Chapter 9 - Real Estate Fixed-Income Investments Flashcards
Keyword ‘Balloon payment’
Large scheduled future payment
Keyword ‘Collateralized mortgage obligations (CMOs)’
Extend the MBS mechanism to create different bond classes called tranches that have different priorities to receiving cash flows and therefore have different risks.
Keyword ‘Commercial mortgage loans’
Largely taken out by corporations or other legal entities. The risk of mortgages on commercial properties often focuses on the rental income generated by the property that can be used to make the mortgage payments.
Keyword ‘Commercial mortgage-backed securities (CMBS)’
Mortgage-based securities with underlying collateral pools of commercial property loans.
Keyword ‘Conditional prepayment rate (CPR)’
Annualized % of a mortgage’s remaining principal value that is prepaid in a particular month.
Keyword ‘Contraction risk’
Dispersion in economic outcomes caused by uncertainty in the longevity, especially decreased longevity, of cash flow streams.
Keyword ‘Covenants’
Promises made by the borrower to the lender and can require the borrower to maintain the property and continue to meet specified financial conditions.
Keyword ‘Cross-collateral provision’
When the collateral for one loan is also utilized for some other loan.
Keyword ‘Debt service coverage ratio (DSCR)’
Concerned with the coverage of all loan payments, including the amortization of the loan.
Keyword ‘Default risk’
Dispersion in economic outcomes due to the actual or potential failure of a borrower to make scheduled payments.
Keyword ‘Equity REITs’
Invest predominantly in equity ownership within the private RE market
Keyword ‘Extension risk’
Dispersion in economic outcomes caused y uncertainty in the longevity, especially increased longevity, of cash flow streams.
Keyword ‘Fixed-rate mortgages’
Fixed-rate constant payment, fully amortized loan has equal monthly payments throughout the life of the loan. Value of loan subject to interest rate and inflation risk.
Keyword ‘Floating-rate tranches’
A floating-rate collateralized mortgage obligation (CMO) tranche whose coupon rate is determined by a formula based on an interest-rate index such as LIBOR.
Keyword ‘Hybrid REITs’
REITs that invest in both markets (mortgage and equity) and do not comply with either 75% cutoff.
Keyword ‘Idiosyncratic prepayment factors’
Factors other than interest rates or other systematic factors that affect prepayment decisions. Prevent the specification of a precise relationship between unscheduled prepayment and interest rate levels, and option pricing models that assume exercise behaviour based solely on interest rates should not be used.
Keyword ‘Index rate’
Variable interest rate used in determination of the mortgage’s stated interest rate
Keyword ‘Interest coverage ratio’
Property’s net operating income divided by the loan’s interest payments. It allows the lender to analyse the level of protection they have in terms of the borrower’s ability to service the debt from the property’s operating income.
Keyword ‘Loan-to-value (LTV) ratio’
Ratio of the amount of the loan to the value (either market or appraised) of the property.
Keyword ‘Margin rate’
Spread by which the stated mortgage rate is set above the index rate
Keyword ‘Mortgage’
Loan secured by a property
Keyword ‘Mortgage REITs’
Mortgage REITs invest predominantly in RE based debt
Keyword ‘Mortgage-backed securities (MBS)’
Type of asset-backed security that is secured by a mortgage or pool of mortgages.
Keyword ‘Option adjustable-rate mortgage loans’
Adjustable-rate mortgage that provides borrowers with the flexibility to make one of several possible payments on their mortgage every month.
Keyword ‘Prepayment option’
Viewed as a call option on the value of the debt, the option may also be viewed as a put option on interest rates.
Keyword ‘PSA benchmark’
Public Securities Association (PSA) established a benchmark of prepayment speed titled the PSA Prepayment Benchmark that is based on the CPR (conditional prepayment rate)
Keyword ‘Recourse’
Recourse includes how the loan is secured, such as the potential ability of the lender to take possession of the property in the event of a default and the potential ability of the lender to pursue recovery from the borrower’s other assets.
Keyword ‘REITs (Real estate investment trusts)’
Entity structured much like a traditional operating corporation except that the assets of the entity are almost entirely RE.
Keyword ‘Residential mortgage loans’
Typically taken out by individual households that generate no explicit rental income if the houses are owner occupied. Therefore, the credit risk of residential mortgages depends on the borrowers income and financial position, in addition to the characteristics of the property.
Keyword ‘Residential mortgage-backed securities (RMBS)’
Mortgage-based securities with underlying collateral pools of residential property loans (usually insured).
Keyword ‘Sequential-pay collateralized mortgage obligation’
Simplest form of Collateralized mortgage obligations
Keyword ‘Subprime mortgages’
Uninsured mortgages with borrowers of relatively high credit risk
Keyword ‘Tranche’
Security class that is created, typically with other tranches, in the structuring or division of an asset’s cash flows, risks, and returns.
Keyword ‘Unscheduled principal payments’
Payments above and beyond the scheduled mortgage payments
Keyword ‘Variable-rate mortgages’
Also known as adjustable-rate mortgages (ARM). Interest rate is periodically adjusted by the lender, generally to reflect changes in underlying short-term market interest rates.
True or false: When interest rates decline, the life of junior tranches will be extended, thereby extending the expected life of the tranche further than originally expected.
False
Which of the following alternatives is least likely to be a factor that influences prepayment rates: the current level of mortgage rates relative to the rates being charged on the loans in the pool, the path that mortgage rates have followed to arrive to the current interest rate level, the type of mortgages in the pool, or the weather of the geographical area from which the pool of mortgages originates?
The weather
