PMT to individ investor ④/no. of securities ‘’ Last yr⑥ *1st yr prepay % Last yr⑥ *2nd yr prepay % 0 With prepayment (prin&int diff every yr) Yr ⑥ ① ②Prin&int 每年計 Pool Prepay bal 0 1M 1 Last yr⑥prin Last yr⑥= xxxxx 2 0 Last yr⑥= xxxxx =/= previous yr pool bal ①+② ①+② ③Total PMT % * last yr pool bal % * last yr pool bal ④Service fee ③-④ ③-④ ⑤Total PMT to investor ⑤/no. of securities ⑤/no. of securities PMT to individ. investor MBB: issuer retain ownership + responsible for risk man of mort but mort pledged as security & placed in 3rd party trustee, issue with variable coupon rates, overcollaterize// valuation prob: many diff int rate on mort placed in trust, mort amortize prin, prepayment & default risk // MPT: market int rate > PT rate=sell at discount // PT rate=avg int r assumption: vacant land site will be developed to highest & best use Last yr benefits of securitization: bank ✓transfer credit risk to capital market& focus on generate fee>int income ate of all mort (<lowest mort rate & > highest mort rate) // int rate↓ -> value of MPT closer to MBB // ✗prepay (prin& int same every yr) // Assumption when ✓prepay: avg maturity (lack accuracy, ✗reflect int rate factor & HH features); constant rate of prepay (✗reflect prepay due to default more frequent in early yrs of mort & understate prepay rate in early & overstate in later &✗reflect int rate factor); references rate (PSA model) // Effect of prepay on MPT: ↓int rate, prepay↑,value of MPT ↓ & approach to par value // value of MPT more sensitive to △in R (market int rate) when R<R*(net PT rate) ; value of PMT ↓sensitive when R>R*, borrower✗refinance, 0% PSA // PSA 愈高, 綫愈平 // Ch.5 CMO ~MPT(tranche A), ~bond (other tranche cuz receive int only but later like MPT) // security holders bear prepay risk // offer broader spectrum of security yield to investor with diff risk tolerance // 要 over-colllaterization //Condition for profitable CMO: diff investor hv diff CF needs & willing to pay for a package of CF; investor misanalyse & misprice bond A Commer banks,money market funds, corp B,C Insur co, pension funds, trusts, international investor Z B,C investors + aggressive long-term bonds, mutual funds Ch.6 REITs: Jhelp developer refinance $ by selling pty to a REIT (asset light); can sell at↑price cuz investor willing to pay premium for stable income; can still control pty (build 2 source of fee income: manager fee on REIT+pty mgt fee); lift return on asset to maket shareholderJ // Growth factor: low lv of securitization of invest grade r.e; many invest grade r.e in asia privately held (✗sustainable in long run) // Jof buying REIT: stable income but want earn return>fixed income security; easiest way to own r.e& r.e diversification; offer liquidity of being publicly traded; higher yields↑overall portfolio yield -> min volatility in bear market (shock absorber against market fluct.) // Key feature: highly regulated (must authorized by SFC under REINT code & SEHK); borrowing limit=45% gross asset value; must distribute >90% NI to holder // Financial engineering: ↑yield in short term at bottom of pty cycle & early stage of upswing & pay for it later when rents↑ // 4 Major tactics: (a)step-up int rate swap arrangement -> suppress int PMT in early stages (exp saved can be used a divid to outside shareholder) // risk: if rent✗go up as expected -> distribution may end up↓; int rate↓ > yield to investor become less attractive when compared with REIT which ✗use swap // (b)distribution entitlement waiver -> developer also shareholder of REIT -> entitle to dividend PMT -> they waive their divid PMT (external shareholder get greater share of income > ↑yield) // (c)rental guarantee -> promise rent income > tdy’s low rental lv // risk: yield will ↓ quickly after expire // (d)fee income in shares than $ -> inflate yield in short-term & work as incentive for mangers to perform well // risk: give impression more cash is available for distribution than is rly the case // risk of REIT: (a)weaker space market -> Lecon will sometimes ↓demand for space -> excess supply problem (b)rising int rate -> depress customer purchasing power & lead to recession -> -ve affect co. profit -> stock price vary with int rate (c) declining commer. r.e prices -> -ve affect share price of REIT // Ch.7 Pre-sale transaction ✓presale market, supply↑ -> property price more stable given underlying demand for use & invest -> in short run, craze in pre-sale market ✓stimulate ↑price volatility // ✗pre-sale market ->✗pass price risk to investor, produce↓, long run supply↓, price↑&even