Fannie Mae and Freddie Mac issue and guarantee pass-through securities; Ginnie Mae only adds its guarantee to privately issued pass-throughs backed by government-insured (FHA and VA) mortgages. Fannie Mae and Freddie Mac have issued CMOs for some time; the Department of Veterans Affairs (VA) began to issu CMOs in 1992; and Ginnie Mae initiated its own CMO program in 1994. Securities guaranteed or guaranteed and issued by these entities are known generically as "agency" mortgage securities. The agency guarantees enhance their credit quality for investors. In addition, the mortgages backing the Fannie Mae and Freddie Mac mortgage securities must meet strict quality criteria. Those backing GNMA pass-throughs are underwritten in accordance with the rules and regulations of the FHA and the VA, which insure them against default.

The extent of the agency guarantee depends on the entity making it. Ginnie Mae, for example, guarantees the timely payment of principal and interest on all of its mortgage securities and its guarantee is backed by the "full faith and credit" of the U.S. government. Holders of Ginnie Mae mortgage securities are therefore assured of receiving payments promptly each month, regardless of whether the underlying homeowners make their payments. They are guaranteed to receive the full return of face-value principal even if the underlying borrowers default on their loans. Mortgage securities issued by the VA carry the same "full faith and credit" U.S. government guarantee.

Fannie Mae guarantees timely payment of both principal and interest on its mortgage securities whether or not the payments of been collected from the borrowers. Freddie Mac also guarantees timely payment of both principal and interest on it Gold PCs and CMOs. Some older series of Freddie Mac PCs guarantee timely payment of interest, but only the eventual payment of principal. Although neither Fannie Mae nor Freddie Mac securities carry the additional "full faith and credit" U.S. government guarantee, the credit markets consider the credit on these securities to be equivalent to that of securities rated triple-A or better.

Some private institutions, such as subsidiaries of investment banks, financial institutions, and home builders, also issue mortgage securities. When issuing CMOs, they often use agency mortgage pass-through securities as collateral; however, their collateral my also include different or specialized types of mortgage loans or mortgage loan pools, letters of credit, or other types of credit enhancements. These so-called "private label" CMOs are the sole obligation of their issuer. To the extent that private label CMOs use agency mortgage pass-through securities as collateral, their agency collateral carries the respective agency's guarantees. Private label CMOs are assigned credit ratings by independent credit agencies based on their structure, issuer, collateral, and any guarantees or outside factors. Many carry the highest AAA credit rating.

As an additional investor protection, the CMO issuer typically segregates the CMO collateral or deposit it in the care of a "trustee", who holds it for exclusive benefit of the CMO bondholders.

With a CMO, the ultimate borrower is the homeowner who takes on a mortgage loan. Because the homeowner's monthly payments include both interest and principal, the mortgage security investor's principal is returned over the life of the security, or "amortized", rather than repaid in a single lump sum at maturity. CMOs provide monthly or quarterly payments to investors which include varying amounts of both principal and interest. As the principal is repaid or prepaid, interest payments become smaller, because they are based on a lower amount of outstanding principal.

A mortgage security "matures" when the investor receives the final principal payment. Most CMO tranches have a stated maturity based on the last date on which the principal from the collateral could be paid in full. This date is theoretical, because it assumes no prepayments on the underlying mortgage loans.

Mortgage securities are more often discussed in terms of their "average life" rather than their state maturity date. Technically, the average life is defined as the average time to receipt of each dollar of principal, weighted by the amount of each principal payment. In simpler terms, the average life is the average time that each principal dollar in the pool is expected to be outstanding, based on certain assumptions about prepayment speeds. If the prepayment speeds are faster than expected, the average life of the CMO will be shorter than the original estimate; if the prepayment speeds are slower, the CMO average life will be extended. While some CMO tranches are specifically designed to minimize the effects of variable prepayment rates, the average life of the security is always a best estimate, contingent on how closely the actual prepayment speeds of the underlying mortgage loans match the assumptions.

