Guest lecture at Sussex University about mortgagtes, REITS, credit ratings, and securitization by Shaheryar Mian.

1. MORTGAGES, REIT’S,
SECURITIZATION, AND
CYCLES
Sussex University

3. UNDERSTANDING RISK AND MARKET RATES
• What is risk?
• Types of risks related to debt products
• Credit | Reinvestment | Liquidity | Inflation | Interest Rate
• Pricing Debt
• Duration for bonds | PV | Bond Equivalent Yield | Market Risk Premium
• Risk and return relationships (High v.s Low)
• Market risk premium
• Risk mitigation strategies
• Guarantees | Insurance | Reserve Funds | Extra collateral
Systematic risk Idiosyncratic risk
risk that affects all
securities – i.e:
market risk
risk of particular
security – i.e: firm-
specific risk,
diversifiable risk
Rise in energy prices
or risk that central
bank raises interest
rate.
Risk that your
pharmaceutical
product won’t get
regulatory approval

4. MORTGAGE
What is a mortgage and uses
(Minto survey)
Acquisitions | Refinancing
Mortgage Terms Amount | Term | LTV | Rate | Collateral
Types of mortgages Interest only | Interest and principal | Fixed
| Floating
Determination of mortgages
rates
Market interest rate | Risk Premium (i.e
liquidity) | Inflation | Economy | Bond
market | Housing market conditions
Major players
Banks | Mortgage brokers | Credit Unions |
Fannie / Freddie Mac
Obligations and recourse
Collateral | Default Provisions | Recourse
(collateral + personal liability) v.s Non-
recourse (collateral but no personal
liability)
Close to £250 billion in mortgage borrowings in 2016. More than
£10 milllion mortgage products outstanding (May 2019) in UK

5. FINANCING EXAMPLE FOR REAL
ESTATE DEVELOPMENT PROJECT
Senior Loan
Mezzanine
Loan
Land Equity
Escrow
Cash
vAbility to lead projects with leverage allows for
maximization of returns and enables acquisition of
assets well above the cash or equity holding of an
investor
vReal Estate development thus qualifies as a great
wealth generator (within reason and risk mitigation)

6. BANK BALANCE SHEET
• Nonbank Deposits by customers
• Borrowings
• Other Liabilities
• Loans and Leases
• Treasury securities
• Deposits at Federal Banks
• Other securities
ASSETS LIABILITIES
Capital reserve requirements for banks restrict their ability to lend. Therefore, they utilize
securitization as an off-balance sheet measure to increase liquidity.

7. • Deal specifics
• Size, location, and brand
• Debtor’s profile and credit history
• Financials of the project
• Collateral
• Counterparty analysis
FINANCING CONSIDERATIONS
FOR A LENDING INSTITUTION
The analysis leads the credit manager to assess the risk associated with extending the loan, pricing
the loan, determine the rate to extend, and conditions associated with the credit agreement.

8. WHAT IF YOU DEFAULT
• What is default
• Cure period | Negotiations
• Recourse v.s Non-recourse
• Receivership – assign new manager
• Guarantor provisions
• Cross-default provisions
• Collateral seizure

9. REITS (1/3)
• What is a REIT and uses
• A real estate trust that earns yields from a diverse base of income producing
properties
• REIT structure
• REIT market
• 37 markets with market cap of $1.7 TRLN (E&Y)
• Listed on exchanges like NYSE and NASDAQ
• Major REIT players
• American Tower – circa $62 billion market cap (builds and leases radio towers)
• Simon Property Group – circa $52 billion market cap (operates malls and outlet
centers)

11. REITS (2/3)
• REITS v.s Real Estate
• Better and more diversified sources of capital than private real estate
• Access to public markets (publicly traded on major exchanges) | Ability to scale which
leads to low operational costs when it comes to property management (i.e >100
properties)
• Lower costs than private real estate
• Buying and selling private real estate can cost 5 – 10% of total value
• Less risky and more liquid than private real estate
• No operational responsibility from you
• Multi-asset exposure such as office, residential and commercial (can be global)
• Outperformed private real estate by circa 3.91% past 25 years (Cambridge
Associates)

12. REIT Performance and Valuation
REITS (3/3)
Cash + Short and Long-term Assets – Fund Liabilities
Outstanding Shares in the Fund
Market value of investment = NAV * No. of Shares Owned
NAV represents a per share value of the fund which allows for smoother transacting of fund
shares and as well valuation of the fund
Most funds like mutual funds and REIT’s don’t trade in real time, and are priced on an end of day methodology
Assets include cash,
interest, and
accrued income
Liabilities include fees,
accrued expenses,
and short/long-term
liabilities
Net Asset Value (NAV) =

13. SECURITIZATION
• Definition and purpose
• Major types of securitization products: RMBS, CMBS, Home, and Auto
• Securitization structure
• Synthetic CDO’s
• Major players: rating agencies, issuers, investors, and SPV’s

14. ABS STRUCTURE
• Issuing SPV would
issue several layers of
ABS bonds with
different credit
ratings: AAA, AA,
AA-, BBB, and so on.