more unstable Ch.8 Speculative txn pty value↑,seller default&sell to another buyer at↑price // pty value↓, buyer default to stop loss or insufficient fund cuz bank loan depends on pty value, if pty↓,bank loan amt↓ // mort policy=70%Min (contracted price, appraised value) // if appraised value<contracted price -> amt of bank financing not enough for buyer to close transaction -> likely to default if pty market deep south Ch.9 Valuation MPT Without prepayment (prin&int same every yr) Yr Pool bal ①Prin&int ②Total PMT ③Service ④Total PMT (same every yr) (same every yr) fee to investor 0 1M 1 In ①, find =① % *last yr ②-③ pool bal int=1M*r à prin=①-int à =1M-prin 2 Last yr pool bal-print MV of each PT=discount back all PMT to individ investor using market interest rate Ch.1 HKMA framework (r.e bubble) Real property price, real new mortgages, transaction volume, confirmor trans, income leverage (HH debt PMT/HH income) // Wealth effect of r.e on consumption:↓asset price hv limited impact on consumption & -ve wealth effect ->↓invest ->↓GDP ->↓income, consumpt↓// AI index= median HH income/avg mortgage PMT (<2: low affordability; <1:unafford) // Problems: HH income not the only source of income e.g personal saving& invest; mort PMT consist of int&prin -> prin PMT=forced saving ↑buyer wealth; only reflect local affordability but not from overseas Ch.2 4 quadrant: Q1 (property market) R* -> Jecon,↑D; Q2(asset market) P*->P=R/i (cap rate) ->↑cap rate, 順時針// 衰野↑cap rate //↑cap rate, ↓price // Q3 (asset market)construction,↑C,shift left, ↑consturct$, ↓C //Q4 (property market)stock adj // Why S contd’ to↑tho D not catching up with S?LT int rate falling & liquidity keep↑ & craze in finan mkt throw pty out of equil // Ch.3 mort subject to high int rate risk:mkt int rate↑,MV of mort↓ //Term loan (interest only at interval & wait till time n sin prin+I) L↑ default risk (large PMT at time n) // Fully amortize mort (PMT=int+prin) J↓default risk at time nL↓affordable to young ppl // Partially amortized mort (PMT=int+prin<PMT) Jfor startup with↑setup cost&短期 CF problem ->firm become↑experienced, able to refinance laterJ↓default risk than TL (balloon< loan amt) Lstill✓residual risk-> borrower ✗repay ballon // GEM(PMT↑3-4% per yr ->↑PMT can↓mort bal) Jcan own pty free&clear in shorter time;total int↓L↑in PMT>↑in salary // BWM(26PMT; interest rate/annual rate/26) // GPM (PMT↑every X yr)Jacquire a more exp hm (↓initial PMT) L-ve amortization: low P MT✗cover int PMT >unpaid int add to loan bal -> prin↑(not bad if↑in pty value>outstanding loan bal) // SAM (profit sharing with bank) ->Lagency problem: if pty↓to mort bal, even if developer sell pty cant cover loan amt, default -> developer manager pty value %loan bal&initial pty value at end -> so✗share profit>after repaid debt, ↑back pty value // Ch.4 Securitization MBS(convert illiquid assets into liquid asset by regular CF: bank sell mort as products to trust) // risk management: overcollateralization(mort with outstanding loan bal must > amt of securities); market-to-market: trustee regularly mark to market all mort ∵quality of mort pool directly affect MV of MBS (MV of pool<agreed lv -> must replenish with same quality mort or else liquidate the pool); investment rating (3rd bond rating agency) on quality (type of mort: resi, commer& LTV ratio), interest rate on mort (↓better),likelihood of repayment before maturity, appraised value&debt coverage ratio (comer mort) ↑better // value-added of MBB PV of growing perpetuity Pre-sale transaction q = no. of units to build h = no. of units to pre-sell 𝑃! = presale market price B = fixed cost of development Variance: 1st term: presale rev 2nd term: $ return on the use of presale rev (alpha %) 3rd term: sales rev. by selling remaining units at end of constru. 4th term: VC 5th term: fixed cost Objective: max CE by optimal q&h Certainty equivalent: amt of $ developer willing to take in order to avoid taking profit risk Optimal supply of units= Optimal pre-sale quantity Affected by: Pf, VC, use of pre-sale rev, opt cost of pre-sale rev Optimal supply (no pre-sale market (h=0) If h*<0, presell all tdy 𝜎 " :price variance, λ: risk aversion factor q* will be pre-sell q’ ↓ if Pf (pre-sale price) = P (future price) which mean no pre-sale market cuz developer risk-averse Affected by: (the more, the lower) risk aversion(landa), expected future spot price, VC, price risk(variance) DCF: PV of future NOI – PV of main cost – PV of construction cost 𝐶𝐹∗(1+𝑔) PV of future NOI=growing perpetuity PV= 𝑟−𝑔 Value of property