As with any bond, the yield on a CMO depends on the purchase "price" in relation to the interest rate and length of time the investor's principal remains outstanding. CMO yields are often quoted in relation to yields on Treasury securities with maturities closest to the estimated average life on the CMO. The estimated yield on a CMO reflects its estimated average life based on the assumed prepayment rates for the underlying mortgage loans. If the actual prepayment rates are faster than or slower than anticipated, the investor who holds the CMO until it is fully paid may realize a different yield. For securities purchased at a discount to face value, faster prepayment rates will increase the yield-to-maturity, while slower prepayment rates will reduce it. For securities purchased at a premium, faster prepayment speeds will reduce the yield-to-maturity, while slower rates will increase it. For securities purchased at face value ("par"), these effects should be minimal.

Because CMOs pay monthly or quarterly, as opposed to the semiannual interest payment schedule for most bonds, CMO investors can use their interest income much earlier than other bond investors. Therefore, CMOs are often discussed in terms of their "bond equivalent yield", which is the actual CMO yield adjusted to account for its greater present value resulting from more frequent interest payments.

Movements in market interest rates have a greater effect on CMOs than other fixed interest obligations because rate movements affect the underlying mortgage loan prepayment rates and, consequently, the average life of the CMO and its yield. When interest rates decline, homeowners are more likely to refinance their mortgages or purchase new homes to take advantage of the lower cost of financing. Prepayment speeds therefore accelerate in a declining interest rate environment. When rates rise, homeowners are more likely to "stay put", causing prepayment speeds to slow.

What's good for the home buyer is not necessarily good for the CMO investor. If interest rates fall and prepayment, CMO investors may find they get their principal back sooner than expected and have to reinvest it at lower interest rates ("call risk"). If interest rates rise and prepayment speeds are slower, investors may find their principal committed for a longer period of time, causing them to miss the opportunity to earn a higher rated of interest ("extension risk"). Therefore, investors should carefully consider the effect that sharp moves in interest rates would have on the performance of their CMO investment.

Each CMO tranche has an estimated first payment date, on which investors can expect to begin receiving principal payments, and an estimated last principal payment (or maturity) date, on which they can expect their final dollar of principal to be returned. The period before principal payments begin in a tranche, when investors receive interest-only payments, is known as the "lockout" period. The period during which principal repayments are expected to occur is called the "window". Both first and last principal payment dates are estimates based on prepayment assumptions and can vary according to actual prepayments made on the underlying mortgage loans.

Planned Amortization Class (PAC) Tranches:
PAC tranches use a mechanism similar to a "sinking fund" to establish a fixed principal payment schedule that directs cash-flow irregularities caused by faster or slower than expected prepayments away from the PAC tranche and toward the other "companion" or "support" tranche. With a PAC tranche, the yield, average life, and lockout periods estimated at the time of investment are more likely to remain stable over the life of the security.

PAC payment schedules are protected by priorities which assure that PAC payments are met first out of principal payments from the underlying mortgage loans. Principal payments in excess of the scheduled payments are diverted to non-PAC tranches in the CMO structure called companion or support tranches because they support the PAC schedules. In other words, at least two bond tranches are active at the same time, a PAC and a companion tranche. When prepayments are minimal, the PAC payments are met first and the companion may have to wait. When prepayments are heavy, the PAC pays only the scheduled amount, and the companion class absorbs the excess. "Type I PAC" tranches maintain their schedules over the widest range of actual prepayment speeds - say from 100% to 300% PSA. "Type II" and "Type III PAC" tranches can also be created with lower priority principal payments from the underlying loans than the primary or Type I tranches. They function as support tranches to higher priority PAC tranches and maintain their schedules under increasingly narrower ranges of prepayments.

PAC tranches are now the most common type of CMO tranche, constituting over 50% of the new issue market. Because they offer a high degree of investor cash flow certainty, PAC tranches are usually offered at lower yields.

