Mortgage and investment analysis. Coursework: mortgage investment analysis in real estate valuation Traditional technique of mortgage investment analysis

Due to the fact that the topic of this work is mortgage lending in the banking sector, the work will consider and analyze indicators related only to the bank’s credit and settlement operations with individuals on mortgages.

Let's analyze the structure of loan debt of individuals by intended use.

Table 7. Analysis of the structure of loan debt of individuals of Sberbank of Russia OJSC for 2010 – 2011.

Indicator					Deviation indicator 2010 to 2011
	Amount, thousand rubles		Amount, thousand rubles
Consumer loans
Car loans
Mortgage loans

From Table 7 we see that the share of mortgage loans in 2010 was 32%, but in 2011 this figure dropped to 28%.

Let's analyze the composition of the bank's loan debt formed by mortgage loans.

Table8. Analysis of the structure of loan debt of Sberbank of Russia OJSC formed by mortgage loans for 2010–2011.

Mortgage lending program					Deviation indicator 2010 to 2011
	Amount, thousand rubles		Amount, thousand rubles
"Loan for real estate"
"Mortgage loan"
Loan "Mortgage +"
"Young Family"
Mortgage loans total

An analysis of Table 8 allows us to see that the analyzed structure of mortgage loans is heterogeneous. In 2010, the largest share of mortgage loans was issued under the “Mortgage Loan” program, the smallest, 13%, was issued under the “real estate loan” program. At the end of 2011, the situation at the bank changed; the largest share of loans was issued under the “mortgage loan +” program, and the smallest – under the “young family” program.

Let us show the dynamics of loan debt under mortgage lending programs in Figure 2

Figure 2. Dynamics of loan debt of Sberbank of Russia OJSC, formed by mortgage lending programs for 2010-2011.

From Figure 2 we see that the largest deviation occurred under the mortgage lending program “Mortgage +”; by 2011, loan debt increased by 157% to 2,081,598 thousand rubles. On the contrary, loan debt under the “Young Family” program was reduced by 74% to 736,322 thousand rubles. up to 192,741 thousand rubles.

Let's analyze the loan debt on mortgage loans by loan term in Table 2.9

Table 9. Analysis of loan debt of Sberbank of Russia OJSC, formed by mortgage loans by loan term for 2010 – 2011.

Mortgage term					Deviation indicator 2010 to 2011
	Amount, thousand rubles		Amount, thousand rubles
from 3 to 6 years
from 6 to 10 years
over 10 years
Mortgage loans total

The analysis of mortgage loans was carried out for terms up to 3 years, from 3 to 6 years, from 6 to 10 years and over 10 years.

An analysis of Table 9 allows us to conclude that the largest share of mortgage loans in 2010, amounting to 65%, was issued for a period of 6 to 10 years; in 2011, this figure dropped to 52%, but remained the main one. The smallest share of loans are long-term loans for a period of over 10 years. The analysis showed that in 2011 the share of mortgage loans for a term of over 10 years increased by 8 percentage points. up to 16%.

Figure 3 - Dynamics of mortgage loans by loan term of Sberbank of Russia OJSC for 2010 – 2011.

Analysis of the figure allows us to conclude that mortgage loans issued for a period of up to 3 years were reduced from 17% to 10% by 7. Mortgage loans from 3 to 6 years changed more significantly from 10% to 22% by 01/01/2012, less significant The change occurred for loans granted from 6 to 10 years and for a period over 10 years.

Having decided to take out a mortgage loan to purchase a home or other real estate (house, apartment, cottage, land, etc.), the borrower begins to look for a suitable lender. One of the leading positions among them is confidently occupied by Sberbank of Russia OJSC. It offers clients several housing programs:

Real estate loan,

Mortgage loan,

Loan "Mortgage +"

"Young Family".

But providing loans on favorable terms imposes certain requirements on the borrowers themselves, so not everyone can take advantage of the mortgage of Sberbank of Russia OJSC. Let's look at its features in more detail.

The main criteria for all mortgage loans from Sberbank of Russia OJSC are: maximum term and minimum down payment. The interest rate does not play a decisive role here (the range of its fluctuations in different banks is about 2%), the method of repaying the mortgage is much more important.

