- nonbinding commitment by Fannie Mae or Freddie Mac to pur-chase a specified number of mortgages in the secondary mortgage market. Loans offered for sale during the standby period may be converted to mandatory commitment at any time during the term of a standby. A commitment fee is paid by the mortgage originator.
- bank lending commitment, convertible to line of credit. See also bank line.
- investment banker's commitment to underwrite a stock or bond offering.
Securities: agreement between a corporation and an investment banking firm or group (the standby underwriter) whereby the latter contracts to purchase for resale, for a fee, any portion of a stock issue offered to current shareholders in a rights offering that is not subscribed to during the two- to four-week standby period. A right, often issued to comply with laws guaranteeing the shareholder's preemptive right, entitles its holder, either an existing shareholder or a person who has bought the right from a shareholder, to purchase a specified amount of shares before a public offering and usually at a price lower than the public offering price.
The risk to the investment banker in a standby commitment is that the market price of shares will fall during the standby period. See also lay off for a discussion of how standby underwriters protect themselves. See also flotation cost; subscription right; underwrite.
Lending: a bank commitment to loan money up to a specified amount for a specific period, to be used only in a certain contingency. The most common example would be a commitment to repay a construction lender in the event a permanent mortgage lender cannot be found. A commitment fee is normally charged.
a commitment by a lender to make available a sum of money at specified terms for a specified period. A standby fee is charged for this commitment. The borrower retains the option of closing the loan or allowing the commitment to lapse.
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