ASSIGNMENT FOR TOMORROW –
TUES.
• REMEMBER: class starts at noon
• Listen to 30 min. of
http://www.thisamericanlife.org/radioarchives/episode/355/the-giant-pool-of-money
-or- Find a similar program and listen to it
Basic Real Estate Principles –
cont. – Monday July 8
Understanding the global financial
crisis
Quick review of steps
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Find broker/agent
Find property
Make offer
Counters/acceptance = contract
Inspections
Financing
Rent rolls
Estoppel certificates
Quick review of terms…
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Equity
Leverage
Down Payment
Close of Escrow
Various types of loans…
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Fully amortized/fixed rate
Interest only
ARM
Negative amortization
Teaser rate
Balloon payment
Property encumbered by a mortgage
Buyer gets
title
[Seller gets $ from buyer and
lender – pays off loans.]
Buyer signs
promissory note
in favor of lender
secured by a
mortgage on the
bldg.
Mortgages (called Deeds of Trust in some places)
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Your understanding?
Why does lender require this?
Bought car on credit?
Can a property have more than one
mortgage?
• Why?
Mortgage MUST have underlying
Promissory Note - pg. 33
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“Jointly and severally” - explain
What type of loan is this? How can you tell?
Prepayment
Acceleration
Due-On-Sale
Attorneys’ Fees
Security
And where did the process get offtrack? Then we’ll examine why
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Financing process – pg. 27
Loan application
Loan analysis
Approval and processing
Closing
Servicing
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
Loan Analysis
• Appraisal – what was happening in the mid2000s?
http://www.youtube.com/watch?v=MS5X8bo
UACI
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
Second mortgage [junior]
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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
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?
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?
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?
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?
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)
Before looking at securitization of
mortages….articles you found
• Explanation of the Mortgage Crisis on the web
or in a magazine or newspaper.
• Volunteers?
Explanation of the crisis in easy-tounderstand terms
• http://vimeo.com/3261363
Also on:
[http://www.youtube.com/watch?v=qqUGoVez8
xg]
• http://www.youtube.com/watch?v=2CVqwoN
5dJg
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 (!)
Many Movies available
http://www.metacritic.com/feature/best-andworst-movies-about-the-financial-crisis