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					課程5: Real Estate Financing
  Flow of Real Estate Financial
  Capital
• The issues:
     • Real estate is capital intensive
     • Typical capital structure is dominated by debt
     • That is a major portion of the funds to purchase a home
       or construct an office building, etc must be borrowed
     • The segment of the capital markets where these funds
       come from are called mortgage markets
     • This sector of the debt market is by far the largest in the
       US and in some respect the world
   Flow of Real Estate Financial
   Capital
• Potential developers, homeowners etc. must obtain financing in
  order to build, own and operate properties
• Funds are supplied by a variety of individuals, firms, institutions
  and government as shown in the figure
• Between the users and the sources of funds are a number of service
  organizations that make the raising of capital easier and more
  efficient
• Financial capital flows from suppliers to users in the form of debt
  (mortgage) and equity
• Providers of debt have priority claim on the revenue from
  operation
• Equity holders have residual claim on cash flow
The Flow of Real Estate
Financial Capital
SUPPLIES                    SERVICE GROUPS            USERS OF
OF CAPITAL                                            CAPITAL
                            Mortgage Bankers      Developers
Thrifts                 E   Mortgage Brokers
Commercial Banks                                  Owners of Homes
                            Real Estate Brokers   Owners of income
Insurance companies
                            Investment Bankers     Properties
Pension Funds           D   Government agencies
REITs                                             Land Owners
                            Syndicators
Credit Unions
Governments
Nonfinancial business
Households
                              Equity
Foreign Investors
                              Debt
Total Credit Outstanding in U.S

                                     Mortgages
          8.67%    8.11%
                            6.09%    U.S. Government
  7.70%
                                     Corporate Bonds

9.34%                                Consumer Credit

                                     Bank Loans and
                                     Commercial Paper
                                     Tax Exempt
   23.96%                            Obligations
                            36.12%
                                     All Others
               3Q 1994
        total: $12,309 Billion
    The Supply of Mortgage Debt
• Types of lenders
   –   Portfolio lenders
   –   Non-portfolio lenders
   –   Depository institutions
   –   Contractual or non-depository institutions
   –   Specialized mortgage market intermediaries
        • mortgage companies
        • federally related agencies or GSEs
        • real estate investment trusts
• Types of loans
   – Construction Loans
   – Permanent loans
Total Mortgage Outstanding
                 16.1%
     6.8%                 1.6%


                                  1-4 family
                                  Multifamily
                                  Comm.
                                  Farm


                             75.2%



            Total $4,279 (billions, 3rd Q 1994)
   Total Mortgage Debt Outstanding
• The total mortgage outstanding is around $4.3 trillion
   – single family mortgage debt accounts for the biggest share 75.2%
     or $3.2 trillion ($3,217.5 billion)
   – Commercial and multifamily accounts for roughly 23% or $1
     trillion
• Residential Mortgages
   – Commercial banks and S&Ls are the major portfolio lenders of whole loans
   – Roughly 49% or $1.6 trillion of the mortgages are securitized mainly by
     GNMA, FNMA FHLMC or GSEs
   – GSEs hold 7.6% or $246.1 billion of whole loans
   – GSEs account for roughly 57% or $1.75 trillion of 1-4 family residential
     mortgages
Mortgage Market Participants
1000

 800
                                                    In Billions
 600
                                                    of Dollars
 400

 200

   0
       Originations      Servicing       Holdings
                thrifts
                mortgage Companies
                Federally Chartered Companies
                Insurance Companies
                Commercial Banks
                Pension and Retirement Funds
                All Others
Multifamily and Commercial
Mortgage Lenders
                       8.1%
               11.6%          6.3%
                                     Com. Bank
                                     Life Co.
          17.8%                      Ind.+ others
                                     S&Ls
                                     GSE
               19.6%         36.5%   CMBS




 Total = $1,062 (Billions)
    Commercial Mortgage Markets
• Commercial mortgage market is smaller than residential market
        • $1.1 trillion versus $3.2 trillion
• This market is far less securitized than the residential market
        • 6.3% or $66.8 billion versus 49% or $1.6 trillion
• Federal agencies are far less involved in commercial mortgages
• The market is dominated by private sector institutions including
  life insurance companies, S&Ls and commercial banks
        • life insurance companies are largest providers of commercial
          mortgages
        • S&Ls expanded their lending activities aggressively into
          commercial mortgages during the 1980s
   Commercial Mortgage Market
• During 1996 approximately $20 billion of whole loans were originated by life
  insurance companies as reported by ACLI
• Throughout the year traditional commercial lenders enjoyed attractive spreads,
  solid underwriting and good real estate market fundamentals
• Traditional lenders dominated the market for $10 M to 50 M mortgages on
  institutional quality offices, warehouses, apartments and retail
• The Market still remains the domain of familiar names: Principal Financial,
  TIAA, Northwestern Mutual, Metropolitan Life and Minnesota Mutual to name
  a few
• No shows: Equitable, Life, Travelers, Aetna and Prudential
• Problem loans remained at record low: 2.51 % (3 Q 1996) vr. 2.35 (4Q 1995)
• Wall Street dominates two extremes of the market: filled the void left by S&Ls
  for low-quality loans and jumbo-sized high-quality loans amenable to “single
  asset” securitization
  COMMERCIAL MORTGAGE CAPITAL SOURCE
Lender Requirements                                            4Q/95                 4Q/96
Insurance Companies/Pension ( “A” quality RE)
   Rates                                                     6.75 - 7.50%          7.50 - 8.15%
   Spreads (UST)                                              125-175 bp           125- 175 bp
   Max. Loan-to-value                                            75%                     75%
   Min. Debt Service Coverage                                   1.20x                  1.20x
   Term                                                        7-10 yrs               7-10 yrs
Commercial Banks (“A” Quality Real Estate)
   Rates --- Fixed                                              6.65 - 7.50%          7.25 - 8.15%
   Rates --- Floating                                           6.75- 8.00%           6.60 -
7.60%
   Spreads -- Fixed (UST)                                        135 - 200 bp         125 - 175 bp
  Spread -- Floating (LIBOR)                                     125 - 250 bp         100 - 200 bp
  Max. loan-to-value                                                 75%                   75%
  Min. Debt Service Coverage                                         1.20x                1.20x
  Term                                                              7 - 10 yrs          7 - 10 yrs
 Conduits (“B” & “C”) Quality Real Estate)
   Rates                                                       7.50 - 8.25%             8.20 - 9.15%
   Spreads (UST)                                                200 - 275 bp            200 - 275
 bp
   Max. Loan-to-Value                                               75%                     75%
   Min. Debt Service Coverage                                       1.20x                  1.20x
   Term                                                             5 - Estate
*Represents typical transaction, not full range; Source: Equitable Real 10 yrs Investment5 -10 yrs
                                                                                          Management
     Delinquency Rates by Property Type
Sector                         3Q/1995           2Q/1996        3Q/1996      12-mo-change