15. CREDIT ENHANCEMENT
Over-collateralization Liquidity facilities Reserve fund Insurance/guarantees
First loss protection via:
Extra collateral and
Reserved Fund
Second loss protection
via: Monoline
insurance on a certain
percentage of the
mortgage pool

16. OVERCOLLATERALIZATION
Collateral Pool
Extra
Collateral
Senior ABS
Equity ABS
(seller)
SPV

17. CREDIT RATINGS
SOURCE: NYU STERN
Moody’s Standard &Poor’s Interpretation
Aaa AAA High quality debt
Aa AA
A A Adequate ability to pay principal and
interestBaa BBB
Ba BB Ability to pay interest and principal
speculativeB B
Caa CCC
Ca CC
C C
D In default

18. RATING AGENCIES
• Major agencies: S&P, Fitch, and Moody’s
• Ratings such as AAA/AA/BBB allow for comparison of credit risk across different types
of debt: corporate bonds v.s sovereign v.s ABS
• Provides a gauge for credit risk
• Default probability, portfolio WLTV, loss given default, prepayment, and
delinquencies are given particular attention and also help determine needed credit
enhancement
Issuer requests
rating
Data gathering
and
management
meetings
- Asset pool credit
analysis
- Legal analysis
and stress tests
Structure and
negotiate credit
enhancement
with issuer
Documentation
+
Final Report

19. RATING
PROCESS
DEFINED
Risk Reduction – Screening
of assets, underwriting
standards of issuer, and
diversification of asset
pool
Legal structure – SPV
(insulated if originator
defaults)
Credit quality of
originator, servicer,
counterparties, and
guarantors
Cash flow matching –
liquidity facilities for timing
mismatch
Credit Enhancement –
internal or external (such
as insurance and
guarantees)

22. REAL ESTATE CYCLES (1/3)
• 2008 financial crisis: faulty assumption on real estate prices not
decreasing coupled with subprime mortgages, poor underwriting
standards, and lax capital reserve requirements
• Current market: political uncertainty, trade volume volatility, low
interest rate environment with accommodative monetary policy
makes the relatively elevated real estate income look attractive.
According to Aberdeen future supply is much lower than the
oversupply in the previous cycle, “anticipated returns have fallen
modestly but the fundamentals of the underlying base of assets
remains strong”

23. • The Dubai case study: Boom cycle that started in early 2000’s and busted in
2008 in light of the global financial crisis which quashed liquidity in the markets
and widened credit spreads to exorbitant levels – prices in Dubai went down by
up to 50%.
• The market recovered at the Emirate kept building through the next decade by
investing heavily in infrastructure project such as Dubai Metro, Al-Maktoum
airport (world’s largest – recently halted) and man-made islands and canals.
• However, speculative premised development around EXPO 2020 yielded a
market with rampant oversupply, lack of employment opportunities and
another costly correction of up to 30% in the last few years (2017 – 2019). The
Dubai case represents the several moving parts of real estate market as it gets
impacted by the backdrop of demographics and the economy.
REAL ESTATE CYCLES (2/3)

25. The Future
• Real estate is the largest asset class in the world and will
continue to exert its importance in the global investment
landscape. E&Y projects up to 37 megacities by 2025/30 – up
from a recent number of 22.
• The tangible nature of real estate and ability to leverage
makes it attractive for large funds like sovereign wealth funds,
and asset management firms – it also serves as an effective
inflation hedge.
• Unusually low interest rates in US/Europe has led to emergence
of the private debt market that is starting to fund real estate
developments and acquisitions for yield seeking investors.
REAL ESTATE CYCLES (3/3)

26. QUESTIONS
SOURCE: NYU STERN, ABERDEEN ASSET MANAGEMENT, ERNST AND YOUNG, S&P GLOBAL, OXFORD UNIVERSITY, AND BERKSHIRE HATHAWAY, DAMAC, AND EMAAR PROPERTIES