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Tomorrow's Assignment: Listen to "The Giant Pool of Money"

Reminder for class tomorrow (Tuesday) at noon. Your assignment is to listen to 30 minutes of "The Giant Pool of Money" from This American Life. If you prefer, you may find a similar program and listen to that instead. This is part of our ongoing discussion in Basic Real Estate Principles, continuing from Monday, July 8. Ensure you're prepared for class by completing the assignment as it will enhance your understanding of fundamental real estate concepts.

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Tomorrow's Assignment: Listen to "The Giant Pool of Money"

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  1. ASSIGNMENT FOR TOMORROW – TUES. REMEMBER: class starts at noon Listen to 30 min. of http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money -or- Find a similar program and listen to it

  2. Basic Real Estate Principles – cont. – Monday July 8

    Understanding the global financial crisis
  3. Quick review of steps Find broker/agent Find property Make offer Counters/acceptance = contract Inspections Financing Rent rolls Estoppel certificates
  4. Quick review of terms… Equity Leverage Down Payment Close of Escrow
  5. Various types of loans… Fully amortized/fixed rate Interest only ARM Negative amortization Teaser rate Balloon payment
  6. Property encumbered by a mortgage [Seller gets $ from buyer and lender – pays off loans.] Buyer signs promissory note in favor of lender secured by a mortgage on the bldg. Buyer gets title
  7. Mortgages (called Deeds of Trust in some places) Your understanding? Why does lender require this? Bought car on credit? Can a property have more than one mortgage? Why?
  8. Mortgage MUST have underlying Promissory Note - pg. 33 “Jointly and severally” - explain What type of loan is this? How can you tell? Prepayment Acceleration Due-On-Sale Attorneys’ Fees Security
  9. And where did the process get off-track? Then we’ll examine why Financing process – pg. 27 Loan application Loan analysis Approval and processing Closing Servicing
  10. Subprime Loans – pg. 34 Application process: No documentation Loan analysis – low credit scores; no verification Higher interest rates Negative amortization Where does equity come into play? “High debt-to-equity” ratio
  11. Loan Analysis Appraisal – what was happening in the mid-2000s? http://www.youtube.com/watch?v=MS5X8boUACI
  12. More than one mortgage… Assume Buyer buying apt. house for $3 million. Has $500,000 down. Qualifies for $2 million loan from Bank – what security? $500,000 short. Solution? $500,000 down
  13. Second mortgage [junior] Goes to another lender – or even same lender Why would someone lend additional $500k? What would first mortgage holder allow this? What is the cushion (margin of security) for 1st? FMV = $3,000,000 (purchase price) Down = 500,000 1st = $2,000,000 2nd = 500,000
  14. Any cushion for 2nd[junior]? FMV = $3,000,000 (purchase price) Down = 500,000 1st = $2,000,000 2nd = 500,000 Would 2nd be “safe”? What happens if property values decline?
  15. Seller Carry-Backs Assume same facts: FMV = $3,000,000 Down payment = $ 500,000 1st = $2,000,000 And buyer can’t find a lender to loan the rest but seller wants/needs to sell. Solution? How structured?
  16. Term: “Under Water” Assume FMV declines from $3,000,000 to $2,000,000. First mortgage – balance of $2,000,000 Second - balance of $ 500,000 How much would you pay for the property? In order to sell what has to happen?
  17. Will discuss why borrowers defaulting – but let’s first look at the process Foreclosure What does this mean? What gives lender the right? And – what’s the process? Same facts: Value at time of default = $2,000,000 1st loan = $2,000,000 First forecloses; what is the highest bid?
  18. Another Term: Deficiency Judgment Assume same facts Value = $2,000,000 at time of default 1st has balance due of $2,000,000 High bid = $1,500,000. Now what? And what about 2nd? (balance due = $500,000)
  19. Before looking at securitization of mortages….articles you found Explanation of the Mortgage Crisis on the web or in a magazine or newspaper. Volunteers?
  20. Explanation of the crisis in easy-to-understand terms http://vimeo.com/3261363 Also on: [http://www.youtube.com/watch?v=qqUGoVez8xg] http://www.youtube.com/watch?v=2CVqwoN5dJg
  21. Overview of where we are and where we’re going…. Understand by the end of today the basics of real estate finance Understand by the end of tomorrow the causes of the global financial crisis Understand next week where the global economy is going (!)
  22. Many Movies available http://www.metacritic.com/feature/best-and-worst-movies-about-the-financial-crisis
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