Lecture 5: Front-end Mortgages

Real Estate Finance

© JR DeLisle, Ph. D.

Lecture 5: Front-end Mortgages

byJames R. DeLisle, Ph.D.

January 19, 2010

Real Estate Finance


Lecture Overview

• Fixed Rate Mortgages– CAM– CPM– Interest Only

• Loans– Typology of Mortgages– Mortgage Regulations– Mortgage Mechanics: Introduction

Real Estate Finance


Introduction to Time Value of Money (TVM)

• Definition of TVM• Math of TVM

– Core Equation: FV = PV * (1 + r)t– Types: Lump Sum, Annuity

• Six Functions of $1– Future Value

• FV$; what is FV of current lump?• FVA; what is FV of annuity?• SF; what annuity draw from PV lump?

– Present Value• PV$: what is PV of future lump?• PVA; what is PV of FV annuity?• PR; what annuity payment to amortize $lump?

Real Estate Finance


Periodic Repayment (PR)

Future

Present

PV$

PR1/P

InterestPrinciple

What is the Periodic Payment to amortize $1?

Real Estate Finance


Periodic Repayment (PR): Overview

$1,000

$247

$200

PR = PV * [r/((1 - (1/(1 + r)t))]= $1,000 * [.075/(1 - (1/(1.075)5))]= $1,000 * [.075/(1 - .6965586)]= $1,000 * (.2471647)= $247.16

Where: Present Value PV $1,000

r 7.50%t 5

Rate Compounding Periods

?

What is the Periodic Payment/Yr that will amortize $1,000 over 5 yr at 7.5%?

Real Estate Finance


Typology of Residential Mortgages

Real Estate Finance


Front-end Mortgage Overview: Part 1

FRM

CAM

BDM

PAM

Real Estate Finance


Front-end Mortgage Overview: Part 2

WRAP

PMM

Real Estate Finance


Base Case

Real Estate Finance

© JR DeLisle, Ph. D.Traditional Mortgage Payment Schedule

Real Estate Finance

© JR DeLisle, Ph. D.Traditional Mortgage Assumptions

PP* LV

Pi

PMT

INT PRIN

Year Mo Prin BOP PMT INT AMORT Prin EOP

1 1 $224,000 $1,416 1,213.33$ 202.50$ $223,7981 2 $223,798 $1,416 1,212.24$ 203.60$ $223,5941 3 $223,594 $1,416 1,211.13$ 204.70$ $223,3891 4 $223,389 $1,416 1,210.02$ 205.81$ $223,1831 5 $223,183 $1,416 1,208.91$ 206.92$ $222,9761 6 $222,976 $1,416 1,207.79$ 208.04$ $222,7681 7 $222,768 $1,416 1,206.66$ 209.17$ $222,5591 8 $222,559 $1,416 1,205.53$ 210.30$ $222,3491 9 $222,349 $1,416 1,204.39$ 211.44$ $222,1381 10 $222,138 $1,416 1,203.24$ 212.59$ $221,9251 11 $221,925 $1,416 1,202.09$ 213.74$ $221,7111 12 $221,711 $1,416 1,200.94$ 214.90$ $221,4962 13 $221,496 $1,416 1,199.77$ 216.06$ $221,2802 14 $221,280 $1,416 1,198.60$ 217.23$ $221,063

