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SyllabusRealEstateCapitalMarkets–FallSemesterAY2016-17Thissyllabusissubjecttofuturerevisions
InstructorProfessor:ArpitGuptaOffice:KMC9-53Email:[email protected]
OfficeHours:Tuesday5-6pm,orbyappointment.
TeachingAssistantsDarrenBredaEmail:[email protected]
ClassTimeTheclassmeetsMondaysandWednesdaysfrom11am-12:15pmfor15weeks.ThevenueisKMC5-75.ThefirstclassisonSeptember7,andthelastclassisonDecember14.ThereisnoclassonOctober10orNovember23.TherewillbeanadditionalclassonDecember13.
ContentReal Estate CapitalMarkets studies debt and equity secondarymarkets linked to real estateassets.InRealEstateCapitalMarkets,wegenerallytaketheperspectiveofasecondarymarketinvestor, suchasan investor inmortgage-backedsecurities,or thecommonequityofaREIT.The course places considerable emphasis on securitization, the housing finance system, theGSEs, the subprime mortgage crisis and related topics. The course will be relevant both topeoplewithaninterestinrealestate,andthoseinterestedinfixedincomemarkets.On the debt side, we will study features of commercial and residential mortgages, andmortgagemath.Wewill thenanalyzeagencyandnon-agencymortgage-backedsecurities,aswell as some related instruments, such as CDOs.We will discuss the key factors that drivedefaultriskandinterestrateriskoncommercialandresidentialmortgages,andlearnthebasicprinciplesforthevaluationofmortgage-backedsecurities,takingintoaccountthevalueoftheprepaymentoptionembedded insuchsecurities.Wewillcoverthehistoricaldevelopmentofmortgagesecondarymarkets, the institutionalstructureof thissector (e.g. theroleofFannieMae, Freddie Mac and Ginnie Mae), and the process of securitization. We will also discussalternative funding sources to securitization, such as covered bonds, syndication, depositfinanceandFHLBadvances.Wewillalsodiscussthecausesandconsequencesofthefinancialcrisis,whichhasimportantimplicationsforbothcommercialandresidentialrealestatefinance.
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Ontheequityside,wewillstudyRealEstateInvestmentTrusts(REITs),whicharetheprimarytraded equity structure used for real estate. This will include a discussion of the legal andinstitutionalframeworkoftheREITindustry,taxissues,andREITvaluation.
Sincebothdebtandequity claimsdepend fundamentallyon thevalueof theunderlying realestateassets,wewillalsocoverthemeasurementofrealestateprices,recentmarkettrends,fundamentaldeterminantsofprices,andvaluationapproaches.Wewillalsospendsometimecoveringinternationalaspectsofrealestatecapitalmarkets(e.g.coveredbonds).Dependingontimeandclassinterests,wemayalsospendtimecoveringothertopics,suchasrealestateinvestmentbankingorCase-Shillerhousingfuturescontracts.Classtimewillbedevotedtoamixofformallectures,in-classexercisesandguestlecturesfromWall Street professionals. The course is amix of qualitative and quantitativework. StudentsshouldexpecttobedoingafairamountofcashflowmodelinginExcel,aswellasfixedincomemathematics.
PrerequisitesTheonlyformalpre-requisiteforthiscourseisFoundationsofFinance.ItishelpfultohavetakenCorporateFinanceforthiscourse.
ReadingsandFinancialCalculatorSincemostofthetopicsstudiedintheclassarenotwellcoveredinanysingletext,thereisnorequired textbook for theclass.Primarymaterials for thecourseare the lecturenotes,plusreadingsforeachclassthatwillberegularlypostedonNYUClasses.Someofthesereadingswillberequired,otherswillbeoptionalorbackgroundreadingforinterestedstudents.(Thiswill bemade clear on Classes). Other classmaterials such as assignments, practice exams,courseannouncementsandsoonwillalsobepostedonClasses.
Althoughyouwillnotneedtopurchaseatextbook,youarestronglyencouragedtoreadtwobooksthatcloselyrelatetothediscussioninclass,andwhichwillbecoveredbyassignmentquestionsforextracredit.ThesebooksareavailableonAmazonandinbookstores.
