Exam 6: Real Estate Market Analysis

A building that is worth $5 Million has a first mortgage on it with $4 Million owed, a second mortgage with $2 Million owed, and a third mortgage with $1 Million owed. Which describes the distribution of the $5 Million proceeds from the foreclosure sale?

Consider the following fully-amortizing 4-year ARM contract interest rate can change once every 48 months) with 12-year maturity, monthly payments. The ARM has initial interest rate 4% with 1 point, caps are 2% per jump, 6% lifetime, margin is 300 basis points, index is LIBOR currently at 4.5%. Under the "straight line" assumption about future interest rates i.e., assuming the market rate on the index remains constant), what is the yield to maturity? Show your work if you want to possibly get partial credit.)

The two legal documents which constitute a mortgage loan include:

For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio LTV) of 80%, and we estimate property value by direct capitalization using a rate of 8% on the stated NOI. By this criterion what is the maximum loan amount?

What is the main factor which can cause the Weighted Average Maturity of the A tranch of a CMBS issue to be lower shorter) than lower tranches?

For the situation described in the problem above i.e., where the BEY is 9.0%), what is the "mortgage equivalent" yield, or the "nominal" annual rate ENAR) with monthly payments on the loan?

In a one-period world, if the conditional yield degradation is 20%, the unconditional default probability is 10%, and the lender wants an expected return of 5%, what contract yield must the loan carry?

A graduated payment mortgage GPM) would be most appropriate in all of the following circumstances except:

Suppose the market yield on mortgages is 9.0% in bond equivalent terms BEY, or "coupon equivalent", CEY). What is the effective yield EAY or EAR)?

An acceleration clause:

If a mortgage has a "Due-on-Sale" clause, the borrower would not be able to:

How much is the previous mortgage worth in the secondary market if the prevailing YTM in that market is 7.75%? Assume the loan is held to maturity.)

Consider a 20-year monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the yield to maturity?

What is the difference between the contract or stated) yield and the realistic expected return ex ante) on a mortgage? Why is this difference important? Answ: The contract yield is the stated yield to maturity for a loan based on the loan's contractual provisions. In contrast, the expected return on the loan is the probabilistic expectation of what the realized return on the loan will be for the investor in holder of) the loan. The latter recognizes the possibility and expected impact of default and resulting credit losses in the loan, while the contractual yield does not recognize this effect. The difference is important because the possibility of default is a part of reality, and the investor must consider this when weighing the trade-off between risk and return in the loan as an investment, and in comparing a given loan or type of loan as an investment) with the other investment opportunities available in the capital market.

Five years ago you took out a $120,000, 30-year mortgage at 9% interest, with no prepayment penalty. Suppose today you can get 30-year mortgages at 7 percent with 2 points, and you plan to be in your house another five years. What would be the before-tax NPV of refinancing ignoring transaction costs and option value)? NPV = +$7,021. @ Mkt OCC = 7.49%, Old loan PV = 122077, less Old loan OLB = 115056

In the ARM above, what will be the contract interest rate after the end of the first adjustment interval if the index remains at 5.50%?

Consider a 7% loan amortizing at a 30-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income NOI) is $1,000,000 per year, if the underwriting criteria specify a debt service coverage ratio DCR) no less than 120%?

Consider the following 5-year ARM contract interest rate can change once every 60 months) with 15-year maturity, monthly payments. The ARM has initial interest rate 6.5% with 2 points, caps are 2% per jump, 5% lifetime, margin is 300 basis points, index is Treasury Bonds that are currently yielding 6.0%. The loan amount is $100,000. Under the "straight line" assumption about future interest rates i.e., assuming the market rate on the index remains constant), what is the reported yield to maturity "APR", rounded to nearest 1/8 point)?

Consider an 8.5% loan amortizing at a 25-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income NOI) is $500,000 per year, if the underwriting criteria specify a debt service coverage ratio DCR) no less than 125%?

In the mortgage in the previous question, what is the "effective interest rate" or yield over the borrower's expected holding period if the borrower expects to hold the loan for 12 years?