Purchase Price 280,000$ Mortgage Terms

Loan-to-Value 80%Rate 6.50%Term 30 Periodicity 12

Real Estate Finance

© JR DeLisle, Ph. D.Traditional Mortgage Amortization Patterns

Real Estate Finance


PP* LV

Pi

PMT

INT PRIN

Interest vs. Principal Share of Payments

0%

20%

40%

60%

80%

100%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Term

Tota

l Pay

men

t

INT vs. PRIN Total Payment

Amortization Schedule

$0

$50,000

$100,000

$150,000

$200,000

$250,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Time

Dol

lars

Principal Balance


$0

$50,000

$100,000

$150,000

$200,000

$250,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Time

Dol

lars

Principal Balance Total Payment Interest

Real Estate Finance

© JR DeLisle, Ph. D.Traditional Mortgage: Prepayment

Real Estate Finance


PP* LV

Pi

PMT

INT PRIN


1 1 $224,000 $1,416 $1,213 202.50$ $223,7981 2 $223,798 $1,416 $1,212 203.60$ $223,5941 3 $223,594 $1,416 $1,211 204.70$ $223,3891 4 $223,389 $1,416 $1,210 205.81$ $223,1831 5 $223,183 $1,416 $1,209 206.92$ $222,9761 6 $222,976 $1,416 $1,208 208.04$ $222,7681 7 $222,768 $1,416 $1,207 209.17$ $222,5591 8 $222,559 $1,416 $1,206 210.30$ $222,3491 9 $222,349 $1,416 $1,204 211.44$ $222,1381 10 $222,138 $1,416 $1,203 212.59$ $221,9251 11 $221,925 $1,416 $1,202 213.74$ $221,7111 12 $221,711 $1,416 $1,201 214.90$ $221,4962 13 $221,496 $1,416 $1,200 216.06$ $221,2802 14 $221,280 $1,416 $1,199 217.23$ $221,0632 15 $221,063 $1,416 $1,197 218.41$ $220,8452 16 $220,845 $1,416 $1,196 219.59$ $220,6252 17 $220,625 $1,416 $1,195 220.78$ $220,4042 18 $220,404 $1,416 $1,194 221.98$ $220,1822 19 $220,182 $1,416 $1,193 223.18$ $219,9592 20 $219,959 $1,416 $1,191 224.39$ $219,7352 21 $219,735 $1,416 $1,190 225.60$ $219,5092 22 $219,509 $1,416 $1,189 226.82$ $219,2822 23 $219,282 $1,416 $1,188 228.05$ $219,0542 24 $219,054 $1,416 $1,187 229.29$ $218,8253 25 $218,825 $218,825 -$ 218,824.91$ $03 26 $0 $0 -$ -$ $03 27 $0 $0 -$ -$ $03 28 $0 $0 -$ -$ $0

Real Estate Finance


Constant Amortization Mortgage

• Advantages• No balloon payment• Declining payments may be appropriate to match declining asset or deflation• Suited for consumer debt on short-lived assets; not common in real estate

• Disadvantages• High initial payments• Declining payment pattern independent from property income to service debt• Rapidly declining interest of payments reduces PV of interest tax shield• Rapid paydown of principal reduces leverage faster than many borrowers like• Constantly changing payment obligation difficult to administer and budget


$0

$50,000

$100,000

$150,000

$200,000

$250,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Time

Dol

lars


Real Estate Finance


CAM PatternYear Mo Prin BOP PMT INT AMORT Prin EOP

1 1 $224,000 1,835.56$ 1,213.33$ 622.22$ $223,3781 2 $223,378 1,832.19$ 1,209.96$ 622.22$ $222,7561 3 $222,756 1,828.81$ 1,206.59$ 622.22$ $222,1331 4 $222,133 1,825.44$ 1,203.22$ 622.22$ $221,5111 5 $221,511 1,822.07$ 1,199.85$ 622.22$ $220,8891 6 $220,889 1,818.70$ 1,196.48$ 622.22$ $220,2671 7 $220,267 1,815.33$ 1,193.11$ 622.22$ $219,6441 8 $219,644 1,811.96$ 1,189.74$ 622.22$ $219,0221 9 $219,022 1,808.59$ 1,186.37$ 622.22$ $218,4001 10 $218,400 1,805.22$ 1,183.00$ 622.22$ $217,7781 11 $217,778 1,801.85$ 1,179.63$ 622.22$ $217,1561 12 $217,156 1,798.48$ 1,176.26$ 622.22$ $216,5332 13 $216,533 1,795.11$ 1,172.89$ 622.22$ $215,9112 14 $215,911 1,791.74$ 1,169.52$ 622.22$ $215,2892 15 $215,289 1,788.37$ 1,166.15$ 622.22$ $214,6672 16 $214,667 1,785.00$ 1,162.78$ 622.22$ $214,0442 17 $214,044 1,781.63$ 1,159.41$ 622.22$ $213,422


