Investor Relations « Glossary »

Glossary

ABS, Asset-backed security: Debt security that is backed by an underlying asset, such as mortgages, auto loans, student loans or credit card debt.

Acquired mortgage: Any mortgage which a PFI purchased and sold to the MPF Bank or for which the PFI acquired the servicing and is servicing for the MPF Bank.

Advance: Secured loan made to a member. Advances are offered at fixed or floating rates, with specific maturities or with embedded options for early redemption.

Agent fee: Fee payable to a PFI by an MPF Bank in accordance with the Origination Guide; in connection with the origination of a bank-funded mortgage, which may be positive, negative or zero.

AHP, Affordable Housing Program: FHLBank program that provides direct grants and subsidized loans to assist members in meeting communities' affordable housing needs. Each FHLBank sets aside approximately 10% of its net income to fund the program.

ALCO: Asset/Liability Management Committee.

AMA: Acquired member assets.

APBO: Accumulated Post-retirement Benefit Obligation.

ARM, Adjustable-rate mortgage: Mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index.

Bank4Banks: FHLBank Pittsburgh's secure transactional and informational Web site providing access to various functions, transactions and reports, and general FHLBank-related information.

Basis Risk: Uncertainty about the spread relation between the hedge and the hedged instrument at the time a hedge may be lifted.

BOB, Banking On Business: FHLBank Pittsburgh program that assists eligible small businesses with start-up and expansion.

Capital Plan: Capital structure for FHLBanks, required by the GLB Act, that produces a more permanent source of capital and facilitates compliance with new risk-based capital requirements.

Capital stock: Comprises two classes: Class A (redeemable on six month's notice) and Class B (redeemable on five year's notice), per provisions of the GLB Act.

CFI, Community financial institution: FHLBank member that has deposits insured under FDIC with total assets of $1 billion or less and exempt from the requirement of having at least 10% of total assets in residential mortgage loans.

CICA, Community investment cash advance: General framework under which FHLBanks may offer an array of specific standards for projects, targeted beneficiaries and targeted income levels that the Finance Agency has determined support community lending.

Closed loan/mortgage: Mortgage that an MPF Bank purchases from a PFI, which is owned by the PFI prior to such purchase and owned by the MPF Bank after such purchase, and which was previously made or purchased by the PFI.

CLP, Community Lending Program: FHLBank Pittsburgh program that funds community and development projects through a noncompetitive revolving loan pool. When loans are repaid, the money is available to be lent to other projects.

CMO, Collateralized mortgage obligation: Type of bond that divides cash flows from a pool of mortgages into multiple classes with different maturities or risk profiles.

CMT, Constant maturity Treasury: Refers to the par yield that would be paid by a Treasury bill, note or bond that matures in exactly one, two, three, five, seven, ten, 20 or 30 years.

CO, Consolidated obligation: Bonds and discount notes that are the joint and several liability of all twelve FHLBanks and issued and serviced through the Office of Finance. These instruments are the primary source of funds for FHLBanks.

COFI, 11th District Cost of Funds Index: Weighted average of the cost of borrowings to members of the FHLBank of San Francisco.

Collateral: Property that secures the discharge of an obligation (e.g., mortgage or debt obligation); a security interest that an FHLBank is required by statute to obtain and thereafter maintain beginning at the time of origination or renewal of an advance.

Conforming mortgage: Loan eligible for sale to GSEs based on specific qualifying characteristics such as loan amount, debt ratio, LTV ratio, documentation, etc.

Conventional loan/mortgage: Mortgage that is neither insured nor guaranteed by the FHA, VA or any other agency of the federal government.

Cost of funds: Estimated cost of issuing FHLBank System consolidated obligations with maturities comparable to that of the subsidized advance.

Credit enhancement fee: Fee payable monthly by an MPF Bank to a PFI in consideration of the PFI's obligation to fund the realized loss for a Master Commitment; based on fee rate applicable to such Master Commitment and subject to terms of the Master Commitment and applicable MPF mortgage product, which may include performance and risk participation features.

