Glossary: NARLO – Note

National Association of Responsible Loan Officers (NARLO) – an organization created solely by loan officers concerned with promoting ethical lending. NARLO has no bank or government affiliation. Members are bound by a Code of Ethics that emphasizes open communication and putting clients’ needs before their commission as well as commitment to educating themselves and the public on issues relating to mortgages and personal finance.

Netbank – a financial company founded in 1996 engaged primarily in retail banking, mortgage banking, business finance and providing ATM and merchant processing services. It was one of the pioneers of the Internet banking industry, and is recognized as one of the first Internet-only banks.

Netbank got into trouble in 2006 when it’s mortgage arm buckled under the weight of bad loans. When the loans it had sold on the open market started to default, Netbank was forced to repurchase them from the original buyer, causing what turned out to be a crippling loss of capital. The Office of Thrift Supervision closed the bank on September 28th, 2007 and Netbank’s remaining deposits were bought by the Dutch bank ING Direct.

Negative Amortization – a loan in which the principal, the amount you owe, increases every month. This is because the monthly payments are not high enough to cover the interest due on the loan. The amount missing to cover the interest is then added to the principal balance.
The benefit of a negative amortization loan is that a buyer can afford to buy a higher priced property, with a lower monthly payment.

Buyers typically choose this loan for short term, or if they are assuming a significant appreciation in value. House flippers are a prime example of the sort of person that would benefit from a negative amortization loan. The disadvantage is that you will owe more than you borrowed, and your loan amount may exceed the property’s value at some point. This is an especially high risk in the current market when house prices are so unstable.

Net Tangible Benefit – the idea that if a person is refinancing, their broker is obligated to find them a product that, at the end of the day, either saves them money or provides some other benefit, such as credit card repayment.

New Century Financial Corporation – the second biggest subprime lender in America. Or at least, it was. New Century is yet another organization on the list of subprime casualties. It was delisted from the New York Stock Exchange on March 14th 2007 and filed for Chapter 11 bankruptcy protection on April 2nd of that year.

No Cash Out Refinance – a loan in which a lender simply refinances the existing first mortgage and no other bills are paid off and the borrower receives no cash as part of the transaction. These loans are usually taken on to improve the borrower’s interest rate and to lower their mortgage payment.

Northern Rock – one of the top five mortgage lenders in the United Kingdom, based in the northern city of Newcastle upon Tyne. On September 13th 2007, Northern Rock asked the Bank of England for a £3 billion loan ($6 billion US). This liquidity problem (not having hard cash) was caused by the mortgage market collapse but was not because Northern Rock had bought subprime securities (like Citibank or UBS).

When the mortgage market collapse hit, banks around the world became wary of lending funds to each other, something they would normally do without thinking. This lack of cash flow hit relatively small banks like Northern Rock the hardest. Northern Rock clients, thinking the bank was going out of business, collectively withdrew nearly £2 billion ($4 billion US) in three days.

Note – A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt, and is, therefore, a promise to pay.
Technically speaking, what is usually referred to as a mortgage is actually a two-part process consisting of a note and the mortgage. The note is the part of the agreement that obligates the borrower to repay the lender. The mortgage obligates the borrower to protect the value of the property by paying taxes and assessments on the real estate, keeping improvements in good repair, maintaining both property damage and personal liability insurance for benefit of lender, and, of course, paying the debt in accordance with the terms of the note.

A good example of the difference between the two is insurance. The note only requires the repayment of the balance owing but the mortgage requires the homeowner to carry insurance. If the policy should lapse for any reason, the mortgage is considered to be in default and the lender is within its rights to demand an immediate repayment of the amount owing on the note.

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