$0

$50,000

$100,000

$150,000

$200,000

$250,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Time

Dol

lars




Price 280,000$ LV 80%

224,000$ Months 360 Amortization 622.22$

Real Estate Finance


CAM Prepayment Year Mo Prin BOP PMT INT AMORT Prin EOP

1 1 $224,000 1,835.56$ 1,213.33$ 622.22$ $223,3781 2 $223,378 1,832.19$ 1,209.96$ 622.22$ $222,7561 3 $222,756 1,828.81$ 1,206.59$ 622.22$ $222,1331 4 $222,133 1,825.44$ 1,203.22$ 622.22$ $221,5111 5 $221,511 1,822.07$ 1,199.85$ 622.22$ $220,8891 6 $220,889 1,818.70$ 1,196.48$ 622.22$ $220,2671 7 $220,267 1,815.33$ 1,193.11$ 622.22$ $219,6441 8 $219,644 1,811.96$ 1,189.74$ 622.22$ $219,0221 9 $219,022 1,808.59$ 1,186.37$ 622.22$ $218,4001 10 $218,400 1,805.22$ 1,183.00$ 622.22$ $217,7781 11 $217,778 1,801.85$ 1,179.63$ 622.22$ $217,1561 12 $217,156 1,798.48$ 1,176.26$ 622.22$ $216,5332 13 $216,533 1,795.11$ 1,172.89$ 622.22$ $215,9112 14 $215,911 1,791.74$ 1,169.52$ 622.22$ $215,2892 15 $215,289 1,788.37$ 1,166.15$ 622.22$ $214,6672 16 $214,667 1,785.00$ 1,162.78$ 622.22$ $214,0442 17 $214,044 1,781.63$ 1,159.41$ 622.22$ $213,4222 18 $213,422 1,778.26$ 1,156.04$ 622.22$ $212,8002 19 $212,800 1,774.89$ 1,152.67$ 622.22$ $212,1782 20 $212,178 1,771.52$ 1,149.30$ 622.22$ $211,5562 21 $211,556 1,768.15$ 1,145.93$ 622.22$ $210,9332 22 $210,933 1,764.78$ 1,142.56$ 622.22$ $210,3112 23 $210,311 1,761.41$ 1,139.19$ 622.22$ $209,6892 24 $209,689 1,758.04$ 1,135.81$ 622.22$ $209,0673 25 $209,067 209,066.67$ -$ 209,066.67$ $03 26 $0 -$ -$ -$ $03 27 $0 -$ -$ -$ $0


$0

$50,000

$100,000

$150,000

$200,000

$250,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Time

Dol

lars


Real Estate Finance


Constant Amortization vs. Constant Payment

BI = Borrower’s Income Required

Real Estate Finance


Buydown Mortgage (BDM)

• Advantages• Increase purchasing power• Allow borrower to purchase at full price• Typically Fixed Rate

• Disadvantages• Lower equity investment may reduce “will to pay”• Cooperative Lender and Set-up Fee• Reduced interest deduction for taxes• Step-up payment risk at end of BDM term

Real Estate Finance


Buydown: Visual

Payments

Principal Balances

Real Estate Finance


Buydown Mortgage: Base Case

Traditional MortgagePurchase Price 280,000$ Mortgage Terms


Sources of CapitalInitial Principal 224,000$ Initial Equity 56,000$

Mortgage FeesOrigination Fee 1%Points 2%Prepayment Penalty 1%

Equity CapitalMortgage Capture Ratio 30%Expected Holding Period 10Cost of Capital 10%

Builder Buydown AccountBuydown % of Price 10%Buydown Rate 8%Term 4Periodicity 12Buydown Fee 2%Buydown Amount: Calculated 28,000$

Real Estate Finance


Mechanics of Buydown


1 1 $224,000 $1,416 $1,213 202.50$ $223,7981 2 $223,798 $1,416 $1,212 203.60$ $223,5941 3 $223,594 $1,416 $1,211 204.70$ $223,3891 4 $223,389 $1,416 $1,210 205.81$ $223,1831 5 $223,183 $1,416 $1,209 206.92$ $222,9761 6 $222,976 $1,416 $1,208 208.04$ $222,7681 7 $222,768 $1,416 $1,207 209.17$ $222,5591 8 $222,559 $1,416 $1,206 210.30$ $222,3491 9 $222,349 $1,416 $1,204 211.44$ $222,1381 10 $222,138 $1,416 $1,203 212.59$ $221,9251 11 $221,925 $1,416 $1,202 213.74$ $221,7111 12 $221,711 $1,416 $1,201 214.90$ $221,4962 13 $221,496 $1,416 $1,200 216.06$ $221,2802 14 $221,280 $1,416 $1,199 217.23$ $221,0632 15 $221,063 $1,416 $1,197 218.41$ $220,8452 16 $220,845 $1,416 $1,196 219.59$ $220,6252 17 $220,625 $1,416 $1,195 220.78$ $220,4042 18 $220,404 $1,416 $1,194 221.98$ $220,1822 19 $220,182 $1,416 $1,193 223.18$ $219,9592 20 $219,959 $1,416 $1,191 224.39$ $219,7352 21 $219,735 $1,416 $1,190 225.60$ $219,5092 22 $219,509 $1,416 $1,189 226.82$ $219,2822 23 $219,282 $1,416 $1,188 228.05$ $219,0542 24 $219,054 $1,416 $1,187 229.29$ $218,825