Sberbank of Russia OJSC provides mortgages to citizens over 21 years of age, and it must be repaid before the borrower reaches 75 years of age. At the same time, the maximum period for which a loan can be issued is 30 years (for comparison: in some banks the maximum period for issuing a loan is 15 years, and it must be repaid before the recipient turns 60 years old). The minimum down payment for a mortgage at a bank is 10% of the value of the purchased property (or even 5% under the Young Family program), while in most banks it is 15% and higher. The basic requirements for the borrower and a description of the programs are presented in Appendix No. 1.

When analyzing the programs, it was revealed that the main feature of the mortgage of Sberbank of Russia OJSC is the differentiated method of its repayment, when the size of the monthly payment changes each time towards a decrease (due to the uniform write-off of the principal debt, and, accordingly, a decrease in interest). Today, many banks are resorting to another scheme for repaying mortgage loans - annuity, which involves paying an equal amount

payments during the entire term of the contract. This scheme is outwardly simpler and more convenient, but in reality it costs the borrower much more than the differentiated one.

Thus, we can conclude that the mortgage of Sberbank of Russia OJSC is certainly beneficial for the borrower, but we should not forget that each bank tries to extract its own benefit from any transaction, since making a profit is the main goal of any bank.

Another program is the “Young Family Mortgage Program, Affordable Housing, Social Mortgage,” which needs to be analyzed both from the bank’s point of view and from the point of view of solving this housing problem, which is the purchase of real estate by young families.

Every young family needs their own housing. Today, this housing problem is relevant and acute for many young families in our country.

Currently, housing prices are very high and tend to constantly increase. Most young families are not able to immediately purchase an apartment or house at the initial stage of their life together. How to solve the current problem, and how to buy an apartment for a young family?

Today, young families in Russia have the opportunity to purchase affordable housing. This became possible thanks to special social mortgage programs that were developed by the Russian government. An example of such programs is the fairly widespread “Young Family” program, which allows a young family to purchase affordable housing with the help of special mortgage lending from Sberbank.

Mortgages for young families are part of the Affordable Housing program and provide affordable housing to young families. The program consists of providing a young family with a subsidy for the purchase of housing.

If at least one of the spouses is not more than 30 years old and they have no children, then the subsidy amount will be 35%; if the family has one or more children, then the subsidy amount increases to 40% of the cost of housing. The size of the subsidy depends on the number of children in the family and on the cost per square meter of the purchased housing. In addition, a loan for a young family can be obtained by an incomplete family in which the mother (father) has not yet reached 30 years of age.

Under such a program, there is a certain size of living space for which a subsidy will be issued. The size of the living space for a young family of two people is 42 square meters; if there are more than 2 people in the family, then another 18 meters for each family member.

In order to participate in this mortgage program of Sberbank of Russia OJSC, the family must be recognized as in need of improving their living conditions. Young families who participate in the project should be issued a special certificate as budget money arrives. The family must have income or other funds that are sufficient to pay the cost of housing in a portion that will be greater than the amount of the subsidy.

When deciding whether to join the program of the national project of affordable housing for young people with the participation of Sberbank of Russia OJSC, or not, the family is faced with various questions. For example, fear of buying housing even with government support; Some families, planning to have children, are afraid of temporarily losing their ability to pay the loan. However, this is provided for in the young family mortgage project. For example, upon the birth of a child, parents receive an additional subsidy from the state, which is taken from the regional budget, and its amount is at least 5% of the cost of the purchased housing. In addition, if a young family cannot temporarily make loan payments, then payments are suspended (up to 3 years). The suspension of payments may be associated not only with the birth of a child, but also with the construction of housing.

Another big advantage of the housing mortgage program with the participation of Sberbank for young families is that you can make a small down payment. The term for mortgage lending is generally up to 20 years. The maximum amount that can be issued is determined taking into account the solvency of the borrower, the cost of housing, etc. A loan issued under the mortgage program for young families can amount to up to 90% of the cost of the purchased home. If a family has children, the loan amount can reach up to 95% of the cost of housing. The interest rate on such a loan is about 16% in national currency (rubles) and 11% in foreign currency (US dollars, euros).