DDA, Demand deposit account: Similar to an individual's checking account, except interest is paid daily on all balances. All incoming and outgoing wires, advances credits and debits, as well as any P&I payments from securities and advances are posted into the DDA.

Debt service ratio: Ratio of a project's annual net operating income divided by the total annual debt service.

Delivery commitment: Mandatory commitment of the parties, evidenced by a written, machine- or electronically generated transmission issued by an MPF Bank to a PFI accepting the PFI's oral delivery commitment offer.

Direct subsidy: AHP subsidy in the form of direct cash payment but does not include homeownership set-aside funds.

Disclosure Committee: Committee recommended by the SEC to oversee adoption and execution of the controls, procedures and disclosures called for by the Sarbanes-Oxley Act.

DTC, Depository Trust Corporation: Central securities repository where stock and bond certificates are exchanged.

EITF: Emerging Issues Task Force.

Exempt securities: FHLBank securities under Section 3(a)(2) of the Securities Exchange Act of 1933.

Fannie Mae, Federal National Mortgage Association (FNMA): GSE established in 1938 to expand the flow of mortgage money by creating a secondary market.

FAS: Financial Accounting Standard.

FASB, Financial Accounting Standards Board: Board created in 1973 responsible for establishing and interpreting generally accepted accounting principles and improving standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information.

FDIC, Federal Deposit Insurance Corporation: Federal agency established in 1933 that guarantees (with limits) funds on deposit in member banks and performs other functions such as making loans to or buying assets from member banks to facilitate mergers or prevent failures.

Federal Home Loan Bank Act (the Act): Enacted by Congress in 1932 creating the FHLBank Board, whose role was to supervise a series of discount banks across the country. The intent was to increase the supply of money available to local institutions that made home loans and to serve them as a reserve credit resource.

Federal Housing Finance Agency: Independent regulatory agency of the executive branch ensuring FHLBanks operate in a safe and sound manner, carry out their housing and community development finance mission, and remain adequately capitalized and able to raise funds in the capital markets.

FFD, First Front Door: FHLBank Pittsburgh program developed to provide grant assistance to cover down payment and closing costs to first-time homebuyers at or below 80% area median income.

FHA, Federal Housing Administration: Government agency established in 1934 and insures lenders against loss on residential mortgages.

FICO: Financing Corporation.

FIN: FASB Interpretation No.

FIRF: Financial Institutions Retirement Fund.

FLA, First loss account: Contingent liability account established by an MPF Bank for each Master Commitment based on and in the amount required under the applicable MPF mortgage product description.

Freddie Mac, Federal Home Loan Mortgage Corporation (FHLMC): GSE chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing.

GAAP, Generally Accepted Accounting Principles: Conventions, rules and procedures that define accepted accounting practice, including broad guidelines as well as detailed procedures.

Ginnie Mae, Government National Mortgage Association (GNMA): GSE established by Congress in 1968 that issues securities backed by a pool of mortgages, which passes through to investors the principal and interest payments of homeowners.

Gramm-Leach-Bliley (GLB) Act: Enacted in 1999 and set forth the following:
Banks with less than $500 million in assets may use long-term advances for loans to small businesses, small farms and small agri-businesses.

A new, permanent capital structure for FHLBanks is established. Two classes of stock are authorized, redeemable on six month's and five year's notice. FHLBanks must meet a 5% leverage minimum tied to total capital and a risk-based requirement tied to permanent capital.

Equalizes the stock purchase requirement for banks and thrifts.
Voluntary membership for federal savings associations takes effect six months after enactment.

Annual $300 million funding formula for REFCORP obligations of FHLBanks is changed to 20% of annual net earnings.