Targeted Amortization (TAC) Tranches:
TAC tranches also provide more cash flow certainty and a fixed principal payment schedule, based on a mechanism similar to a sinking fund, but this certainty applies at one prepayment rate rather than a range. If prepayments are higher or lower than the defined rate, TAC bondholders may receive more or less principal than the scheduled payment. TAC tranches' actual performance depends on their priority in the CMO structure and whether or not the PAC tranches are also present. If PACs are also present, the TAC tranche will have less cash flow certainty. If no PACs are present, the TAC provides the investor with some protection against accelerated prepayment speeds and early return of principal. The yields on TAC bonds are typically higher than yields on PAC tranches, but lower than yields on companion tranches.

Companion Tranches:
Every CMO that has PAC or TAC tranches in it will also have companion tranches (sometimes called support bonds), which absorb the prepayment variability that is removed from the PAC and TAC tranches. Once the principal is paid to the active PAC and TAC tranches according to the schedule, the remaining excess or shortfall is reflected in payments to the active companion tranche. The average life of a companion tranche may vary widely, increasing when interest rates rise and decreasing when rates fall. To compensate for this variability, companion tranches offer the potential for higher expected yields when prepayments remain close to the rate assumed at purchase. Similar to Type II and Type III PACs, TAC tranches can serve as companion tranches for PAC tranches. These lower priority PAC and TAC tranches will in turn have companion tranches further down in the principal payment priority. Companion tranches are often offered for sale to retail investors who want higher income and are willing to take more risk of having their principal returned sooner or later than expected.

Z Tranches (also known as Accretion Bonds or Accrual Bonds):
Z tranches are structured so that they pay no interest until the lockout period ends and they begin to pay principal. Instead, a Z tranche is credited "accrued interest" and the face amount of the bond is increased at the stated coupon rate on each payment date. During the accrual period the principal amount outstanding increases at a compounded rate and the investor does not face the risk of reinvesting at lower rates if market yields decline. Typical Z tranches are supported as the last tranche in a series of a sequential or PAC and companion tranches and have average lives of 18 to 22 years. However, Z tranches can be structured with intermediate term average lives as well. After the earlier bonds in the series have been retired, the Z tranche holders start receiving cash payments that include both principal and interest.

While the presence of a Z tranche can stabilize the cash flow in other tranches, the market value of Z tranches can fluctuate widely, and their average lives depend on other aspects of the offering. Because the interest on these securities is taxable when it is credited, even though the investor receives no interest payment, Z tranches are often suggested as investments for tax-deferred retirement accounts.

Principal-Only (PO) Securities:
Some mortgage securities are created so that investors receive only principal payments generated by the underlying collateral. These Principal Only (PO) securities may be created directly from mortgage pass-through securities, or they may be tranches in a CMO. In purchasing a PO security, investors pay a price deeply discounted from the face value and ultimately receive the entire face value through scheduled payments and prepayments.

The market values of POs are extremely sensitive to prepayment rates and therefore interest rates. If interest rates are falling and prepayments accelerate, the value of the PO will increase. On the other hand, if rates rise and prepayments slow, the value of the PO will drop. A companion tranche structured as a PO is called a "Super PO".

Interest-Only Securities:
Separating principal payments to create PO mortgage securities necessarily involves the creation of Interest Only (IO) securities. CMOs that have PO tranches will therefore also have IO tranches. IO securities are sold at a deep discount to their "notional" principal amount, namely the principal balance used to calculate the amount of interest due. They have no face or par value. As the notional principal amortizes and prepays, the IO cash flow declines.

Unlike POs, IOs increase in value when interest rate rise and prepayment rates slow; consequently, they are often used to "hedge" portfolios against interest rate risk. IO investors should be mindful that if prepayment rates are high, they may acutally receive less cash back than they initially invested.

