1. California Real Estate Finance Fesler & Brady 10th Edition
Chapter 1
Introduction to Real Estate Finance

2. Objectives After completing this chapter, you should be able to:
Describe current financing trends in the real estate market.
Trace the flow of money and credit into the mortgage market.
Discuss the role of the Federal Reserve System.
List five characteristics of the California mortgage market.
Explain and illustrate two basic types of promissory notes.
Describe the differences among a deed of trust, mortgage, and installment sales contract.

3. Outline Welcome to the Real World of Real Estate Finance
Short Overview of the Mortgage Market
The Meaning of Money
The Flow of Money and Credit into the Mortgage Market
Federal Control of the Money Supply
Cost Characteristics of the Mortgage Market
Instruments of Real Estate Finance
The Five-Step Financing Process

4. Welcome to the Real World of Real Estate Finance
Real Estate market in California
Booms
Early 1960s
1971 – 1973
1975 – 1979
1982 – 1989
2000 – 2006
Busts (High interest rates, government deficits, better investment opportunities)
1966
1969
1974
1980 – 1981
1990 – 1996 ?
Caused by disintermediation
flow of money out of thrift institutions into the general money market

5. “Fog a Mirror” loans Interest only Stated Income 100% Loans
Negatively Amortized Adjustable Rate Mortgage (Option ARM)

6. Money is… Money Near money Credit Coins Paper currency
Checking accounts (demand deposits) (along with debit cards)
Negotiable orders of withdrawal (NOW accounts)
Money market accounts
Near money
Savings accounts (time deposits)
U.S. government bonds
Cash value of life insurance
Preferred and common stocks publicly traded
Money market mutual funds
Credit
Credit cards
Overdrafts
Credit reserves
Home equity lines of credit

7. The Meaning of Money Created Accumulated
Cash
Checking Accounts
Accumulated
Wages, fees & commissions
Interest
Dividends
Profits
Rents
Ultimate source of funds for borrowing is savings

8. The Flow of Money and Credit into the Mortgage Market
Income is
Taxed
Spent
Saved
Savings go to financial institutions
Known as intermediation
Withdrawals from savings are known as disintermediation
Re-deposits are known as re-intermediation

10. Federal Control of the Money Supply (Slide 1 of 2)
Federal Reserve System
Issues currency
Monetary policy
Reserve requirements
A 20% reserve requirement means that $200 in reserves is needed for every $1,000 of deposits
The higher the requirement, the lower the lending
Open-Market operations
Fed buys and sells government securities
The more government securities sold, the lower the lending
Discount rates
Rate the Fed charges banks
The higher the rate, the lower the lending
Federal funds rate
Bank to bank borrowing rate
Prime rate
Rate banks charge preferred customers

12. Federal Control of the Money Supply (Slide 2 of 2)
U.S. Treasury
Government Spending
Government Taxing
Together known as Fiscal Policy
When spending exceeds taxing, inflation results
Housing prices rise
Fewer people can afford housing
Established and promoted
Federal National Mortgage Association (Fannie Mae)
Government National Mortgage Association (Ginnie Mae)
Federal Land Bank System
“Recovery Act” 2008
“Make Home Affordable” program 2009

13. Cost Characteristics of the Mortgage Market (Slide 1 of 3)
Deposit cost (Interest paid)
Borrowing costs (Underwriting and float)
Sales costs (Promotion costs)
Administration (Rent, utilities, etc.)
Reserves (?%)
Liquidity (Capital requirements)
Profit (for the shareholders)

14. Cost Characteristics of the Mortgage Market (Slide 2 of 3)
Interest rate changes due to
Excessive government spending
Large government borrowings
Inflation
Supply
Demand
Federal reserve actions

15. Cost Characteristics of the Mortgage Market (Slide 3 of 3)
California Mortgage Market
Large population and high demand
Financial institutions
Loan correspondents
Title companies
Security (Deed of trust)
Active secondary market
Diversification

16. Instruments of Real Estate Finance (Slide 1 of 2)
Promissory notes
Straight
Interest only
Installment
Both principal and interest
Balloon payments
Both principal and interest, but principal payments not large enough, so more is due at end of note
Negatively amortized
Payments not even enough to cover interest

17. Instruments of Real Estate Finance (Slide 2 of 2)
Deed of Trust (used in California instead of a mortgage)
Borrower – Trustor
Lender – Beneficiary
Third party – Trustee (Holds title until loan is paid in full)
Installment Sales Contracts
Title remains with seller
Seller is “lender”

19. The Five-Step Financing Process
Application (Chapter 10)
Analysis/Processing (Chapters 8 & 9)
Qualifying/Underwriting (Chapters 7 – 10)
Funding/Closing (Chapter 10)
Servicing (Chapters 10 & 11)

20. Questions and Comments?