Governance of FHLBanks is decentralized from the Finance Board to the individual FHLBanks. Changes include the election of a chairperson and vice chairperson of each FHLBank by its directors rather than the Finance Board, and a statutory limit on FHLBank directors' compensation.

GSE, Government-sponsored enterprise: A private organization with a government charter whose function is to provide liquidity for the residential loan market.

HOEPA, Home Ownership and Equity Protection Act: Federal law designed to discourage predatory lending in mortgages and home equity loans.

HUD, Department of Housing and Urban Development: Federal agency founded in 1965 responsible for stimulating housing development in the United States.

Joint and several liability: Obligation for which multiple parties are liable for payment.

LFI, Large financial institution: Member that has deposits insured under FDIC and average total assets greater than $500 million based on regulatory reports for the three most recent calendar year-ends adjusted by CPI as determined by the Finance Board.

LIBOR, London Interbank Offer Rate: Offer rate that a Euromarket bank demands to place a deposit at (or equivalently, make a loan to) another Euromarket bank in London. LIBOR is frequently used as the reference rate for the floating-rate coupon in interest rate swaps and option contracts such as caps and floors.

Loan level credit enhancement: Portion of the credit enhancement pertaining to the risks of an individual mortgage loan.

LOC, Letter of credit: Standby document issued by FHLBanks on behalf of a member as a guarantee against which funds can be drawn, that is used to facilitate various types of business transactions the member may have with third parties. "Standby" is defined as the FHLBank standing by to make good on the obligation made by the obligor to the beneficiary.

Lockout: Period of time during which prepayment is prohibited.

Master Commitment: Documentation executed by a PFI and an MPF Bank, which provides the terms under which the PFI will deliver mortgages to the MPF Bank.

Master Servicer: Financial institution that the MPF Provider has engaged to perform various master servicing duties on its behalf in connection with the MPF Program.

MBS, Mortgage-backed securities: Investment instrument backed by prime-credit-quality first-mortgage loans as security.

Mortgage Partnership Finance® (MPF®) Program: FHLBank of Chicago (MPF Provider) program offered by select FHLBanks (MPF Bank) to their members to provide an alternative for funding mortgages through the creation of a secondary market.

MPF Bank: FHLBank of which the subject PFI is a member.

MPF Provider: FHLBank of Chicago, in its capacity as manager and provider of services to PFIs and MPF Banks in connection with the MPF Program.

MSRs, Mortgage servicing rights: Contractual obligations undertaken by one party to provide servicing for mortgage loans owned by another party, typically for a fee.

NRSRO: Nationally recognized statistical rating organization.

Office of Finance (OF): FHLBank System's centralized debt issuance facility that also prepares combined financial statements, selects/evaluates underwriters, develops/maintains the infrastructure needed to meet System goals, and administers REFCORP and FICO funding programs.

OCC, Office of the Comptroller of the Currency: Administrator of national banks and the primary regulator of Treasury Bank, N.A.

OTS, Office of Thrift Supervision: Primary regulator of all federally chartered and many state-chartered thrift institutions, which include savings banks as well as savings and loan associations.

OFHEO, Office of Federal Housing Enterprise Oversight: Government agency established in 1992 and responsible for ensuring the financial safety and soundness of Fannie Mae and Freddie Mac.

ORERC: Other real estate-related collateral.

Pair-off fee: A fee assessed against a PFI when the aggregate principal balance of mortgages funded or purchased under a delivery commitment falls below the tolerance specified.

Permanent capital: Retained earnings and Class B stock.

PFI, Participating financial institution: FHLBank member participating in the MPF Program, which is legally bound to originate, sell and/or service mortgages in accordance with the PFI Agreement, which it signs with the MPF Bank of which it is a member.

Real estate mortgage investment conduit (REMIC): Multi-class bond backed by a pool of mortgage securities or mortgage loans.

Real estate owned (REO): Mortgaged property acquired by a servicer on behalf of the mortgagee, through foreclosure or deed in lieu of foreclosure.

