Preliminary Syllabus for GW Finance 279 Part I, Spring 2008

Course: Finance 279 Semester: Spring 2008

Course
Description: This is a course on fixed income real estate securities. It will explore the peculiarities of mortgages and mortgage-backed securities. While there is a suggested text with good background, I do not “teach the text.” I hand out notes and expect you to learn largely by doing.

We will value these securities and analyze their risk using tools from finance theory and real estate valuation theory. Most of the work will be performed in spreadsheets. We will do spreadsheet work in class—if you have a laptop, please bring it to class. Data for class will be posted on the class web site.

Learning To apply fixed income pricing and option pricing techniques to mortgage pricing
Goals: problems.

To understand urban land markets sufficiently well to underwrite mortgage default risk.

Professor: Richard K. Green
507 Funger Hall
202-994-2377 (o)
301-467-3582 (m)
drgreen@gwu.edu
Office Hours: Thursdays and Fridays, 5-6 pm.



Requirements: Assignments 1-5 10% each
Exam I 25%
Exam II 25%


Texts (suggested reading)

Frank Fabozzi, Bond Markets, Analysis and Strategies, Sixth Edition, Prentice Hall.

January 24-25

The Primary Residential Mortgage Market
An Institutional Overview of Government Sponsored Enterprises
Richard K. Green and Susan M. Wachter, The US Mortgage in Historical and International Contexts, Journal of Economic Perspectives, Fall 2005.

Text, Ch. 10.

Assignment 1: Qualifying a primary borrower and Housing Affordability Indexes







January 31, Feb 1

Text, Chs. 4, 6, and 21.

Mortgage Backed Securities and Pass-through Certificates
Three kinds of risk:
-default risk
-prepayment risk
-bond-like interest rate risk

Exercise in Class: Measuring Duration
Assignment 2: Pricing a security with ruthless default

February 7-8

An Overview of Modeling Prepayment Risk for MBS
-Option pricing models
-PSA models
-Empirical survivor function models

Text, Chapter. 11.

Richard K. Green and Michael Lacour-Little, Some Truths about Ostriches, Journal of Housing Economics, 1999, vol. 8, issue 3, pages 233-248

Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.

Exercise in Class: Calculating an Empirical Survival Function
Assignment 3: Developing a PSA spreadsheet

February 14-15

Derivatives and Hedging
-Collateralized Mortgage Obligations
-Strips
-Secondary Market Institutions Funding Mechanisms
-Swaps

Text, Chs. 12, 26, 27 and 28.

EXAM 1


February 21-22

Asset Backed Securities, Sub-prime loans, CDOs, Adjustable Rate Mortgages
Assignment 4: To be determined

Readings TBA

February 28-29

The Primary Commercial Mortgage Market
-Underwriting Issues—the pro forma
-Structural Issues
-Roles of Institutions

In class exercise: Pro Forma Development
Assignment 5: Leverage, Risk and Returns
Reading: Handout


March 6-7

The Secondary Commercial Mortgage Market
Low Income Housing Tax Credits

Text, Chapter 13.



EXAM II