month
after origination and an increase of an additional 0.2 percent per annum
in each month thereafter (for example, 0.4 percent per annum in the second
month) until the 30th month. Beginning in the 30th month and in each month
thereafter, 100 percent PSA assumes a constant annual prepayment rate (CPR)
of 6 percent. Multiples are calculated from this prepayment rate; for example,
150 percent PSA assumes annual prepayment rates will be 0.3 percent in
month one, 0.6 percent in month two, reaching 9 percent in month 30 and
remaining constant at 9 percent thereafter. A 0 percent PSA assumes no
prepayments.

**Record
Date — **The date used to determine the owner of a security for purposes
of distributing the next scheduled payment.

**REMIC
(Real Estate Mortgage** **Investment Conduit) — **A multiple class
mortgage cash flow security.

**Scenario
Analysis — **An examination of expected investment performance over a
variety of assumed economic conditions.

**Secondary
Mortgage Market — **The market in which existing mortgages or mortgage
securities are bought and sold.

**Sequential
Class — **A REMIC class that receives principal payments in a prescribed
sequence.

**Settlement
Date — **The date of the delivery of and payment for a security.

**Stripped
Mortgage-Backed** **Security (SMBS) — **A mortgage security that separates
principal and interest payments from the underlying mortgage-backed securities.

**Super
Floater — **A floating-rate class that pays a rate of interest that resets
periodically as a multiple of the benchmark index.

**Support
**Class**
— **(see **Companion Class)**

**TAC
(Targeted Amortization** **Class) — **A REMIC class designed to provide
investors with a payment schedule that will hold at a single, constant
prepayment speed. Prepayments in excess of the predefined prepayment speed
are allocated to companion classes and do not affect the TAC class. If
prepayments fall below the predefined speed, however, the TAC class will
have slower principal repayment and its average life will extend.

**Tranche
— **French word for ``slice"; a class of investment interest in a REMIC.

**WAC
(Weighted-average coupon) — **The weighted average of the interest rates
on the mortgage loans underlying the MBS that back the REMIC or the weighted
average of the WACs of the individual MBS pools backing the REMIC.

**WAL
(Weighted-average life) — **The average amount of time that will elapse
from the date of a security's issuance until each dollar of principal is
repaid to the investor. The weighted-average life of each class of a REMIC
is only an assumption. The average amount of time that each dollar of principal
is actually outstanding is influenced by, among other factors, the rate
at which principal, both scheduled and unscheduled, is paid on the mortgage
loans underlying the MBS that back the REMIC.

**WAM
(Weighted-average maturity) — **The weighted average of the remaining
terms to maturity (expressed in months) of the mortgage loans underlying
the MBS or the weighted average of the remaining terms to maturity of the
individual MBS pools backing the REMIC.

**Yield
— **The rate of return on an investment over a given time, expressed
as an annual percentage rate. Yield is affected by the price paid for the
investment as well as the timing of principal repayments.

**Yield
to Maturity — **The annual percentage rate of return on an investment,
assuming it is held to maturity.

**Z
Class — **A REMIC class that pays no cash flow to the investor until
certain other classes are paid off or some other specified event occurs.
The interest earned but not paid increases the principal balance of the
class. Once the previous classes have paid off or the specified event occurs,
the Z class becomes an interest-paying amortizing class.