Principles of Real Estate
Principles of Real Estate FIN 3433
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This 7 page Class Notes was uploaded by Miss Candida Hoppe on Thursday October 29, 2015. The Class Notes belongs to FIN 3433 at University of Texas at San Antonio taught by Staff in Fall. Since its upload, it has received 11 views. For similar materials see /class/231329/fin-3433-university-of-texas-at-san-antonio in Finance at University of Texas at San Antonio.
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Date Created: 10/29/15
FIN 3433 RENTAL PROFORMA NOTES All of the computations noted below depend on the inputs shaded in blue Nothing but formulas are required to complete the spreadsheet once the input figures are given This inputs allow you specify the annual property taxes separately with all other expenses including CAPEX input as a single figure under Other Operating Exp Top Section 0 The Initial Depreciation Basis is the Purchase Price Plus the Acquisition Costs Minus the Land Value 0 The Annual Depreciation is lnitial Depreciation divided by the Depreciation Period 0 The Mortgage Amount is the Purchase Price times the LTV o The Mortgage Payment can be computed using the PMT function in Excel use Excel Help if need 0 The balance after 60 months is the PV of the remaining payments Use the Excel PV function 0 The Prepay Penalty is the Prepay Penalty times the Ending Loan Balance As this is a residential mortgage you will probably not have a prepayment penalty Before and After Tax Cash Flow by Year 0 The Operations Cash Flow values are taken from computations noted below and presented as a summary here First compute values below and then link them to this summary area 0 The Year 0 Capital Cash Flow can be computed as Purchase Price Acquisition Cost Points Dollar Amount Mortgage Amount The dollar amount of the points is the Mortgage Amount times the Points Link this cell to the After Tax portion as it is the same 0 The Year 5 Capital Cash Flow is computed near the bottom of the spreadsheet and then linked to the appropriate cell 0 After you have done the linking you can compute the Total CF which is the sum of the Operations and Capital Figures 0 Forthe IRR calculations use the IRR function on the Total CF 0 Forthe NPV use the NPV function Note The NPV function in Excel assumes the first cash is one period from now so use the NPV for CF Year 15 and then subtract off the initial CF The rate for discounting is from the input cell labeled Equity Hurdle Ratequot 0 Debt Coverage Ratio Ignore this section if you wish it s used primarily for commercial loans The Debt Coverage Ratio is the NOl divided by the Mortgage Payment 0 Cash on Cash Return You may ignore this section if you Wish It is the Before Tax CF divided by the Initial Investment Cash Flow From Operations Gross Rent is the monthly rent times 12 for period 1 It is then increased at the rate input as Growth Rate in Rent Vacancy is the percent of Gross Rent specified in the Vacancy Rate cell Other Income is typically zero for residential rental houses Effective Gross Income is Gross Rent minus Vacancy Plus Other Income Operating Expense for Year 1 is the sum of the Property Taxes and Other Operating Exp This figure increases each year at the rate specified as Growth Rate in Exp NOl is the EGI minus the Operating Expense Mortgage Payment is the 12 times the monthly payment computed earlier and is level Professor Thomson mm 2 MaigaguLlbl melamine in up n mquot In 39 Chapter 12 MilwMonquotmilitatnmmi So u rces of Fu n ds E ll i m ili quot39quot m for Residential 53 ortgages WWMMWWMroomm e a A 7 Traditional and Modern ousing Finance Vlngs cnannel to laigeseale uses e g l mortgage loans 9 Savlngs associations 5ample savlngs banks Commercial banks credituniens Savings Associations I Formerly backbone of mortgage nance Flood ofnorne loans in late l9705 r all xed rate Dominated mortgage lending interest rates soared in War on inflation Extremallocalized Wde freedoms lrl l9805 starting With DlDMCA Fatal flaw Funded longeterm loang With Assetrllablllty mismatch severely damaged Wilts snorteterrn Savll l 5 Almustunertnlrdfall ed Traded freedom fordeposlt insurance lgsos 7 had disappeamd b 2 0mm m regular ellateral damage to Elected errieialsl regulaturs Unabletu adamm a new flrlarlclal world 39 WWW Mametsnare orneme luans plummeted lama ever ariaDi law 15 y uni Savings Associations Today I Changed approach to regulation 39 Financial institutions Reform Recovery and Enforcement Act 0f1989 FlRREA 39 Riskrbased capital standards I Most are now banks acquired or converted I Others o en have boutique roles 39 Commercial loans Multifamily loans I Emphasis on ARM lending 40 of loans Commercial Banks Histurically Real Estate needs erouslness clients Euslnessielatedrealestate luans Persunalln estments Assumed rurmerruies or savings assuciatiuns Largerscaie cunstru len lending l llnesrermengage bankers nuirnuus cunsulldatlun utthe industry Aggressivepuisultutiealestate lending Directh Tnmudnmandade banklndsubsdlarles Newpuweistu reenter real estate investment and develupment Credit Unions I Historically Employee savings and consumer loans I Great expansion of clientele I Larger and more diversi ed I Mortgage lending mainly as brokers NonDepository Lenders Mortgage Companies I Mortgage banker Not a bank accepts no deposi s Originates loans to sell Retains right to service the loan for a fee I Mortgage broker Brings borrower and lender together for a fee never owns the loan Mortgage Banker I Originates and owns loans long enough to sell Sell loans Winole Pool and securitiZe loans I Threestep process l issue mortgage commitment to potential borrower 2 Close oronglnate loan funding loan 3 Sell loan Mortgage Banking Creates Two Financial Assets on an dim mama mn zn am minnow m tum mu m new n e 1 Will it Mortgage Banker as Servicer