Lewis,Michael,1989,Liar'sPoker,PenguinBooks,NY,NY,ISBN0-393-02750-3.ThechaptersmostrelevanttothiscourseareCh5,6and7(thesewillbediscussedinweek3/4),buttheentirebookisrecommended.Thisbookgivesaclear,entertainingaccountofthebirthofthemortgage-backedsecuritiesmarket.
McLean, Bethany, 2015, Shaky Ground: The Strange Saga of the U.S. Mortgage Giants,ColumbiaGlobal Reports, ISBN 978-0990976301. This short book (159 pp.) provides a vividoverview of the history and downfall of Fannie Mae and Freddie Mac, as well as recentdevelopments(includinghighprofilelawsuitsbyinvestorsagainsttheUSgovernment).
Forcontextonthehousingboomandthesubprimecrisis,youarealsoencouragedtowatchtherecentblockbustermovie“TheBigShort” (Dec2015),basedontheMichaelLewisbookwiththesametitleandfeaturingChristianBale,BradPitt,SteveCarell,andRyanGosling.
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Inaddition,wewillmakereference(eitherinclassorinassignments)tothreeHarvardBusinessSchool cases during the course. A course packet containing these cases will be available topurchaseinelectronicformfromtheNYUbookstore:
“Mortgage-Backs at Ticonderoga”, HBS Case 205-122, 2005. George Chacko, Peter Hecht,VincentDessain,AndersSjoman.
“RosetreeMortgageOpportunityFund”,HBSCase9-209-088,2009,VictoriaIvashina,AndreF.Perold.
“Cypress Sharpridge: Raising Capital in a Time of Crisis”, HBS Case 9-310-140, 2010, LenaG.Goldberg,AdamNebesar.
Financialcalculator:
Afinancialcalculatorwillberequired for thecourseand forexams, toperformbasicannuityandpresentvaluetypecalculations.Anyfinancialcalculatorwilldo,aslongasyouunderstandhowtouseit.However,wewillbeusingaTexasInstruments:TI-BAIIPlus,andwillsometimesrefertoitinclass.[N.B.StudentsinterestedinobtainingCFAcertificationshouldnotethatthetwoapprovedcalculators forCFAexamsare theTI -BA IIPlus, and theHewlettPackard:HP12C.]
OptionalReferenceMaterialsThebookslistedbelowarerelevantforvariousaspectsofthecourse,andatvariouspointsmaterialfromthebookswillbereferredtointhelectures.Interestedstudentswhowanttogainanin-depthunderstandingofparticularaspectsofthecourseshouldfeelfreetoconsultmeaboutpurchasingoneormoreofthetextsbelow.Noneofthemarerequired,however.
Itshouldbenotedthatmanyofthetextslistedbelowpredatetherecentmortgagecrisis,andoftentheboominnon-agencyMBSthatprecededit.Forthisreason,thebooksaregenerallyarelativelybetterguidetotheagencymortgagemarket.
Textbooksandtechnicalbooks
1.Fabozzi,BhattacharyaandBerliner,“Mortgage-BackedSecurities:Products,StructuringandAnalyticalTechniques”,ISBN978-0-470-04773-6,WileyandSons,2007.
Well-writtenoverviewofmortgageandMBSfixed-incomemarkets,includingprepayment,default,valuation,etc.
2.DavidsonandLevin,“MortgageValuationModels:EmbeddedOptions,Risk,andUncertainty”,ISBN978-0-199-99816-6,OxfordUniversityPress,2014.
State-of-the-artreferenceonvaluationmethodsforagencyandnon-agencyMBS,emphasizingtherelationshipwiththeCAPMandarbitragepricingtheory.
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3.Davidson,Sanders,Wolff,andChing,“Securitization:StructuringandInvestmentAnalysis”ISBN:978-0-471-02260-2,576pages,September2003.
Coversarangeofdifferentsecuritizationmarkets,notjustMBS.IncludesagoodintuitivediscussionofpricingandOAS.
4.Hayre,“SalomonSmithBarneyGuidetoMortgage-backedSecurities,”WileyandSons,Inc,2001.
SalomonBrotherspioneeredtheunderwriting,trading,andmodelingofmortgage-backedsecuritiesinthe1980s,asdescribedinLiar’sPoker.
5.Fabozzi,2006,“HandbookofMortgage-BackedSecurities”,6thEdition,McGraw-HillTrade,ISBN0-07-146074-8.
