RES9776 - SPRING 2013

Real Estate Finance

Real Estate Finance

Class Schedule: MONDAY, WEDNSDAY 05:50-07:05pm
Room Number: building 22, room 203
Code: RES9776PMWA
 

Instructor: Professor Ko Wang
Phone: (646) 660-6930 (Real Estate Department)
            (646) 660-6939 (Direct Line)
Fax: (646) 660-6931 (Real Estate Department)
        (646) 660-6995 (Direct Line)
E-mail: Ko.Wang@baruch.cuny.edu
Website: http://faculty.baruch.cuny.edu/kwang/
Office Hours: M/W 4:40 -5:40 pm, or by appointment
　

Course Description and Objectives

This course examines selected techniques and issues in the area of real estate finance. Special emphasis will be placed on the design and valuation of mortgage instruments. Federal housing policies and institutional details of mortgage policies will not be emphasized. This class will be conducted using a lecture format. While my lectures will follow the table of contents of the textbook rather closely, there are times when supplemental readings will be required.

The first 3 weeks of the course review the fundamentals of real estate finance. The next 12 weeks consider in detail three important issues in real estate finance: (1) residential real estate finance, which includes the valuation of alternative (creative) mortgage securities; (2) commercial real estate finance, which includes the ownership structure for financing real estate holding and valuation of mortgage-backed securities; and (3) special topics in real estate finance, which includes mortgage underwriting, portfolio and agency problems, and secondary markets.


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Course Prerequisites

The prerequisite for this class is FIN9770 or equivalent. Students are assumed to have completed, as a background for the course, an introductory course in finance and in quantitative analysis. It is important for students to have a clear understanding of the time value of money concept and knowledge of how to use the spreadsheet before taking this class. Knowing how to use a calculator to solve present value problems (but without a clear understanding of the underlying concept) is not sufficient for tackling the course material of this class. In this class, I will not teach students how to use a (or any) calculator or spreadsheet.

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Course Materials:

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Course Structure and Classroom Procedures

There will be two mid-term exams and one final exam. The mid-term exams will be held during regular class hours. The final exam will be comprehensive. The mid-term and final exams consist of two components: in-class and take-home. The in-class exam will be a combination of problems and conceptual questions. The take-home exam will be problems that require intensive calculations and students are expected to use spreadsheets to solve the problems (see appendix A for sample questions).
 
The evaluation of class participation consists of two components: class discussion and quizzes. There are no specific rules on how to score points for the class discussions. A student's grade in this category is solely based on the instructor's objective judgement. However, a meaningful question to the instructor as well as the ability and willingness to answer the instructor's questions will definitely improve your performance. The quiz, if there is any, will be very simple.

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Course Evaluation

Your final grade will be weighted as follows:

The final class grade will be based on a relative frequency distribution (percentile ranking) of the total points accumulated over the entire semester. This approach implies that your final grade will be determined by the relative performance of the students in the class, as well as the overall performance of the entire class. Class participation will play an important role in your final grade if you are at the borderline between two grades.

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Course Policies and General Information

1. Unless otherwise told, you are NOT responsible for ALL the material in a chapter. Pay attention to my class lectures and use the textbook as a reference. The overhead transparencies and class handouts contain the important points in this class. For the exams, use them as a guide to where your studying should be focused.

2. I will not take class attendance. However, if you miss classes, it will be EXTREMELY difficult for you to pass the exams. If you miss a lecture, it will take you a lot of time to catch up.

3. NO MAKE-UP EXAM will be given. Should you miss an exam without presenting to me a legitimate reason prior to the exam, you will be assigned a score of zero for the exam.

4. Please pay attention to the university's policy on academic dishonesty.

5. I will allow a student to drop this class as long as the procedure conforms to the university withdrawal policy.
   　

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Tentative Class Schedule

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Appendix A:  Sample Questions

In-class component:

1. A borrower can obtain a lower first year interest rate (as compared to the first year interest rate of a standard fixed-rate mortgage) when she/he selects an adjustable rate mortgage. Why (5 points)? Note: I will only read your first 30 words.

2. Given the following information:

   A. Original Loan Amount =  $300,000.
   B. Loan Balance at the end of First Year =  $296,800.
   C. First Year Debt Service =  $45,950.  

   What is the sinking fund factor of the loan? (5 points). Hint: To answer this question, you need to figure out the principal payment of the first year. Show your work for partial credit.

    3.   Given the following information,

          (1)  Fixed-rate mortgage,
          (2)  Annual interest rate = 12%,
          (3)  Monthly payment, (or monthly interest rate = 1%),
          (4)  Amortization period = 30 years (or 360 months),
          (5)  Original loan amount = $100,000.

Please calculate the annual debt service, annual interest payment, annual principal payment, and the ending loan balance at end of each year for the next three years.  Specifically, please complete the following amortization table (10 points).

            ================================================================

                                 Beginning          Debt                 Interest             Principal           Ending
             Year             Balance            Service              Payment           Payment           Balance

            =================================================================
            0                      $100,000                     NA                  NA                  NA             NA

            1                                  ?                     ?                     ?                     ?                     ?

            2                                  ?                     ?                     ?                     ?                     ?

            3                                  ?                     ?                     ?                     ?                     ?

            ==================================================================
           Note:  This mortgage assumes monthly payments.  The amortization table is different from the one using annual payments.

    4.     Why would one expect that the cash-equivalent value of an assumable loan would not be fully capitalized into the house prices (10 points)?

    5.     Explain what interest only (IO) and principal only strips are (5 points).  Which strip, the IO strip or the PO strip, is said to have negative duration (1 point)?  Why (4 points)?

    6.     State and explain the two theories of default (2 points).  Which theory makes more "intuitive" sense (3 points)?

Take-home component:

    1.     Please re-construct the amortization tables of the five ARMs discussed in class.  In addition, please extend the period from 37 months (as shown in my handouts) to 61 months. Please calculate the monthly IRR and MIRR (FMRR) for each of the 5 ARMs listed in problem 1 (20 points).

    2.     Please re-construct the amortization table of a graduated payment mortgage ($100,000 at 12 percent for 30 years, monthly payment, graduating in payments through the first 10 years) using 10% annual payment growth rate.  Please report the amortization table of the first 181 months (10 points).
 

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