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Real Estate Finance. John P. Harding Office SBA 442 Phone: 860-486-3229 e-mail: john.harding@business.uconn.edu Up or Down ?. 35% Decline. 65% Decline. Commercial RE. 6% Decline. Existing Homes. New Homes. Ratio of “For Sale” to Sales. Months Supply. Fannie & Freddie Feel the Pain.
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Real Estate Finance John P. Harding Office SBA 442 Phone: 860-486-3229 e-mail: john.harding@business.uconn.edu Up or Down?
35% Decline 65% Decline Commercial RE 6% Decline Real Estate Finance
Existing Homes New Homes Ratio of “For Sale” to Sales Months Supply Real Estate Finance
Fannie & Freddie Feel the Pain Real Estate Finance
Plenty of Pain in the Entire Real Estate Industry Real Estate Finance
FHFA HPI (8/25/10) Real Estate Finance
What Role Did Mortgages Play in This Mess? One Answer Real Estate Finance
Introduction • What is Real Estate and Why is it Important? • Types of Real Estate • Mortgages Real Estate Finance
What is Real Estate? • Real Estate: Physical Land and Improvements Constructed on the Land • Tangible : • Dirt • Buildings • Real Property: Ownership Rights Associated with a Parcel of Real Estate • Rights to possess, use, enjoy and/or dispose of the real estate • Rights can be divided over time or over space. • Freehold • Fee Simple • Life Estate • Future Life Estates • Leasehold • Rights can be possessory or not • Easements • Mortgages Real Estate Finance
Types of Real Estate • Single-Family Residential • Single-family detached homes • 2-4 unit homes • condominiums • Commercial • Income-producing real estate • Apartment • Retail • Office • Industrial • Lodging • Other • Note that “residential” properties fall into both categories • “Single-Family” category generally includes 2-4 flat buildings and units in high rise condominium complexes Real Estate Finance
Two Ways to Invest in Real Estate • Debt or Equity • There are two primary ways to invest in real estate -- as a lender and as an owner • In this course, we will focus on debt rather than equity • We will study issues from the perspective of lender and borrower Real Estate Finance
Publicly Traded Securities(Est. mid-year 2010) Source: Federal Reserve Statistical Supplement Table 1.41,1.54,1.59 & , NYSE and NASDAQ Real Estate Finance
Treasuries & Mortgages • U.S. Treasury Debt (Q1 2010): • $13.2 trillion • $8.2 trillion marketable • $5.1 trillion non-marketable • Held by Treasury and other federal agencies and trust funds • Mortgages Outstanding (Q1 2010) • $14.2 trillion • $7.6 trillion -- MBS • $3.7 trillion -- Commercial Banks • $.6 trillion – Savings Institutions • $10.7 trillion residential • $3.5 trillion commercial • Source: Federal Reserve Statistical Supplement June 2010 tables 1.41 & 1.54 (7/04) Real Estate Finance
Significance of Mortgages • Mortgages Are the Most Significant Securities in the Fixed Income Market • Total Mortgages Outstanding Exceed Total Federal Debt • MBS roughly equal to Marketable Treasuries • But, Treasuries Growing more rapidly than Mortgages since the crash • Total Federal Debt has Grown at 12%/yr since 2005 • Marketable Federal debt: 20% • Total Mortgages: 4%/yr • Peaked in 2008 • MBS: 6.7%/yr from from 2005-200 • More than three times the size of corporate bonds • Almost six times the size of other consumer debt • Mortgage-Backed Securities are also one of the most complex fixed income securities. Real Estate Finance
Definitions of Loan Types Conventional Loans Government Loans FHA Loans VA Loans Non-Conforming Loans Conforming Loans Subprime Loans Jumbo Loans Non-agency Loans Real Estate Finance
Market Overview • Primary • Mortgage Market • Mortgage Companies • Commercial Banks • Thrifts • Other Lenders • Secondary Mortgage Market • Fannie Mae • Freddie Mac • Ginnie Mae • FHLBs • Commercial Banks & Thrifts • Private Conduits • Capital • Market • Commercial Banks & Thrifts • Fannie Mae • Freddie Mac • Insurance Co. • Mutual Funds • Pension Funds • State Government Cash Cash Debt MBS MBS Loan Real Estate Finance
Loan Origination Process Origination Closing & Funding Secondary Marketing Underwriting Servicing Real Estate Finance
Major Players • Who Originates the Most Mortgages? • Company • Type • Who Holds the Most Mortgages? • Type of Institution • Who Services the Most Mortgages? • Company • Functional Specialization • How is the Risk of Mortgage Investment Allocated? • Credit Risk • Interest Rate Risk Real Estate Finance
Originations are Highly Volatile • Originations are very cyclical • more than doubled from 1991 to 1993 and fell 40% by 1995. • More than doubled again by 1998 • Set new “all-time” records in 2001, 2002 & 2003. • Originations almost tripled between 1998 & 2003 • Why? • 2004 below 2003 peak; 2005: small recovery • What was happening then? • 2006-2008 shows steady decline • 2006 down about 5% from 2005 • 2007 down about 20% from 2006 • 2008 down about 40% from 2007 • Overall originations declined 62% from peak to trough • 2009 up 20% from 2008 but still less than half the peak in ‘03 Real Estate Finance
Loan Purpose Is One Factor But, the reasons to refinance in 2006-2009 refis were likely very different than the reasons that drove 2003-2004 refis Real Estate Finance Source: Fannie Mae Economic & Mortgage Market Developments; 7/2008
This Chart Shows the Distribution of Fannie Mae MBS Coupons ($ Volume) The underlying loans have coupons roughly .50% above that. With Current Mortgage Rates around 4.5%, there is room for a lot of refinancing. Real Estate Finance 8/14/07
Type of Originator • In recent years, mortgage companies have originated more than 60% of all residential mortgages. • 58% in 1997; 57% in 1996 • 1989 was the first year in which mortgage company share exceeded thrift share • mortgage company share in 1989 was 36% • Commercial banks account for approximately 20-25% share Real Estate Finance
Holders of Mortgages • Financial Institutions hold $4 trillion of residential mortgages in the form of “whole loans” • 6% growth rate since 2001 • Mortgage pools and trusts account for $6.8 trillion • 9% growth rate since 2001 • MBS are generally held by financial institutions and mutual funds • Roughly 50% of all the growth in residential mortgage investment has been funded by MBS between 2001-2009 • This is down from 70% share of growth from 2000-2004 • Reflects increased investment by banks & restrictions on GSEs • GSEs hold $.5 trillion in whole loans and more than $1 trillion in MBS in their investment portfolios as of May/June 2010 • In addition, Fannie & Freddie guarantee an additional 3.3 trillion • Total “book” of roughly $5 trillion out of roughly $10.7 trillion Real Estate Finance
Revolutions in U.S. Real Estate Finance • Three Revolutions • Building a Housing Finance System – • Depression into 1970’s • “It’s a Wonderful Life” • Depository dominance • Long term fixed-rate mortgages • The Rise of the Secondary Market • Problems Arise: Regional Imbalances, Inflation • Securitization • Rise of the GSEs: Fannie Mae, Freddie Mac, FHLBs • The New Millennium • Technology/Automation • Loan level pricing • Automated Underwriting • Unbundling of Functions • The Rise of Moral Hazard • Creative Solutions to Housing Affordability • Housing Bubble • Alt-A Subprime and exotic mortgages • The Crash Real Estate Finance