The structure of IOs and POs exaggerates the effect of prepayments on cash flows and market value. The heightened risk associated with these securities makes them unsuitable for certain investors.

Floating Rate Tranches:
First offered in 1986, "floating rate" CMO tranches carry interest rates that are tied in a fixed relationship to an interest rate index, such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI), subject to and upper limit, or "cap", and sometimes to a lower limit, or "floor". The performance of these investments also depends on the way interest rate movements affect prepayment rates and average lives.

Sometimes the interest rates on these tranches are stated in terms of a formula based on the designated index, meaning they move up or down by more than one "basis point" (1/100 of one percent) for each basis point increase or decrease in the index. These "superfloaters" offer leverage when rates rise. The interest rates on "inverse floaters" move in a direction opposite to the changes in the designated index and offer leverage to investors who believe rates may move down. The potential for high coupon income in a rally can be rapidly eroded when prepayments speed up in response to falling interest rates. All types of floating rate tranches may be structured as PAC, TAC, companion, or sequential tranches, and are often used to hedge interest rate risks in portfolios.

Residuals:
CMOs also contain a "residual" interest tranche, which collects any cash flow remaining from the collateral after the obligations to the other tranches have been met. Residuals are not classified as regular interest and may be structured as sequential, PAC, floating rate, or inverse floater tranches, and differ from regular tranches primarily in their tax characteristics, which can be more complex than other CMO tranches. CMOs issued as non-REMICs may also have residuals which are sold as a separate security such as a trust certificate or a partnership interest.

Because payments to CMO investors depend on the collection and distribution of payments made by the holders of the underlying mortgage loans, a payment delay occurs when the security is first purchased. "Payment dates" for CMO tranches are defined in the prospectus and are usually stated as the 15th or 25th day of the month following the record date. Depending on when the CMO transaction settles, the investor may have to wait up to two months for the first payment, but this delay is factored into the yield quoted at the time of the purchase. Once the first payment is received, future payments will be made monthly.

A national network of mortgage securities dealers sells, trades, and makes markets in CMOs. These transactions are executed over-the-counter, directly from dealer to dealer, rather then through an exchange.

CMOs are bought and sold between dealers and investors like other debt instruments. Dealers trade the securities at a net cost which includes their own spread or profit on the transaction. Spreads on CMO transactions may be wider than spreads on Treasury security transactions, because Treasury securities have a broader and deeper secondary market and are therefore more liquid.

Although there is a sizable and active secondary market for many types of CMOs, the degree of liquidity can vary widely. Investors should remember that if they sell their CMOs rather than waiting for the final principal payment, the securities may be worth more or less than their original face value.

Any portion of the CMO payment that represents return of principal or original cost is not taxable. However, if the securities were purchased at a discount from original issue or at a market discount, different rules apply. If an investor buys a mortgage security when originally issued for a price that represents an original discount from its face value, the investor may incur a tax liability on interest which accumulates on the security before it is paid out. If the security is purchased at a discount in the secondary market (market discount), the investor may be subject to a tax on the amount of principal received in excess of the purchase price as well as on the interest.

For CMO securities held in brokerage accounts, the Internal Revenue Service (IRS) requires the broker-dealer to report the investor's aggregate amount of interest earned and the original issue discount accrued during a given calendar year and allows reliance on an external source to supply such tax reporting information. If interest is earned in one calendar year, but not paid until the next, it still must be reported and may be taxable. Broker-dealers provide clients with copies of reports submitted to the IRS.

As required by federal income tax law, CMO issuers provide information to certain entities to calculate properly the taxable income attributable to CMOs. Those entities, in turn, are obligated to supply such information to individuals and other "beneficial owners" who are not exempt recipients. Investors should be aware, however, that such information need not be furnished before March 15 of any calendar year following a calendar year in which income accrues on a CMO.

Investors should consult their tax advisor for more specific information.

