Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower or investor, fails to close and the loan "falls out" of the pipeline.

The lending risk that occurs when the terms of a loan are confirmed simultaneously with the terms of a property sale. Because the mortgage terms are set but the sale is not finalized, there is a risk that the transaction may not be completed. This represents a risk to the mortgage pipeline, as the loan may not be issued.

Negative Equity

When the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan.

The equity in the investment is the difference between how much the purchased item is worth and how much still owes on the loan. If the amount owing on the loan becomes greater than the value of the investment then the difference between these two figures is known as negative equity. This can happen for a number of reasons, but the most common is due to an unforeseen decline in the asset's value.

For example, negative equity often occurs when a homeowner purchases a house using a mortgage and then the economy starts to slow or home prices start to drop. After the house purchase, the value of the home decreases below the value of the amount owed on the mortgage, causing negative equity.

Value Additivity Principal

Value additivity principal prevails when the value of a whole group of assets exactly equals the sum of the values of the individual assets that make up the group of assets. The principle states that the net present value of a set of independent projects is just the sum of the net present values of the individual projects.

The Balanced Scorecard

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and non-profit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals.

A balanced scorecard is a set of performance measures constructed for four dimensions of performance. The dimensions are financial, customer, internal processes, and learning and growth. Having financial measures is critical even if they are backward looking. Customer measures examine the company's success in meeting customer expectations. Internal process measures examine the company's success in improving critical business processes. And learning and growth measures examine the company's success in improving its ability to adapt, innovate, and grow. The customer, internal processes, and learning and growth measures are generally thought to be predictive of future success.

Efficient Market Hypothesis

The hypothesis states that all relevant information is fully and immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis.

Three forms of efficient market hypothesis exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all publicly available information) and strong form (stock prices reflect all relevant information including insider information).