In addition to young families, there are still many Russian residents in need of improved housing conditions, but cannot purchase it under the terms of a regular mortgage due to low income. which is another problem when purchasing a home. To solve this housing problem, Sberbank offers a social mortgage program.

This type of social mortgage will help people who have stood in line for several years for free housing and never received any results. With this program, a borrower can purchase a home at construction cost rather than at market price, which is a significantly cheaper option.

In addition, if the borrower is in line to improve their living conditions or purchase their own separate living space, then the state provides an apartment for which the borrower will only have to pay the difference between the old living space and the new one.

Immediately after the borrower makes full payment for the housing with his own and credit funds, he becomes its owner and can register in it together with his family members. However, until the borrower fully repays the loan, the housing is pledged to the bank.

Despite great successes in the development of social mortgage lending programs, the bank continues to work on social lending, and makes a lot of efforts to increase the availability of such programs for Russian citizens. Thus, people should understand that even with a relatively low level of income, they can get their own housing without waiting in line for several years.

Today, Sberbank, as well as others, provide loans without a down payment. For example, such a Sberbank mortgage program looks like this. The bank provides a loan secured by your existing apartment, with which you can purchase a new home. The loan repayment period ranges from 5 to 15 years, and interest rates can range from 11% in US dollars and from 14% in Russian rubles.

Let's compare the Sberbank program with the program of another bank. Absolut-Bank uses a different lending scheme: the borrower receives two loans at once. The first is up to 90% of the cost of housing, and the second loan, for a period of 3 years and secured by the client’s housing, is allocated to pay the down payment. The borrower first pays interest on the second loan, and pays the remaining principal at the end of the loan term or after the sale of the home. City Client Bank has its own original mortgage lending program without a down payment. The bank provides loans if there is real estate collateral not only from the borrower, but also from parents, who thus help children solve the housing problem. This loan is convenient for those who have a high and stable family income, but cannot save money for a down payment.

Mortgage lending without a down payment is quite risky for both the borrower and the lending bank. That is why the conditions for this type of lending are much stricter, and the interest rates on the loan are higher. There is a dangerous possibility for the bank that the client will not repay the loan. It may arise due to the fact that the borrower did not invest his own funds in the form of a down payment and he lacks a sense of responsibility to the lending bank. However, banks protect themselves from possible risks through the mandatory procedure of insurance of mortgage loans, as well as the presence of collateral, which is the property itself. Increasing competition between banks is contributing to an increase in the number of banks that include mortgage lending without a down payment in their loan programs.

Today, Sberbank's mortgage lending program using maternity capital is developing and is in demand.

With the support of Sberbank, lending is carried out using maternity capital, which is another feature of the bank’s mortgage programs.

Maternity capital is one of the forms of state assistance provided for by the Federal Law “On additional measures of state support for families with children” dated December 26, 2006 No. 256-FZ. Maternity capital is due at the birth (adoption) of a second or subsequent child. The total amount of maternity capital was initially equal to 250 thousand rubles. Today it is a little more than 400 thousand rubles. In Russia there is a high level of inflation, and so that parents do not lose anything, this figure is indexed several times a year. You can receive maternity money for a child born no earlier than January 1, 2007. You can receive maternity capital only once, that is, the money is provided only for one child.

The law strictly stipulates the purposes for which maternity capital can be spent:

Getting a child's education;

Improving family living conditions;

Formation of the funded part of the mother’s labor pension.

It is possible to use maternity capital only when the child reaches the age of three. However, according to amendments to Article 7 of the Federal Law of the Russian Federation dated December 29, 2006 N 256-FZ, you can manage the allocated money now, regardless of the age of the baby, if funds from maternity capital are used to repay a mortgage loan.

Thus, Sberbank helps solve the housing problem when a family receives maternity capital.

The housing issue worries many young people and is an urgent problem. And therefore, the opportunity provided by Sberbank to direct maternity capital to solve this problem is relevant.

According to the terms of Sberbank's mortgage lending using maternity capital, maternity capital can be used both to repay debt on a previously received mortgage loan and as a down payment.

