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SyllabusRealEstateCapitalMarkets–FallSemesterAY2016-17Thissyllabusissubjecttofuturerevisions

InstructorProfessor:ArpitGuptaOffice:KMC9-53Email:arpit.gupta@stern.nyu.edu

OfficeHours:Tuesday5-6pm,orbyappointment.

TeachingAssistantsDarrenBredaEmail:db3246@stern.nyu.edu

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