BDM BOP BDM PMTBDM INT B-AMORT B-EOP Net PMT

$28,000 $684 $187 $497 $27,503$27,503 $684 $183 $500 $27,003$27,003 $684 $180 $504 $26,499$26,499 $684 $177 $507 $25,992$25,992 $684 $173 $510 $25,482$25,482 $684 $170 $514 $24,968$24,968 $684 $166 $517 $24,451$24,451 $684 $163 $521 $23,931$23,931 $684 $160 $524 $23,407$23,407 $684 $156 $528 $22,879$22,879 $684 $153 $531 $22,348$22,348 $684 $149 $535 $21,814$21,814 $684 $145 $538 $21,276$21,276 $684 $142 $542 $20,734$20,734 $684 $138 $545 $20,188$20,188 $684 $135 $549 $19,640$19,640 $684 $131 $553 $19,087$19,087 $684 $127 $556 $18,531$18,531 $684 $124 $560 $17,971$17,971 $684 $120 $564 $17,407$17,407 $684 $116 $568 $16,839$16,839 $684 $112 $571 $16,268$16,268 $684 $108 $575 $15,693$15,693 $684 $105 $579 $15,114

$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732$732

Real Estate Finance


BDM Yields

Lender

Year T-PMT T-EOP(219,520)$

1 $16,990 $221,4962 $16,990 $218,8253 $16,990 $215,9754 $16,990 $212,9335 $16,990 $209,6896 $16,990 $206,2267 $16,990 $202,5328 $16,990 $198,5919 $16,990 $194,386

10 $206,889 $011 $0 $012 $0 $013 $0 $014 $0 $015 $0 $016 $0 $017 $0 $018 $0 $019 $0 $020 $0 $021 $0 $022 $0 $023 $0 $024 $0 $025 $0 $026 $0 $027 $0 $028 $0 $029 $0 $030 $0 $0

IRR CalculationsAnnual 6.75%

B-PMT B-INT B-AMORT B-EOP

$8,203 $2,016 $6,186 $21,814$8,203 $1,503 $6,700 $15,114$8,203 $947 $7,256 $7,858$8,203 $345 $7,858 ($0)

($0) ($0) ($0) ($0)($0) ($0) ($0) ($0)($0) ($0) ($0) ($0)($0) ($0) ($0) ($0)($0) ($0) ($0) ($0)($0) ($0) ($0) $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0$0 $0 $0 $0

IRR CalculationsAnnual

NET PAY

($224,000)$8,787$8,787$8,787$8,787

$16,990$16,990$16,990$16,990$16,990

$206,889$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0

IRR Calculations4.69%

Year T-PMT(224,000)$

1 $16,9902 $16,9903 $16,9904 $16,9905 $16,9906 $16,9907 $16,9908 $16,9909 $16,990

10 $206,88911 $012 $013 $014 $015 $016 $017 $018 $019 $020 $021 $022 $023 $024 $025 $026 $027 $028 $029 $030 $0

IRR CalculationsAnnual 6.45%

Lender Points

Real Estate Finance


Pledged Account Mortgage (PAM)

• Advantages• Increase purchasing power• Single lender• Fixed Rate

• Disadvantages• Higher LV ratio triggers PMI• Set-up Fee• Reduced interest deduction for taxes• Step-up payment risk at end of PAM term

Real Estate Finance


PAM Visual

Cash Flows

Principal Balances

Real Estate Finance


PAM Case

Pledged Account MortgagePAM LV 90%PAM Rate 4%Term 4Periodicity 12PAM Fee 2%PAM Amount: Calculated 28,000$