if renovate at end of time t=land value at time time t / 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 # (cost of capital) e.g if renovate at end of yr2, value of property NOI at yr3 =( – cost) / (1 + 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒)# $%&'()*# ,-#./0 Hedonic approach: Condition for immediate development Condition to develop at end of time t Condition to develop % 0 and time t =require rate of return R, C, NOI, N ↑ à T*↓ r=cost of borrowing Variance: Pre-sale transaction: Developer’s profit q = no. of units to build h = no. of units to pre-sell 𝑃! = presale market price B = fixed cost of development Optimal supply of units= Objective: max CE by optimal q&h Certainty equivalent: amt of $ developer willing to take in order to avoid taking profit risk 1st term: presale rev 2nd term: $ return on the use of presale rev (alpha %) 3rd term: sales rev. by selling remaining units at end of • constru. 4th term: VC 5th term: fixed cost Hedonic approach: use this to cal value of land if use 右邊 formula Affected by: Pf, VC, use of pre-sale rev, opt cost of pre-sale rev Optimal pre-sale quantity Optimal supply (no pre-sale market (h=0) If h*<0, presell all tdy 𝜎 " :price variance, λ: risk aversion factor q’ < q* if Pf (pre-sale price) = P (future price) which mean no pre-sale market cuz developer risk-averse Affected by: (the more, the lower) risk aversion(landa), expected future spot price, VC, price risk/uncertainty(variance) Condition for immediate development q* will be pre-sell -> if expected spot price include risk premium (P > Pf (1+alpha*r) -> developer ✓ exchange certain price (Pf) for uncertain price (P) ->↑risk averse is developer,↑hedging lv for same +ve price diff % P & Pf -> if diff % P&Pf ↓,pre-sell more Condition to develop % 0 and time t Condition to develop at end of time t If N=infinite, whole R, C, NOI, N ↑ à T*↓ CMO Residual CF: Yr ①CF into pool 0 =CF discount rate r=cost of borrowing ->當 0 if not given ②PMT to tranche =1 Residual PMT DCF: PV of future NOI – PV of main cost – PV of construction cost 負 overcollaterized amt Main cost=cost incur before start of development -> if develop at end of yr3, main cost 去到 yr3 1 =M.P② Tran A④ + =①-② -> if given expected life of pty & start to develop at end of time t Tran B ③ 年年一樣 #12/3,幾有456 1. find NOI at time t+1 -> = NOI (1 + 𝑔) 2 =M.P② Tran A④ + =①-② 2. find value at time t = ①/ (r-g) -> time t 打後既 value Tran B ④ 年年一樣 # 3. discount ② back to tdy = ② / (1 + 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒) Investors require int rate = coupon rate à same price (loan amt) 4. value of pty=value of indefinite life - ③ If > à lower price 𝐶𝐹∗(1+𝑔) If < à higher price PV of future NOI=growing perpetuity PV= Speculation txn 𝑟−𝑔 "#$! "#$" /(123) PPT↑,consider seller 先 ` Value of property if renovate at end of time t= Cap rate = = %&'() +! ,-. %&'() +! ,-. -> Seller default=gain from resale 減 additional land value at time time t / 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 # (cost of capital) NOI at yr3 PMT to buyer e.g if renovate at end of yr2, value of property= ( – cost) /(1 + 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒)# $%&'()*# ,-#./0 -> Seller✗default=no gain/loss CMO CMO - Weighted avg coupon (WAC) = (sum of all tranche ge -> Buyer(seller default)= 賺 seller 賠既$ Step 1: Mortgage pool (amortization table) coupon rate x how much is issued) / mortgage pool (total issue) -> Buyer(seller✗default)=賺差價 cuz use Yr ①Mortg pool ②Total PMT (Prin&int) ④Prin ③Int ⑤Security owned cheaper price buy 0 Total loan Ttl amt issued for all tranche PPT↓,consider buyer 先 1 Last yr①-④ ②-③ Last yr① Last yr⑤-④ -> Buyer default=forgo down PMT *interest rate -> Buyer✗default=輸差價 cuz use more exp Step 2: Tranche Z price to buy Yr ②Amt owned Accrued interest Total PMT ①Interest ③Prin PMT -> Seller(buyer default)=buyer down pay0 Tran Z loan loss from resale amt -> Seller(buyer✗default)= no gain/loss 1 0 0 Lasy yr②+① Last yr②*coup rate =左邊個格 2 Lasy yr②+① Last yr②*coup rate =左邊個格 0 0 3 Lasy yr②-③ Last yr②*coup rate 0 M.P prin-Tran B prin PMT ①+③ Step 3: Tracnhe A Yr ⑤Amt owned 0 Tran A loan amt 1 Last yr⑤-② 2 0 Step 4: Tranche B Yr ⑤Amt owned 0 Tran B loan amt 1 Last yr⑤-② 2 Last yr⑤-② 3 0 ①Prin from pool&Z ②Prin PMT ③Coupon int ④Total PMT M.P prin+Z① =左邊個格 Last yr⑤*coup rate ②+③ M.P prin+Z① Last yr⑤ Last yr⑤*coup rate ②+③ ①Prin from pool&Z ②Prin PMT ③Coupon int ④Total PMT M.P prin+Z① M.P prin+Z① 0 Tran A①Tran A② Last yr⑤ Last yr⑤*coup rate Last yr⑤*coup rate ②+③ ②+③ Last yr⑤*coup rate ②+③ M.P prin+Z①