Real Estate Financial and Investment Analysis 1 THE

Real Estate Financial and Investment Analysis 1 THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE • • • ASSET - LIABILITY MIX PROBLEM RATE CEILING CONSTRAINTS USURY CEILINGS DE-REGULATION OF LIABILITIES AND ASSETS ACTIVITY OF OTHER FINANCIAL INTERMEDIARIES AND WALL STREET

Real Estate Financial and Investment Analysis 2 ALTERNATIVE MORTGAGE INSTRUMENT DESIGN • INTEREST RATE RISK • INFLATION / DEFLATION

Real Estate Financial and Investment Analysis 3 INSTRUMENT MODIFICATION TO REDUCE RISKS OF INTEREST RATE UNCERTAINTY • PARTICIPATION IN EQUITY • SHORTENING OF MATURITIES

Real Estate Financial and Investment Analysis VRMs vs GPMs VRMs • VARIABLE PAYMENT / FIXED TERM • VARIABLE TERM / FIXED PAYMENT HYBRIDS • RESTRICTED VS. UNRESTRICTED GPMs • TOTAL BALLOON • INTEREST ONLY • PARTIAL PRINCIPLE PAYDOWN • AMORTIZED LOAN • GEM 4

Real Estate Financial and Investment Analysis DESIGN OBJECTIVES • • TILT PROBLEM OF BORROWER RATE RISK OF LENDER LONG RUN “PAYMENT RISK” BURDEN TO BORROWER SHORT RUN “PROPERTY VALUE RISK” TO LENDER 5

Real Estate Financial and Investment Analysis PROBLEMS INHERENT IN DESIGN OF MORTGAGES • INDEX CHOICE AND REAL RETURNS • SECONDARY MARKETABILITY 6

Real Estate Financial and Investment Analysis RISK MANAGEMENT STRATEGIES • HEDGING WITH FINANCIALS - FUTURES - OPTIONS • BETTER DURATION MATCHING OF ASSETS AND LIABILITIES • NO HOLD STRATEGIES - REMICs • DIVERSIFICATION OF BUSINESSES • RISK SHARING ALTERNATIVES THROUGH INSTRUMENT DESIGN 7

8 Real Estate Financial and Investment Analysis RISK MANAGEMENT STRATEGIES REDUCE RISK DEFENSIVE STRATEGY SYNTHETIC ALTERNATIVES OFFENSIVE STRATEGY

Real Estate Financial and Investment Analysis MODULE DEVELOPMENT • • TOOLS OF RISK MANAGEMENT PORTFOLIO BALANCE AND RISK-RETURN BALANCE DESIGN OF ALTERNATIVE MORTGAGE INSTRUMENTS HEDGING TECHNIQUES FOR “PIPELINE” ACTIVITIES LIQUIFICATION OF PORTFOLIO LIABILITY MANAGEMENT DIVERSIFICATION OF ASSETS 9