Accretion Bond:
See "Z tranche"

Accrual Bond:
See "Z tranche"

Accrued Interest:
Interest deemed to be earned on a security but not yet paid to the investor.

Active Tranche:
A CMO tranche that is currently paying principal payments to and investor.

Amortization:
Liquidation of a debt through installment payments.

Average Life:
On a mortgage security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.

Basis Point: One-one hundredth (1/100 or 0.01) of one percent. Yield differences among bonds are stated in basis points.

Beneficial Owner:
One who benefits from owning a security, even if the security's title of ownership is in the name of a broker or a bank ("street name").

Bid:
The price at which a buyer is willing to buy a security.

Bond Equivalent Yield:
An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, as opposed to semiannual interest payments on most other types of bonds.

Book Entry:
A method of recording and transferring ownership of securities electronically, thereby eliminating the need for physical certificates.

Call Risk:
For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor's principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.

Cap: The upper limit for the interest rate on a floating rate security.

Clean CMO:
See "Sequential-pay CMO"

CMO (Collateralized Mortgage Obligation):
A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. See "REMIC".

CMT (Constant Maturity Treasury):
A series of indexes of various maturities (one, three, five, seven or ten years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.

COFI (Cost of Funds Index):
A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.

Collateral:
Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, although it may also encompass letters of credit, insurance policies, or other credit enhancements.

Companion Tranche:
A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.

Confirmation:
A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.

Conventional Mortgage Loan:
A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.

CPR (Constant Prepayment Rate):
The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.

Current Face:
The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.

CUSIP Number:
A unique nine digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form, the CUSIP number is printed on its face.

Extension Risk:
For a CMO, the risk that rising interest rates may slow the anticipated prepayment speeds, causing investors to find their principal committed longer than they expected. As a consequence, they may miss the opportunity to earn a higher rate of interest on their money.

Face Value:
The par value of a security, as distinct from its market value.

Factor:
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value. The Bond Buyer publishes the "Monthly Factor Report", which contains a list of factors for Ginnie Mae, Fannie Mae, and Freddie Mac securities. Fannie Mae, Freddie Mac, and trustees of private label CMOs also publish CMO tranche factors.

Floating Rate CMO:
A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).

Floor:
The lower limit for the interest rate on a floating rate security.

Hedge:
A committment or investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices and offsetting potential losses.

Inverse Floater:
A CMO tranche that pays an adjustable rate of interest that moves in the opposite direction from movements in a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treaury (CMT), or the Cost of Funds Index (COFI).

IO (Interest Only) Security:
In the case of a CMO, an IO tranche is created deliberately to pay investors only interest and not principal. IO securities are priced at a deep discount to the "notional" amount of principal used to calculate the amount of interest due.

Issue Date:
The date on which a security is deemed to be issued or originated.

Issuer:
An entity which issues and is obligated to pay amounts due on securities.

Jump Z Tranches:
A Z tranche that may start receiving principal payments before prior tranches are retired if market forces create a "triggering" event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. "Sticky" jump Z tranches maintain their changed payment priority until they are retired. "Non-sticky" jump Z tranches maintain their priority only temporarily for as long as the triggering event is present. Although jump Z tranches are no longer issued, some still trade in the secondary market.

LIBOR (London Interbank Offered Rate):
The interest rate banks charge each other for short term Eurodollar loans ranging from overnight to five years in maturity.

Lockout:
The period of time before a CMO investor will begin receiving principal payments.

Maturity Date:
The date on which the principal amount of a security is due and payable.

Mortgage:
A legal instrument that creates a lien upon real estate securing the payment of a specific debt.

Mortgage Loan:
A loan secured by a mortgage.

Mortgage Pass-Through Security:
A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis. Mortgage pass-through securities are also known as mortgage backed securities (MBS) and participation certificates (PC).