Traditional Mortgage InputsPurchase Price 280,000$ Mortgage Terms





Real Estate Finance


Mechanics of PAMsYear Mo T-BOP T-PMT T-INT T-AMORT T-EOP

1 1 $252,000 $1,593 $1,365 227.81$ $251,772 $28,0001 2 $251,772 $1,593 $1,364 229.05$ $251,543 $26,8771 3 $251,543 $1,593 $1,363 230.29$ $251,313 $25,7511 4 $251,313 $1,593 $1,361 231.53$ $251,081 $24,6211 5 $251,081 $1,593 $1,360 232.79$ $250,849 $23,4871 6 $250,849 $1,593 $1,359 234.05$ $250,614 $22,3501 7 $250,614 $1,593 $1,357 235.32$ $250,379 $21,2081 8 $250,379 $1,593 $1,356 236.59$ $250,143 $20,0631 9 $250,143 $1,593 $1,355 237.87$ $249,905 $18,9141 10 $249,905 $1,593 $1,354 239.16$ $249,666 $17,7611 11 $249,666 $1,593 $1,352 240.46$ $249,425 $16,6041 12 $249,425 $1,593 $1,351 241.76$ $249,183 $15,4442 13 $249,183 $1,593 $1,350 243.07$ $248,940 $14,2792 14 $248,940 $1,593 $1,348 244.38$ $248,696 $13,1112 15 $248,696 $1,593 $1,347 245.71$ $248,450 $11,9392 16 $248,450 $1,593 $1,346 247.04$ $248,203 $10,7632 17 $248,203 $1,593 $1,344 248.38$ $247,955 $9,5832 18 $247,955 $1,593 $1,343 249.72$ $247,705 $8,3992 19 $247,705 $1,593 $1,342 251.08$ $247,454 $7,2112 20 $247,454 $1,593 $1,340 252.44$ $247,202 $6,0192 21 $247,202 $1,593 $1,339 253.80$ $246,948 $4,8232 22 $246,948 $1,593 $1,338 255.18$ $246,693 $3,6242 23 $246,693 $1,593 $1,336 256.56$ $246,436 $2,4202 24 $246,436 $1,593 $1,335 257.95$ $246,178 $1,2123 25 $246,178 $1,593 $1,333 259.35$ $245,919 $0

PAM BOP P-PMT P-INT P-AMT P-Pb Net PMT

$28,000 $1,216 $93 $1,123 $26,877$26,877 $1,216 $90 $1,126 $25,751$25,751 $1,216 $86 $1,130 $24,621$24,621 $1,216 $82 $1,134 $23,487$23,487 $1,216 $78 $1,138 $22,350$22,350 $1,216 $74 $1,141 $21,208$21,208 $1,216 $71 $1,145 $20,063$20,063 $1,216 $67 $1,149 $18,914$18,914 $1,216 $63 $1,153 $17,761$17,761 $1,216 $59 $1,157 $16,604$16,604 $1,216 $55 $1,161 $15,444$15,444 $1,216 $51 $1,164 $14,279$14,279 $1,216 $48 $1,168 $13,111$13,111 $1,216 $44 $1,172 $11,939$11,939 $1,216 $40 $1,176 $10,763$10,763 $1,216 $36 $1,180 $9,583

$9,583 $1,216 $32 $1,184 $8,399$8,399 $1,216 $28 $1,188 $7,211$7,211 $1,216 $24 $1,192 $6,019$6,019 $1,216 $20 $1,196 $4,823$4,823 $1,216 $16 $1,200 $3,624$3,624 $1,216 $12 $1,204 $2,420$2,420 $1,216 $8 $1,208 $1,212$1,212 $1,216 $4 $1,212 $0

$0 $0 $0 ($0) $0

Net PMT

$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377$377

$1,593

Real Estate Finance


PAM Yields

Lender

Year T-PMT($252,000)

1 $19,1142 $19,1143 $19,1144 $19,1145 $19,1146 $19,1147 $19,1148 $19,1149 $19,114

10 $232,75011 $012 $013 $014 $015 $016 $017 $018 $019 $020 $021 $022 $023 $024 $025 $026 $027 $028 $029 $030 $0

IRR CalculationsAnnual 6.45%Monthly 6.94%

Lender with PointsYear T-PMT T-EOP

($244,440)1 $19,114 $249,1832 $19,114 $246,1783 $19,114 $242,9714 $19,114 $239,5505 $19,114 $235,9006 $19,114 $232,0057 $19,114 $227,8498 $19,114 $223,4159 $19,114 $218,684

10 $232,750 $011 $0 $012 $0 $013 $0 $014 $0 $015 $0 $016 $0 $017 $0 $018 $0 $019 $0 $020 $0 $021 $0 $022 $0 $023 $0 $024 $0 $025 $0 $026 $0 $027 $0 $028 $0 $029 $0 $030 $0 $0

IRR CalculationsAnnual 6.90%Monthly 6.94%

P-PMT P-INT P-Amort P-EOP Net Pay

$14,591 $870 $13,721 $14,279 $4,523$14,591 $311 $14,279 $0 $4,523

$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $19,114$0 $0 ($0) $0 $232,750$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0$0 $0 $0 $0 $0