ContainschaptersonvariousaspectsoftheMBSmarket,writtenbyindustryprofessionals.Whilelengthyandbroadinscope,itislessusefulthan(1)asapedagogicaltoolforlearningaboutMBSmarkets.
6.GarriganandParsons,1997,“RealEstateInvestmentTrusts:Structure,AnalysisandStrategy”,McGraw-HillIrwin,ISBN0-7863-0002-7.
ContainsawealthofinstitutionalinformationaboutREITs.
7.BrueggemanandFisher,“RealEstateFinanceandInvestments”,Irwin2008,13thEdition.
8.PoorvuandCruikshank,“TheRealEstateGame:TheIntelligentGuidetoDecision-MakingandInvestment”,FreePress1999.
Thesetwobooks(7)and(8)areusefuloveralltextsonrealestatefinanceandrealestateinvesting(notspecificallyfocusingonrealestatecapitalmarkets).
Popular/generalreading
1.RobertShiller,2008,“TheSubprimeSolution:HowToday’sGlobalFinancialCrisisHappenedandWhattoDoAboutIt”,PrincetonUniversityPress,ISBN13:978-0-691-13929-6.
Ashort,straightforwardaccountofthecausesofthesubprimemortgagecrisis,aswellasasetofpolicysuggestions.RobertShilleralsowrotethewell-knownbookIrrationalExuberance,whichpredictedthecollapseoftheinternetstockmarketbubble.
2.RichardBitner,2008,“ConfessionsofaSubprimeLender:AnInsider’sTaleofGreed,FraudandIgnorance”,Wiley,ISBN978-0470402191.
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Aformerownerofamortgagecompanyservingthesubprimemarketexplainsclearlyandindetailthestructureofthatmarket,andvariousincentiveproblemsthathelpedleadtothecrisis.
3.EdwardGramlich,2007,“SubprimeMortgages:America’sLatestBoomandBust”,UrbanInstitutePress,ISBN978-0877667391.
AformerFederalReservegovernordiscussesthegrowthinsubprimelending,andeventsthatleduptothesurgeinmortgagedefaultsthatledtothefinancialcrisis.
4. Atif Mian and Amir Sufi, 2014, “House of Debt: How They (And You) Caused the GreatRecession and HowWe Can Prevent It from Happening Again”, University of Chicago Press,ISBN:9780226081946.
NewbookontheroleofhousingdebtintheGreatRecession.
StayingUp-to-DateYouarestronglyencouragedtofollowrealestatefinancenews,broadlydefined.Ifyouencounteraninterestingarticlethatyouwouldliketosharewiththeclass,pleasesendmeanemailandIwillpostitontheclasswebsite.
ClassroomCivilityYourbehaviorshouldrespectyourclassmatesdesiretolearn.Eachlecturebeginsandendsexactlyontime.Iunderstandyourbusyschedules,buttrynottocomelate.Becauseoftheclassroomlayout,itisdisruptivenomatterhowquietyouare.Ifyoumustmissaclassormustcomelate,pleaseletmeknowbyemailbeforehand.
Whilelaptopshaveadvantagesintheclassroom,theyalsohavethepotentialtohamperyourownlearningexperienceaswellasthatofyourneighbors.Pleaserestrictyourlaptopusagetoinclasscalculations.
TheuseofBlackberries,iPhones,iPads,cellphones,andsimilardevicesisnotallowed.Pleaseturnthemoffbeforeenteringclass.Donotengageinsideconversationsduringthelecture.Repeatedoccurrenceofsuchdisruptionswillbereflectedinthefinalgrade.
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GradingandAssignmentsThedistributionofoveralllettergradesforthecoursewillreflectStern’sguidelines.Yourfinalcoursegradewillbebasedonthefollowing:
Assignments:20%
Midtermquiz:10%or30%
Finalexam:60%or40%.
Classattendanceandparticipation:10%
Notethatthereissomeflexibilityinthegradingscheme,i.e.thebalancebetweenthemidtermand final exam. Your midterm exam will be worth either 10% or 30% of your final grade,dependingonhowwellyoudointhemidtermrelativetothefinal. I’llcorrespondinglyadjusttheweight on the final exam (e.g. if yourmidtermweight is 30%, your final examweight is40%).Thisadjustmentwillbedoneautomaticallybymeinawaythatmaximizesyouroverallgrade.Theintentionhereistoprovidesomeinsuranceforyouincaseyou“haveabadday”onthedateofthemidtermorthefinalexam.