Negative Convexity:
A characteristic of CMOs and other callable or prepayable securities that causes investors to have their principal returned sooner than expected in a declining interest rate environment or later than expected in a rising interest rate environment. In the former scenario, investors may have to reinvest their funds at lower rates ("call risk"); in the latter, they may miss an opportunity to earn higher rates ("extension risk").

Offer:
The price at which a seller will sell a security.

Original Face:
The face value or original principal amount of a security on its issue date.

PAC (Planned Amortization Class):
A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed from a PAC is transferred to a companion tranche.

Par:
A price equal to the original face amount of a security, as distinct from its market value. On a debt security, the par or face value is the amount the investory has been promised to receive from the issuer at maturity.

Payment Date:
The date that principal and interest payments are paid to the record owner of a security.

P&I (Principal and Interest):
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.

Plain Vanilla CMO:
See Sequential pay CMO.

PO (Principal Only) Security:
In the case of a CMO, a PO tranche is created deliberately to pay investors principal only and not interest. PO securities are priced at a deep discount from their face value.

Pool:
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

Prepayment:
The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.

Price:
The dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities.

Principal:
With mortgage securities, the amount of debt outstanding on the underlying mortgage loans.

Private Label:
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions, or home builders.

PSA Standard Prepayment Model:
A model based on the historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The PSA model is based on the Constant Prepayment Rate (CPR), which annualizes the Single Monthly Mortality (SMM), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as "percentage of PSA". A prepayment of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.4% CPR in the second month, 0.6% CPR in the thrid month, and 0.2% increases in every month thereafter until the 30th month, when the rate reaches 6%. From the 30th month until the mortgage loan reaches maturity, 100% PSA equals 6% CPR.

Ratings:
Designations used by investors' services to give relative indications of credit quality.

Record Date:
The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.

REMIC:
Real Estate Mortgage Investment Conduit. As a result of a change in the 1986 Tax Reform Act, most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms "REMIC" and "CMO" are now used interchangeably.

Residual:
In a CMO, the residual is the tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.

Scenario Analysis:
Examining the likely performance of an investment under a wide range of possible interest rate environments.

Sequential Pay CMO:
The most basic type of CMO, in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.

Servicing:
Collection and pooling of principal, interest, and escrow payments on mortgage loans and mortgage pools, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing the servicing receives a servicing fee.

Servicing Fee:
The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.

Settlement Date:
The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds.

Sinking Fund:
Money set aside on a regular basis, sometimes from current earnings, for the specific purpose of redeeming debt.

SMM (Single Monthly Mortality):
The percentage of outstanding mortgage loan principal that prepays in one month.

Super PO:
A principal-only security structured as a companion bond.

Superfloater:
A floating rate CMO tranche whose rate is based on a formulaic relationship to a representative interest rate index.

Support Tranche:
See Companion tranche.

TAC tranche:
Targeted amortization class tranche. A TAC tranche uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.

Toggle Tranche:
See Jump Z tranche.

Tranche:
A class of bonds in a CMO offering which shares the same characteristics. "Tranche" is the French word for "slice".

Transfer Agent:
A party appointed to maintain records or securities owners, to cancel and issue new certificates, and to address issues arising from lost, destroyed, or stolen certificates.

Trustee:
An individual or institution that holds assets for benefit of another.

Weighted Average Coupon (WAC):
The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.

Weighted Average Loan Age (WALA):
The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass-through security pool issued by Freddie Mac, weighted by the size of the principal loan balances.

Weighted Average Maturity (WAM):
The weighted average number of months to the final payment of each loan backing a mortgage security, weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARM) and weighted average remaining term (WART).

Window:
In a CMO bond, the period of time between the expected first payment of principal and the expected last payment of principal.

Yield:
The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security's purchase price and interest rate.

Z Tranche:
Often the last tranche in a CMO, the Z tranche receives no cash payments for an expected period of time until the previous tranches are retired. While the other tranches are outstanding, the Z tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z tranche begins to receive cash payments that include both principal and continuing interest.