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This text delves into the critical aspects of real estate finance, highlighting the types of real estate, mortgage dynamics, and market trends. It discusses the significance of mortgages in the fixed income market, the role of major players such as Fannie Mae and Freddie Mac, and the cyclical nature of mortgage originations. The text also covers the concept of investing in real estate through debt and equity, providing a comprehensive overview of how mortgages shape the real estate landscape.
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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