Real Estate Finance

© JR DeLisle, Ph. D.WRAP Mortgage: Seller’s Approach

Advantages• Increase access and speed of closing• Lower rate on WRAP vs. new market• Hold price for seller• Provide arbitrage/spread opportunity

Disadvantages• Title not as clearly held by buyer• Seller retains liability• Seller services loan

Real Estate Finance


WRAP Part I: Flows

Traditional MortgagePurchase Price 280,000$ Mortgage Terms





WRAP MortgageWRAP LV 95%WRAP Rate 7.0%WRAP Begin Year 3Term (begin yr-end yr) 28Periodicity 12Appreciation 2%

MV

$280,000$280,467$280,934$281,402$281,871$282,341$282,812$283,283$283,755$284,228$284,702$285,176$285,652$286,128$286,605$287,082$287,561$288,040$288,520$289,001$289,483$289,965$290,448$290,932$291,417$291,903$292,390$1878

$ 391$1416 Excess $71

$292,390

$276,386

$57,561

Real Estate Finance


Wrap Visualization

Real Estate Finance


Wrap CaseTraditional Mortgage






WRAP MortgageWRAP LV 95%WRAP Rate 7.0%WRAP Begin Year 3Term (begin yr-end yr) 28Periodicity 12Appreciation 2%

Real Estate Finance


WRAP MechanicsYear Mo Prin BOP PMT INT AMORT Prin EOP

($219,520) 224,000$

1 1 $224,000 $1,416 $1,213 202.50$ $223,7981 2 $223,798 $1,416 $1,212 203.60$ $223,5941 3 $223,594 $1,416 $1,211 204.70$ $223,3891 4 $223,389 $1,416 $1,210 205.81$ $223,1831 5 $223,183 $1,416 $1,209 206.92$ $222,9761 6 $222,976 $1,416 $1,208 208.04$ $222,7681 7 $222,768 $1,416 $1,207 209.17$ $222,5591 8 $222,559 $1,416 $1,206 210.30$ $222,3491 9 $222,349 $1,416 $1,204 211.44$ $222,1381 10 $222,138 $1,416 $1,203 212.59$ $221,9251 11 $221,925 $1,416 $1,202 213.74$ $221,7111 12 $221,711 $1,416 $1,201 214.90$ $221,4962 13 $221,496 $1,416 $1,200 216.06$ $221,2802 14 $221,280 $1,416 $1,199 217.23$ $221,0632 15 $221,063 $1,416 $1,197 218.41$ $220,8452 16 $220,845 $1,416 $1,196 219.59$ $220,6252 17 $220,625 $1,416 $1,195 220.78$ $220,4042 18 $220,404 $1,416 $1,194 221.98$ $220,1822 19 $220,182 $1,416 $1,193 223.18$ $219,9592 20 $219,959 $1,416 $1,191 224.39$ $219,7352 21 $219,735 $1,416 $1,190 225.60$ $219,5092 22 $219,509 $1,416 $1,189 226.82$ $219,2822 23 $219,282 $1,416 $1,188 228.05$ $219,0542 24 $219,054 $1,416 $1,187 229.29$ $218,8253 25 $218,825 $1,416 $1,185 230.53$ $218,5943 26 $218,594 $1,416 $1,184 231.78$ $218,3633 27 $218,363 $1,416 $1,183 233.03$ $218,130

MV

$280,000$280,467$280,934$281,402$281,871$282,341$282,812$283,283$283,755$284,228$284,702$285,176$285,652$286,128$286,605$287,082$287,561$288,040$288,520$289,001$289,483$289,965$290,448$290,932$291,417$291,903$292,390

WPRINBOP WRAP PMT

$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0

$276,386 $1,878$276,120 $1,878

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WRAP Details

333333333333444444444444

$0 $0 $0 $0 $276,386$276,386 $1,878 $1,612 $266 $276,120$276,120 $1,878 $1,611 $268 $275,852$275,852 $1,878 $1,609 $269 $275,583$275,583 $1,878 $1,608 $271 $275,312$275,312 $1,878 $1,606 $272 $275,040$275,040 $1,878 $1,604 $274 $274,766$274,766 $1,878 $1,603 $276 $274,490$274,490 $1,878 $1,601 $277 $274,213$274,213 $1,878 $1,600 $279 $273,934$273,934 $1,878 $1,598 $280 $273,654$273,654 $1,878 $1,596 $282 $273,372$273,372 $1,878 $1,595 $284 $273,088$273,088 $1,878 $1,593 $285 $272,803$272,803 $1,878 $1,591 $287 $272,516$272,516 $1,878 $1,590 $289 $272,227$272,227 $1,878 $1,588 $290 $271,937$271,937 $1,878 $1,586 $292 $271,645$271,645 $1,878 $1,585 $294 $271,351$271,351 $1,878 $1,583 $295 $271,056$271,056 $1,878 $1,581 $297 $270,758$270,758 $1,878 $1,579 $299 $270,460$270,460 $1,878 $1,578 $301 $270,159$270,159 $1,878 $1,576 $302 $269,856$269,856 $1,878 $1,574 $304 $269,552