Please note that with the help of maternity capital, the repayment of the mortgage loan does not occur independently, but by the Pension Fund.

The analysis revealed that the Pension Fund is considering an application for loan repayment through Sberbank and sending the money to the bank. This is where his work for the foundation ends. The further fate of the money depends on the bank.

To issue any of the above loans to Sberbank of Russia OJSC, it is necessary to provide a certain list of documents (Appendix No. 2) and fill out the borrower’s application form (Appendix No. 3). To determine the loan amount for the purchase of real estate, Sberbank has criteria based on family income (Appendix No. 4).

Therefore, given that the bank Sberbank of Russia OJSC is one of the leaders in our country, it is one of the 10 largest and most reliable banks, its participation in mortgage lending is justified and can be proposed as a development direction for this bank for the forecast period .

The basis of investment and mortgage analysis is the idea of ​​property value as a combination of the value of equity and borrowed funds. In accordance with this, the maximum reasonable price of property is determined as the sum of the current value of cash flows, including proceeds from reversion, attributable to the investor's funds, and the amount of the loan or its current balance.

When investing and mortgage analysis, the investor’s opinion is taken into account that he is not paying for the cost of real estate, but the cost of equity, and the loan is considered as an additional means to complete the transaction and increase equity capital. The analysis uses two methods (two techniques): the traditional method and the Elwood technique. The traditional method explicitly reflects the logic of investment and mortgage analysis. Elwood's method, reflecting the same logic, uses ratios of profitability ratios and proportional ratios of investment components.

Traditional method. This method takes into account that the investor and lender expect to receive a return on their investment and return it. These interests must be ensured by the total income for the entire amount of investment and the sale of assets at the end of the investment project. The amount of investment required is determined as the sum of the present value of the cash flow consisting of the investor's equity and the current debt balance.

The present value of an investor's cash flow consists of the present value of periodic cash receipts, the increase in the value of equity assets resulting from loan amortization. The value of the current debt balance is equal to the present value of loan service payments for the remaining term, discounted at the interest rate.

Cost calculation in traditional technology is carried out in three stages.

StageI. For the accepted forecast period, a statement of income and expenses is drawn up and cash flow before tax is determined, i.e. on own capital. The stage ends with determining the current value of this flow in accordance with the forecast period and the final return on Ye's equity capital expected by the investor.

StageII. The proceeds from the resale of property are determined by subtracting from the resale price the costs of the transaction and the remaining debt at the end of the forecast period. The present value of the proceeds is assessed at the same rate.

StageIII. The current value of equity capital is determined by adding the results of the stages. The value of equity and current debt balance is assessed.

The traditional technique of mortgage investment analysis allows one to draw certain conclusions regarding the influence of the forecast period on the assessment results. An important factor limiting the holding period from an investor's point of view is the reduction over time of depreciation (assets) and interest deductions from pre-tax earnings. In addition, more preferable investment options may emerge (external factors). On the other hand, the current value of the current debt ratio gradually decreases, which leads to the effectiveness of financial leverage. Analysis using traditional techniques of options with different tenures shows the obvious influence of the forecast period on the value of the estimated value. Moreover, the dependence is such that with an increase in the predicted tenure, the value of the assessed value decreases, provided that the value decreases over the forecast periods.

Elwood technique. It is used in investment and mortgage analysis and gives the same results as the traditional technique, since it is based on the same set of initial data and ideas about the relationship between the interests of equity and borrowed capital during the development period of the investment project. The difference between Elwood’s technique is that it is based on the return ratios of equity indicators in the investment structure, changes in the value of total capital and quite clearly shows the mechanism of changes in equity capital over the investment period.

General view of the Elwood formula:

where R 0 is the overall capitalization ratio

WITH– Ellwood mortgage ratio

- share change in property value

(sff,Y e ) – compensation fund factor at the rate of return on equity capital

- share change in income for the forecast period

- stabilization coefficient

Elwood Mortgage Ratio:

C = Ye + p(sff, Ye) – Rm

Where p is the share of the current loan balance amortized over the forecast period

Rm – mortgage constant relative to the current debt balance.