REFCORP, Resolution Funding Corporation: Government agency created by Congress in 1989 to issue "bailout" bonds and raise industry funds to finance activities of the Resolution Trust Corporation, and merge or close "sick" institutions inherited from the disbanded Federal Savings and Loan Insurance Corporation.

RHFA: Residential housing finance assets.

Risk types:

Basis risk: Uncertainty about the basis the time a hedge may be lifted.

Counterparty credit risk: The risk of financial loss arising out of holding a particular contract or portfolio of contracts as a result of one or more parties to the relevant contract(s) failing to fulfill its financial obligations under the contract.

Credit risk: The chance of loss to an investor, arising from the loan default of a borrower who fails to make promised interest and/or principal payments when due, or the corporate default of a business partner or other counterparty.

Default risk: The chance that a borrower will fail to make promised interest and/or principal payments when due.

Funding risk: The possibility that interest rates will rise, making it more expensive for investors to fund mortgages or more costly for investors to hold financial instruments yielding fixed rates of return when higher-yielding opportunities become available.

Interest rate risk: The risk that the value or cash flows of an asset, liability or commitment will change as a result of changes in interest rates.

Liquidity risk: The chance of loss due to a firm's inability to quickly convert non-cash assets into cash or to obtain cash to pay upcoming debts.

Market risk: The chance of loss due to changes in interest rates, exchange rates, commodity prices or stock prices.

Operating/operations risk: The chance of loss attributable to human error, internal or external systems failures, fraud or inadequate internal controls and procedures.

Prepayment risk: The possibility of receiving full or partial principal payments before they are due.

Systemic risk: The risk that a market crisis places on the financial system as a whole.

Sarbanes-Oxley Act: Legislation passed largely because of a number of corporate accounting scandals to protect shareholders and the public from accounting errors and fraudulent practices in the enterprise. The Sarbanes-Oxley Act:

• Sets deadlines for compliance and publishes rules on requirements.
• Defines which records are to be stored and for how long.
• States that all business records, including electronic records and electronic messages, must be saved for 'not less than five years.' Consequences for noncompliance are fines, imprisonment or both. IT departments are increasingly faced with the challenge of creating and maintaining a corporate records archive in a cost-effective fashion that satisfies the requirements put forth by the legislation.

SERP: Supplemental Employee Retirement Fund.

Servicer: Institution approved to service mortgages funded or purchased by an MPF Bank. The term "servicer" refers to a servicer acting in its capacity as a servicer of mortgages for an MPF Bank under a PFI Agreement.

Small business: In general, any business with revenue under $500,000/year qualifies, but many larger agricultural and commercial businesses may also apply. The definition is found in section 3(a) of the Small Business Act (15 U.S.C. 632(a)) and implemented by the Small Business Administration under 13 CFR part 121, or any successor provisions.

Supplemental mortgage insurance (SMI) policy: Any and all supplemental or pool mortgage guarantee insurance policies applicable to mortgages delivered under the Master Commitment.

Third-party pledge: Service offered by an FHLBank's Safekeeping Department whereby the member may deliver securities into the custody of the FHLBank for the benefit of a member's depositor. The member requests in writing that the FHLBank provisionally segregate the specified collateral, in essence pledging the collateral to the depositor.

Underlying: A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates or other variable. An underlying may be the price or rate of an asset or liability, but is not the asset or liability itself.

VA, Department of Veterans Affairs: Federal agency with oversight for programs created for veterans of the U.S. armed forces. Mortgage loans granted by a lending institution to qualified veterans or to their surviving spouses may be guaranteed by the VA. Weighted average coupon: Weighted average of the interest rates of loans within a pool or portfolio.

Weighted average maturity: For a mortgage-backed security, the weighted average of the remaining terms to maturity of the mortgages underlying the collateral pool at the date issue, using as the weighting factor the balance of each of the mortgages as of the issue date.