WPRINBOP WRAP PMT WRAP INT W AMORT WPRIN-EOPS-Mtg BOP Sell PMT Sell INT Sell AMORT S-MTG EOP Excess to

$0 $0 $0 $0 $0 $0$57,561 $391 $336 $55 $57,505 $71$57,505 $391 $335 $56 $57,450 $71$57,450 $391 $335 $56 $57,394 $71$57,394 $391 $335 $56 $57,337 $71$57,337 $391 $334 $57 $57,281 $71$57,281 $391 $334 $57 $57,224 $71$57,224 $391 $334 $57 $57,166 $71$57,166 $391 $333 $58 $57,108 $71$57,108 $391 $333 $58 $57,050 $71$57,050 $391 $333 $58 $56,992 $71$56,992 $391 $332 $59 $56,933 $71$56,933 $391 $332 $59 $56,874 $71$56,874 $391 $332 $59 $56,815 $71$56,815 $391 $331 $60 $56,755 $71$56,755 $391 $331 $60 $56,695 $71$56,695 $391 $331 $60 $56,634 $71$56,634 $391 $330 $61 $56,574 $71$56,574 $391 $330 $61 $56,512 $71$56,512 $391 $330 $62 $56,451 $71$56,451 $391 $329 $62 $56,389 $71$56,389 $391 $329 $62 $56,327 $71$56,327 $391 $329 $63 $56,264 $71$56,264 $391 $328 $63 $56,201 $71$56,201 $391 $328 $63 $56,138 $71

Reduce THIS...

Real Estate Finance


WRAP YieldsYear T-PMT

($219,520)

1 $16,9902 $16,9903 $16,9904 $16,9905 $16,9906 $223,2167 $08 $09 $0

10 $011 $012 $013 $014 $015 $016 $017 $018 $019 $020 $021 $022 $023 $024 $025 $026 $027 $028 $029 $030 $0

IRR Annual Lender 6.89%Monthly

W-PMT S-PMT

$0 $0($276,386) $0

$22,540 $4,694$22,540 $4,694$22,540 $4,694

$281,178 $58,950$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0

6.70%

Excess SellTotal

$0 $0$0 ($57,561)

$856 $5,550$856 $5,550$856 $5,550

($989) $57,962$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0$0 $0

SellerAnnual 7.65%Monthly 7.73%

Real Estate Finance


Purchase Money Mortgage: PMM

• Advantages• Allow borrower to qualify • Pay more than could afford• Hold price for seller• Quick approvals

• Disadvantages• Title not as clearly held by buyer• Seller retains claim• Seller services loan• Buyer may not be able to make step

Real Estate Finance


PMM Visual

Cash Flows

Principal

Real Estate Finance


PMM Case

Traditional Mortgage InputsPurchase Price 280,000$ Mortgage Terms





Purchase Money MortgagePMM LV 90%PMM Rate 8%Term 10Periodicity 12

Financial Structure (Calculated)Traditional First Mortgage 224,000$ PMM 28,000$ Equity 28,000$ Total Capital 280,000$