Therewillbefiveassignmentspostedoverthecourseofthesemester.Youareencouraged,tocomplete these assignments in a group of up to three people, and submit a single groupanswer.Whenyousubmityourassignmentonline,pleasemakesureyouwritethenamesofallthemembers of the group on the assignment. The assignments are due onMonday beforeclass.Unlessexceptionalcircumstancesapply, lateassignmentswillnotbeaccepted.Youareresponsibleifanothermemberofyourgroupfailstosubmittheassignmentontime.
HonorCodeYouareresponsibleformaintainingStern'sHonorCodewhichmandateszerotoleranceforcheatingandplagiarism.Violationsofthehonorcodewillbeprosecutedwithaminimumpenaltyoffailureforthecourse,asrequiredbycodeofconductrules.Ifyoubecomeawareofanyviolationsofthehonorcodeyoumusttakewhateverstepsarenecessarytostoptheviolators.Perrequestofthedean,youmustincludeasignedstatementatthetopofeachproblemsetandexam,indicatingthatyouadheretothehonorcode.Thestatementis:“IpledgemyhonorthatIhavenotviolatedtheSternHonorCodeinthecompletionofthisexam/problemset.”ItisinyourbestinterestthatthemarketplaceknowsthatSterntakeshonestyseriously;itaddstothevalueofyourdegree.
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ClassSchedule(Tentative,willbeupdatedregularly)
Week Date Materialtobecovered
1 Sep7 Introduction
• Courseoutlineandintroduction• Measurementofcommercialandresidentialpropertyprices
2 Sep12,14 RealEstatepricedynamicsandmortgages
• Economicdeterminantsofrealestateprices• PrimerontheUSmortgagemarket• Structureofcommercialandresidentialmortgagecontracts
3 Sep19,21 Themortgagefinancesystem
• Mortgagemathematics(e.g.calculatingpoints,NPV,prepaymentsetc.)• Securitizationandthefundingofresidentialandcommercialmortgages• Theroleofgovernment:GSEs,FHA,GinnieMae• Passthroughsecuritiesversuscollateralizedmortgageobligations(CMOs)
4* Sep26,28 MortgagerisksandtheAgencyMBSMarket
• Mortgagerisks:(i)interestraterisk,(ii)creditrisk,(iii)prepaymentrisk• AgencyMBSpoolsandthelinktotheprimarymortgagemarket• Trading,liquidity,andtheTBAmarket
*Assignment1dueby11amonSep26
5 Oct3,5 Introductiontoprepaymentrisk
• Understandingprepaymentriskandwhyitmatters• CashflowmodelingofagencyMBS
6 Oct12 Prepaymentrisk(contd.)
• Modelingprepaymentrisk
7* Oct17,19 Mortgagevaluation,andCMOs
• Estimating expected returns: static yield spreads and option adjustedspreads(OAS)
• UnderstandingCMOs• CashflowmodelingofCMOs
*Assignment2dueby11amonOctober17
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8 Oct24,26 HBSCase:MortgageBacksatTiconderoga[TBC]
Mortgagedefaults&residentialdefaultmodeling
• Driversofmortgagedefaultsandcreditlosses• Defaultmodelingforresidentialmortgages
9 Oct31,Nov2 MidtermquizOctober31
Guestlecturer:Nov2,TBD
10 Nov7,9 Thenon-agencyMBSmarketandthecrisis
• Non-agencymarketstructuring(waterfallsetc.)• Thesubprimecrisis• Governmentresponsestothecrisis• ConservatorshipsoftheGSEsandthefutureofhousingfinance
11* Nov14,16 Commercialrealestateandcommercialmortgages
• IntroductiontocommercialrealestateGuestlecturer:TBD*Assignment3dueat11amonNovember14
12 Nov21 Commercialrealestate
• Structureandperformanceofcommercialmortgages
13 Nov28,30 CommercialSecuritiesandREITs
• CommercialMortgageBackedSecurities(CMBS)• IntroductiontoRealEstateInvestmentTrusts(REITs)
14* Dec5,7 REITs(cont.)
