UNIVERSITY OF CALIFORNIACourse Outline
Haas School of Business Fall 1999
E283 -- REAL ESTATE FINANCE
Professor Nancy Wallace
1. COURSE OVERVIEW
This course considers the structure and operation of the U.S. Mortgage market and other sources of structured finance that are applied in real estate investments. The course applies basic tools of finance to the evaluation of mortgage and lease contract design, the pricing of mortgage products in the both the residential and commercial markets, and securitization of mortgage debt and real estate equity. The course exposes students to cases about current “real-world” real estate debt and equity deals and provides hands-on experience using modern option pricing tools for evaluating mortgage securities.
Basic principles of economics and finance will be used to motivate the analysis tools surveyed in this course. The course begins with an overview of the structure of mortgage contracts and some fundamentals of real estate law. The basic financial mathematics of mortgages will be reviewed including the calculation of payment schedules, duration, convexity, and yields to maturity. These principles will be applied in the first major topic of the course: risk sharing in mortgage finance. Risk evaluation and pricing strategies used to analyze modern mortgage and lease contracts will be considered. In the second, part of the course we will consider mortgage pricing including methods to price the default and prepayment options. The final section of the course will consider mortgage securitization techniques and the bond market for residential and commercial mortgages.
2. TEXTBOOKS AND READINGS
A reading packet and a required textbook:
Tuckman, Bruce, Fixed Income Securities, New York, John Wiley, 1995.
3. REQUIREMENTS
There will be a mid-term and a final exam, two case write-ups, and a final project with an oral presentation in class. Graded and ungraded homework sets will also be provided on a weekly basis. The homework sets will require the use of either a financial hand calculator or a computer. Course grades will be assigned based on the higher value of the following:
Plan 1:Midterm 20%, Final Exam 30%, homework sets and cases 20%, class presentation 30%.
Plan 2:Midterm 25%, Final Exam 25%, homework sets and cases 20%, class presentation 30%.
Class presentations will occur in the last two class sessions.
The examination schedule is as follows:
a. Mid-term 1October 20
b. FinalAs Posted for course.
E283 - SYLLABUS
1. INTRODUCTION: OVERVIEW AND DEFINITIONS[Week 1]
Lea, M. "Innovation and the Cost of Mortgage Credit: A Historical Perspective,” Housing Policy Debate, 7, 1996.
2. BASIC MATHEMATICS OF BONDS AND MORTGAGES[Week 2]
Tuckman, Chapters 1, 2, 3, 10-12.
3. DESIGNING RESIDENTIAL MORTGAGE CONTRACTS[Weeks 3 and 4]
Peek, J. and Wilcox, J. "A Real, Affordable Mortgage," New England Economic Review, Jan. Feb. 1991.
Canner, Glenn, Thomas A. Durkin, and Charles A. Luckett, “Recent Developments in Home Equity Lending,” Federal Reserve Bulletin, April, 1998.
- DESIGNING COMMERCIAL MORTGAGE CONTRACTS
AND UNDERSTANDING LEASE CONTRACTS[Weeks 5 and 6]
Downs, A., “The REIT “Explosion”: What Does It Mean?” Salomon Brothers, January, 1994.
Hottensen, R., "Rockefeller Center Properties," Goldman Sachs, 1986.
Case Negotiation (Sept. 28 ): “Do the Deal and Other Short Stories” John Grassi, Vice Chairman, Shorenstein Company
5. PREPAYMENT AND MORTGAGE PRICING[Week 7 and 8]
Tuckman, Chapters 5 - 9.
Hendershott, P. and Van Order, R., "Pricing Mortgages: An Interpretation of the Models and Results," Journal of Financial Services Research, 1, 1987.
Hall, A. "Valuing the Mortgage Borrower's Prepayment Option," AREUEA Journal, Vol. 13, No. 3, 1985.
Patruno, G. , “Mortgage Prepayments: A New Model for a New Era,” Journal of Fixed Income, December, 1994.
Chan, Y.K. and Robert A. Russell, “A Term Structure Model and the Pricing of Fixed-Income Securities,” Salomon Brothers Fixed Income Research, 1999.
6. THE MORTGAGE DEFAULT OPTION[Week 9]
Avery, R., Bostic, R. Calem, P. and Canner, G., “Credit Risk, Credit Scoring, and the Performance of Home Mortgages, The Federal Reserve Bulletin, July, 1996.
Clauretie, R. and Herzog, T. "The Effect of State Foreclosure Laws on Loan Losses: Evidence from the Mortgage Insurance Industry,” Journal of Money, Credit, and Banking, Vol. 22, No. 2, May, 1990.
7. REAL ESTATE SECURITIZATION: INTRODUCTION[Weeks 10 and 11]
Tuckman, Chapters 13, 15, and 18.
Securitization Case: “FirstPlus Financial Corporation”
8. MORTGAGE-BACKED SECURITIES AND DERIVATIVES[Weeks 12 and 13]
Hayre, L. “Guide to Mortgage-Backed Securities,” United States Fixed Income Research, Salomon Brothers, March, 1999.
Dynkin, Lev, Jay Hyman, Vadim Konstantinovsky, and Nancy Roth, “MBS Index Returns: A Detailed Look,” The Journal of Fixed Income, March, 1999.
9. COMMERCIAL/MULTI-FAMILY MORTGAGE SECURITIZATION[Week 14 and 15]
Quigg, L. "Commercial Mortgage Backed Securities," Fixed Income Research, Mortgage Securities, Lehman Brothers, 1993.
Ganapati, Sunita and Alex Reyfman, “Collateralized Debt Obligations: Market Structure, and Value,” Lehman Brothers Fixed Income Research, June, 1998.
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