Real Estate Finance


Mechanics of PMM

Year Mo T-BOP T-PMT T-INT T-AMORT T-EOP($217,280) 224000

1 1 $224,000 $1,416 $1,213 202.50$ $223,7981 2 $223,798 $1,416 $1,212 203.60$ $223,5941 3 $223,594 $1,416 $1,211 204.70$ $223,3891 4 $223,389 $1,416 $1,210 205.81$ $223,1831 5 $223,183 $1,416 $1,209 206.92$ $222,9761 6 $222,976 $1,416 $1,208 208.04$ $222,7681 7 $222,768 $1,416 $1,207 209.17$ $222,5591 8 $222,559 $1,416 $1,206 210.30$ $222,3491 9 $222,349 $1,416 $1,204 211.44$ $222,1381 10 $222,138 $1,416 $1,203 212.59$ $221,9251 11 $221,925 $1,416 $1,202 213.74$ $221,7111 12 $221,711 $1,416 $1,201 214.90$ $221,4962 13 $221,496 $1,416 $1,200 216.06$ $221,2802 14 $221,280 $1,416 $1,199 217.23$ $221,0632 15 $221,063 $1,416 $1,197 218.41$ $220,8452 16 $220,845 $1,416 $1,196 219.59$ $220,6252 17 $220,625 $1,416 $1,195 220.78$ $220,4042 18 $220,404 $1,416 $1,194 221.98$ $220,1822 19 $220,182 $1,416 $1,193 223.18$ $219,9592 20 $219,959 $1,416 $1,191 224.39$ $219,7352 21 $219,735 $1,416 $1,190 225.60$ $219,5092 22 $219,509 $1,416 $1,189 226.82$ $219,2822 23 $219,282 $1,416 $1,188 228.05$ $219,0542 24 $219,054 $1,416 $1,187 229.29$ $218,825

PMM P-PMT P-INT P_AMT PMM EOPTot-PMT

$28,000 $340 $187 $153 $27,847 $1,756$27,847 $340 $186 $154 $27,693 $1,756$27,693 $340 $185 $155 $27,538 $1,756$27,538 $340 $184 $156 $27,382 $1,756$27,382 $340 $183 $157 $27,224 $1,756$27,224 $340 $181 $158 $27,066 $1,756$27,066 $340 $180 $159 $26,907 $1,756$26,907 $340 $179 $160 $26,747 $1,756$26,747 $340 $178 $161 $26,585 $1,756$26,585 $340 $177 $162 $26,423 $1,756$26,423 $340 $176 $164 $26,259 $1,756$26,259 $340 $175 $165 $26,095 $1,756$26,095 $340 $174 $166 $25,929 $1,756$25,929 $340 $173 $167 $25,762 $1,756$25,762 $340 $172 $168 $25,594 $1,756$25,594 $340 $171 $169 $25,425 $1,756$25,425 $340 $169 $170 $25,255 $1,756$25,255 $340 $168 $171 $25,083 $1,756$25,083 $340 $167 $172 $24,911 $1,756$24,911 $340 $166 $174 $24,737 $1,756$24,737 $340 $165 $175 $24,562 $1,756$24,562 $340 $164 $176 $24,386 $1,756$24,386 $340 $163 $177 $24,209 $1,756$24,209 $340 $161 $178 $24,031 $1,756

Real Estate Finance


PMM YieldsYear T-PMT T-EOP

($217,280)1 $16,990 $221,4962 $16,990 $218,8253 $16,990 $215,9754 $16,990 $212,9335 $16,990 $209,6896 $16,990 $206,2267 $16,990 $202,5328 $16,990 $198,5919 $16,990 $194,386

10 $16,990 $189,89911 $16,990 $185,11112 $16,990 $180,00313 $16,990 $174,55314 $16,990 $168,73715 $16,990 $162,53216 $16,990 $155,91217 $16,990 $148,84918 $16,990 $141,31219 $16,990 $133,27020 $16,990 $124,69021 $16,990 $115,53622 $16,990 $105,76823 $16,990 $95,34624 $16,990 $84,22625 $16,990 $72,36126 $16,990 $59,70227 $16,990 $46,19528 $16,990 $31,78329 $16,990 $16,40730 $16,990 $0

PMM-PMT PMM-INT POO-Am PMM-EOP($28,000)

$4,077 $2,171 $1,905 $26,095$4,077 $2,013 $2,064 $24,031$4,077 $1,842 $2,235 $21,796$4,077 $1,656 $2,420 $19,376$4,077 $1,455 $2,621 $16,754$4,077 $1,238 $2,839 $13,915$4,077 $1,002 $3,074 $10,841$4,077 $747 $3,330 $7,511$4,077 $471 $3,606 $3,905$4,077 $171 $3,905 ($0)

$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)$0 ($0) $0 ($0)

Lender

Seller

IRR Calculations7.49%

Real Estate Finance


Operating Period Mortgages

Real Estate Finance


Lecture Summary

• Mortgages– Mortgage Process– Mortgage Risk Management– Mortgage Concepts– Mortgage Transfer– Foreclosure & Bankruptcy

• Types of Loans– Typology of Mortgages– Mortgage Regulations– Mortgage Mechanics: Introduction

Documents

Lecture 5: Front-end Mortgages