Collects monthly payments remits to investor Collects and remits payments for property taxes hazard insurance and mortgage 5 insurance a Manages late payments defaults foreclosures Receives fee of 25 to 44 25 to 44 bps Typically accept loss at origination ofa loan to b o tain servicing rights Management Toosfor Pipeline Risk Good pipeiine inrormation Forward commitment Sale orioan at a preset prioe ror future delivery e set now Delivery and payment are EU to an days away Anaiuguus to mtures contract I Standby forward commitment Optional forward 5 sale same as rurwaru urnrnitrnent exceptthat mortgage banker nas uptiun to use or nut More custiy than rurwaru cummitment PipelinerRisk Signature Risk of Mortgage Banking I Pipeline risk Risk between loan commitment and loan sale I Twoc omponents 39 Fallout risk Risktnat loan applicant backs out 39 interest ratepnce risk Risktnat closed loans Will fall in value be ore sold Banking Type oersw gaff Arm crest wawzv gamma ask at m lelmthsk m menial era em cim Emergence of Bankers I Megabanks see home lending as pro t center I Cyberelectronics imply huge economies of scale I Four modes of operation 39 Traditional racertorrace or retail lending Wholesale mortgage banking lnternetlending Lending tnrobgn brokers I Tremendous consolidation in last decade 1 Consolidation of the Top 20 Home M e Lenders anibinzs Mir Hustlersiruw tel Mortgage Brokers I Places borrower s loan application with lender Receives application fee Receives part oflender s ongrnatron fee I Never owns and never services loan I Rapidly growing aspect ofindustry I Consumer concerns about mortgage okerage 39 Frontyloaded compensation Few repeat customers Low competency requrrernents L 7 Evolution ofthe Secondary Mort ae M rket I Pre1970 Limited and informal I Lack of standardization a barrier I Large interregional differences in home mortgage interest rates 100 200 bps I Rising interest rates could shut down home mortgage lending through disintermediation Beginning of the Modem Secondary Mortgage Market I Fannie Mae 1968 Spun offfrom HUD to become a primary purchaser of FHA and VA mortgage loans I Ginnie Mae 1968 Empowered to guarantee passthroughquot mortgagebacked securities based on FHA and n I Freddie Mac 1970 Formed to purchase and ns securitize conventional home loa 39om savings associations MortgageBacked Securities I Multiple mortgage loans in a single pool or fund I Security entitles investor to pro rata share of all cash ows I Loans in a given pool will be similar FHANA conventiona Same vintage new or recent loans 39 Similarinterest rates I Nearly twothirds of all new home loans have been securitized in recent years r 7 4 m The Ginnie Maeis MortgageBacked The Growth of Home Security Process Mortgage Securitization l thlrlAMrnlmtr E ml l v ian we mm 421 9 mm r r Hnmt M39ittmum as Farmquot swim a m WMR MMun mmmm a Roleof Ginnie Mae in the Secondary Mortgage Market I GNMA created rst major pass through MBS program quot39 I Does not buy mortgages 5 I Guarantees timely payment ofinterest and principal to holders of GNMA securities I Guarantees only securities based on FHAVA loans Fannie Mae r I OriiiRal mission Secondary market for I Now privately owned but still under US charter Publlc mission rornousing 39 U 8 Treasury flrlarlclal credlt llrle avallable I Surpasses Freddie Mac in buying conventional loans I Funded through both debt issues and n age securltlzat o I Has securitized and sold or owns about 23 of outstanding home loans Freddie Mac I Has congressional charter I eals exclusively in conventional loans I Securitized all loans purchased until recent years I Financially similarto Fannie Mae I Has securitized and sold or owns about 15 of outstanding home loans Importance of Fannie Mae and Freddie Mac continued I Type of loans that GSEs buy heavily in uences what loans most lenders will ake m Growing complaints about GSEs Too mucn inlluence on mortgage markets 39 Urlfalr Compellllorl due to thelr federal flrlarlclal backsto 5 Exceedlrlg bourldarles ofthelrcharters Bearlrlg too much urldlsclosed risk Importance of Fannie Mae and Freddie Mac I Have brought about Standardlzatlorl ln Mertgages and mertgage netes Appraisal farms and practlces nunsenrerming meitgage markets i Have increased llquldltyofrnortgage markets I Nu interstate uirrerentials in mungage interest rates N e mungage lendlrlg lrlterruptlurls when interest rates rise New seurces er mungage runes hruugh security lnvesturs The Mortgage Finance System Capl i Markets lierm Ailmm Farlrlle F39Eadndnl ee Freddlm k Am I Lenders Underwriting Decisions Underwriting Process of determining whether the risks of a loan are acceptable Three Cs of traditional underwriting Collateral URAR appraisal Creditworthiness Credit report Capacity Ability to pay payment ratios Traditional Payment Ratios for MortgageUnderwriting I Total debt ratio F lT LTO GMI LTO is longterm obligation Recent convention set maximum at 36 for conventional loans 43 for FHA Known as backend ratio Note GMI is critical Its computation is closely regulated by ECOA Modern Home Loan Underwriting Automated underwriting is dominant Creation of Single Statistical Score URAR appraisal yields to automated valuation ll i most ses Credit report displaced by credit score Single underwriting index incorporates house value credit score income and obligation data Automated underwriting superior to traditional ods Remaining issue Howimportant is a cash dovm payment requirement7 Traditional Payment Ratios for Mortgage Underwriting Housing expense ratio PITIGMI PITI is principal interest property taxes and insurance GMI is gross monthly income Recent convention set maximum at u forconven ioi39ial loans 29 forFHA KnoVim as frontendquot ratio The Three Cs ofMongage Underwriting The Three Cs ofMongage Underwriting Multivariate Und t
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