• REITs:Taxtreatmentotherbenefits• REITvaluationmethodsGuestlecturer:TBD
*Assignment4dueat11amonDecember5
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15* Dec12,13,14 REITS,andInnovationsandderivativesinrealestatecapitalmarkets
• Innovationsandfeaturesofforeignmarkets• Coveredbonds,realestatefutures• CDOs,CDSandsyntheticCDOs• RisksharingdealsbytheGSEs
*Assignment5dueat11amonDecember12
16 December21 Finalexam,4pm
InformationabouttheUndergraduateRealEstateTrack
TheRealEstateTrackprovidesrigoroustrainingin(i)theeconomicsofrealestatedevelopmentand
investment,thefinancingsuchprojects,leasing,andappraisalofbuildings,(ii)thepricing/valuationandtradingoffinancialinstrumentswithrealestateastheunderlying,suchRealEstateInvestmentTrusts(REITS),residentialandcommercialmortgage-backedsecurities(MBS),andrelatedderivativeand
structuredfinanceproductssuchascollateralizeddebtobligations(CDOs),creditdefaultswaps(CDS),andindexproducts(CDX,ABX,etc.),and(iii)theworkingsofrealestateprimaryandsecondarymarkets,includingthevariousparticipantsinthesemarkets,theirroles,and(iv)thelegal,taxation,and
regulatoryenvironment.Electivecoursescanbechosentoemphasizethecommercialrealestatedevelopmentprocess(REDfocus)ortheinvestmentstrategiesinrealestatecapitalmarkets(REFfocus).Withanappropriatechoiceofelectivecourses,thistrackprovidesin-depthpreparationforcareersin
realestatedevelopment,realestatebrokerage,realestateprojectinvestmentforprivateequityfirms,familyoffices,sovereignwealthfunds,andcareersinrealestatefinanceinthefixedincomeorequitydesksofinvestmentbanks(research,sales&trading),hedgefunds,andsovereignwealthfunds.
Prerequisites
• SternBusinessTools• Law,Business,andSociety• FoundationsofFinancialMarkets(FINC-UB.0002)
Essentials
• CorporateFinance(FINC-UB.0007,req:FoundationsofFinancialMarkets)• RealEstateTransactions(MULT-UB.0051)
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• RealEstatePrimaryMarkets(FINC-UB.0039,co-req:CorporateFinance)• RealEstateCapitalMarkets(FINC-UB.0038,req:FoundationsofFinancialMarkets)
AdvancedElectives–Fourcoursesfromthefollowinglist,ofwhichatleastoneofthefirsttwocourses.
Thecoursesdenotedby[REF]aremoreinterestingforstudentswhowanttospecializemoretowards
arealestatefinancespecialization,whereasthecoursesdenotedwith[RED]aremoreinterestingforstudentswhowanttofocusonthedevelopment,directinvestment,ormanagementofproperty.
• [RED]RealEstateDevelopmentandEntrepreneurship(MULT-UB.0050)• [REF]RealEstateInvestmentStrategies(FIN-UB.00XX)
• [RED]UrbanEconomics(ECON-UA227–CAS)• [RED/REF]FinancialStatementAnalysis(ACCT-UB.0003)• [RED]TaxationofIndividuals(ACCT-UB.0063)• [REF]RiskManagementinFinancialInstitutions(FINC-UB.0022)• [RED/REF]TopicsinEmergingFinancialMarkets(FINC-UB.0023)• [REF]DebtInstruments(FINC-UB.0026)• [RED/REF]BehavioralFinance(FINC-UB.0029)• [REF]EquityValuation(FINC-UB.0041)• [RED]TopicsinEntrepreneurialFinance(FINC-UB61)• [RED]Mergers,Acquisitions,andRestructuring(FINC-UB50)• [REF]MonetaryPolicyandtheFinancialSystem(ECON-UB221)• [REF]MacroeconomicFoundationsforAssetPrices(ECON-UB233)• [RED]StrategicAnalysis(MGMT-UB18)• [RED/REF]NegotiationandConsensusBuilding(MGMT-UB30)
FormoreinformationontheSternundergraduatetracksystem,pleaseseehttp://www.stern.nyu.edu/portal-partners/current-students/undergraduate/academics/tracks/index.htm
Academicadvisorfortherealestatetrack:Prof.StijnVanNieuwerburgh
