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Loan and Mortgage Terms Glossary

Swap:

(1) a technique of the federal home loan mortgage corporation by which original lenders exchange the mortgages they have made for freddie mac participation certificates (pcs), which provide the lender with ownership interests in the same mortgages. Freddie mac refers to the transaction as the guarantor program, because the corporation adds its own guarantees to the safety of the mortgage investment. (2) a financial transaction in which two counterparties agree to exchange streams of payments over a period of time according to a predetermined rule. For example, the counterparties may swap interest payments, with each paying the other's interest on the same amount of principal. Usually a fixed rate interest obligation is swapped for a floating rate interest obligation, so that both parties can match the form of interest they owe on their debts with the form of interest income they expect to receive on their assets -- fixed with fixed, or floating with floating. Or, the counterparties may swap payments in one denomination of currency for payments in another country's currency. Both interest rate swaps and currency swaps are designed to lessen market exposure of paying off debt in an environment of potentially changing interest rates.


 
     
 
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