Sources and Uses of Real Estate Credit

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Chapter 4

• Sources and Uses of Real Estate Credit

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Where the Money Comes From

• Money moves through a complex network of
  financial institutions, from those who save to
  those who invest in real estate assets. Central
  figures are
• Savers
• Savings depository institutions
• Mortgage originators
• Secondary market expediters
• Final capital users

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Figure 4.1
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An Industry in Transition

• Three types of financial intermediaries
  traditionally dominated the real estate mortgage
  lending industry
• Commercial banks
• Thrift institutions
• Life-insurance companies

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An Industry in Transition (continued)

• Pension groups have entered the mortgage-lending
  arena
• Today, conduit financing, provided by commercial
  mortgage-backed securities, has emerged as one
  of the most popular and dominant forms of
  financing

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Figure 4.2
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Major Mortgage Lenders

• Commercial banks are one of the largest sources
  of new real estate mortgage loans heavily
  concentrated in construction financing
• Savings associations and savings banks
• Life insurance companies

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Figure 4.3
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Figure 4.4
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Table 4.1
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Other Sources of Third-Party Loans

• Real estate investment trusts (REITS)
• Operate much like closed-end mutual funds with
  income tax advantages
• Raise funds by issuing their own shares, bonds,
  and commercial paper and by borrowing
• Equity REITS, Mortgage REITS, Hybrid REITS
• About 300 REITS operate in the United States today

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Other Sources of Third-Party Loans (continued)

• Pension funds
• Federal credit unions
• Mortgage companies
• Secondary mortgage market
• Federal Home Loan Mortgage Corporation (Freddie
  Mac)

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Figure 4.5
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Table 4.2
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Where the Money Goes

• Construction loans (called interim loans)
• Permanent financing
• Standby financing
• Conduit lending (CMBS)

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CMBS Lending

• Conduit loans (CMBS) are a special type of
  financial instrument in which individual real
  estate mortgages are grouped together (pooled)
  and used as collateral for bond offerings
• Long-term lenders have increasingly adapted their
  underwriting guidelines and loan requirements to
  the CMBS market
• Conduit loans are typically nonrecoursethe
  lenders only recourse in the event of default is
  the property

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CMBS Lending (continued)

• Conduit loans prohibit prepayment for a number of
  yearsa major attraction for bond investors
• Escrow of impounded funds
• Standard underwriting practices and documentation
• Tranching is key to creating CMBS bonds

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Table 4.3