Apartment                        1.80%           0.99%            1.02%        -0.78%

Retail                           1.95%            1.82%            1.75%       -0.20%

Office                            4.32%           4.27%            4.14%       -0.18%

Industrial                        3.96%           1.77%            1.47%       -2.49%

Hotel                             5.20%            2.67%           2.80%        -2.40%
Source: American Council of Life Insurance (ACLI); 1996 Mean = 2.51%, 1995 Mean = 2.35%
   Why Study Mortgage Market ?

• Shed light on how traditional method of financing assets
  by financial intermediaries is rapidly changing
      • securitization is the new BIG BROTHER
• Demonstrates how financial engineering can redirect
  cash flows to create securities that more closely satisfy
  the asset/liability needs of investors
• Government agencies provide Credit guarantees for
  mortgage backed securities
      • should government agencies continue to provide
        guarantee
   Supply of loanable funds
• The amount of funds borrowed and lent depends on interest rates.
   – As rates rise many spending units save more and spend less
   – Simultaneously when interest rates rise many spending units demand less
     credit
   – The figure following illustrates the operation of supply and demand for
     loanable funds
   – The demand schedule is downward sloping, reflecting greater willingness
     to borrow at lower rates.
   – The supply schedule, s1, rise to the right, because people have more to lend
     at higher rates
   – The intersection of the of the two schedules determines the amount of
     funds lent, f1, and the prevailing interest rate, i1
      Supply and demand for loanable funds

Interest                          s2
rate                                   s1

      i1
       i2

                                       d1

                     f1     f2
             Amount of loanable
             funds
        Real Estate Financial Instrument

• When ever real estate is financed, the property is pledged
  as collateral or security creating a financial instrument
  known either as MORTGAGE or DEED OF TRUST
  Power of secured debt: attempting to buy a $300 suit on credit
  versus obtaining $200,000 loan to build a house
   –   Mortgage : Two Parties
   –   Deed of Trust : Three Parties
   –   Promissory Note
   –   Title Pledge
                   MORTGAGE
                A bilateral financial contract

                     Note + Pledge

Borrower                                         Lender
(Mortgagor)               Funds                  (Mortgagee)



              Pledge and lien are extinguished
              with performance of mortgage
              contract
                          DEED OF
                          TRUST
                    A three-party financial contract



                            Note
     Borrower                                    Lender
     (Trustor)              Funds                (Beneficiary)

Title                                                     if default
goes         pledge                                       property
to borrow    of title                                     is sold
if no                                                     and
default                                                   proceeds
                                                          goes to
                            Trustee
                                                          lender
     Important Contractual Provisions in Real
     Estate Financial Instruments
•   Parties to the contract
•   Loan amount
•   Term of loan
•   Interest rate
•   Amortization period
•   Property description
•   Priority of loan
•   Acceleration clause
•   Escalation clause
•   Prepayment clause
         • callable mortgage
         • non-callable mortgage
       Important Contractual Provisions in real
       estate financial instrument
• Due-on-Sale Clause
• Default Clause (put option)
• Personal Liability Clause
• Deficiency Judgment
• Foreclosure
• Redemption Rights
   – Equitable right
   – Statutory right
• Escrow Provisions
   Loan Termination
• Termination by satisfying contract
     • ending lien against pledged property
     • trustee provides deed of release
     • defeasance clause
• Termination by mutual agreement
     • Refinance
     • Recasting
• Deed in lieu of foreclosure
• Termination by foreclosure
   Theories of Mortgage Law
• Legal steps after default to apply property to payment of the
  debt
      • What is default
• Theories of mortgage law
      • lien theory
      • title theory
      • intermediate theory
• Types of foreclosure
      • foreclosure by court action and judicial sale
      • foreclosure by power of sale contained in document
    Redemption Rights
              FORECLOSURE PROCESS
           Foreclosur     Foreclosure    End of
date of
           e              sale           Statutory
default
           suite filed                   period



   Equitable Right of         Statutory Right of
   Redemption Period          Redemption Period

				
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