Expression
in the equation is a stabilizing factor and is used when income is not constant, but changes regularly. Usually the law of income change is specified (for example, linear, exponential, according to the accumulation fund factor), in accordance with which the stabilization coefficient is determined according to pre-calculated tables. The value is determined by dividing the income for the year preceding the valuation date by the capitalization rate, taking into account the stabilization of income. In the future, we will consider Elwood’s technique only for permanent income.

Let's write Elwood's expression without taking into account changes in the value of real estate at constant income:

This expression is called the basic capitalization ratio, which is equal to the rate of final return on equity capital adjusted for financing conditions and depreciation.

Let's consider the structure of the overall capitalization ratio in Elwood form without taking into account changes in property values, for which we use the investment group technique for rates of return. This technique weighs the rates of return on equity and debt in their respective shares of total invested capital:

Yo = m*Ym + (1 – m)*Ye

In order for this expression to become equivalent to the basic coefficient r, two more factors must be taken into account. The first is that the investor must periodically deduct from his income to amortize the loan, reducing his equity. Therefore, it is necessary to adjust the value of Yo in the previous expression by adding the periodically paid share of the total capital at interest equal to the interest rate on the loan. The expression for this adjustment is the leverage ratio m multiplied by the recovery fund factor at the interest rate (sff, Ym). The value (sff, Ym) is equal to the difference between the mortgage constant and the interest rate, i.e. Rm – Ym. Thus, taking into account this amendment:

Yo = m*Ym + (1 – m)*Ye + m*(Rm – Ym)

The second adjustment term must take into account the fact that the investor's equity as a result of reversion increases by the amount of the portion of the loan amortized over the holding period. To determine this adjustment, you need to multiply the depreciated amount as a share of the total original capital by the replacement fund factor at the rate of final return on equity (realization into equity occurs at the end of the holding period). Consequently, the second correction term has the form: mp(sff, Ym), with a minus sign, since this amendment increases the cost.

Thus:

Yo = m*Ym + (1 – m)*Ye + m(Rm – Ym) – mp(sff, Ye)

And after combining similar terms and replacing Yo with r (we do not take into account the change in property value):

R = Ye – m*(Ye + (p(sff) – Rm))

Thus, we obtain the basic capitalization ratio of the Elwood expression. Progressing from the investment group technique through the necessary adjustments to Elwood's expression shows that this expression actually reflects all the elements of the transformation of equity and borrowed funds combined in the invested capital, in particular financial leverage, amortization of the mortgage loan and the increase in equity as a result of amortization of the loan.

The Elwood equation expressed in terms of the debt coverage ratio. Financing projects associated with significant risks regarding the receipt of stable income may change the orientation of lenders regarding the criterion determining the amount of borrowed funds. The lender believes that in this situation it is more appropriate to determine the loan size not on a price basis, but on the basis of the ratio of the investor’s annual net income to the annual payments on the loan obligation, i.e. the lender requires guarantees that the value of this ratio (naturally, greater than one) will not be less than a certain minimum value determined by the lender. This ratio is called the debt coverage ratio:

In this case, the mortgage debt ratio in the Elwood equation should be expressed through the debt coverage ratio DCR:

DCR = NOI/DS = RV/(Rm*Vm) = R/(Rm*m), or

After substituting this expression for m, we obtain the Elwood equation, expressed in terms of the debt coverage ratio:

3. Determination of the cost of invested capital based on capitalization of income

3.3. Mortgage and investment analysis

Mortgage investment analysis consists of determining the value of property as the sum of the costs of equity and borrowed capital. In this case, the investor’s opinion is taken into account that he is not paying for the cost of real estate, but for the cost of capital. A loan is seen as a means of increasing the invested funds necessary to complete the transaction. The cost of equity capital is calculated by discounting the cash flows coming to the investor's equity capital from regular income and from reversion, the cost of borrowed capital is calculated by discounting debt service payments.

The current value of the property is determined depending on discount rates and cash flow characteristics. That is, the current value depends on the duration of the project, the ratio of equity and debt capital, the economic characteristics of the property and the corresponding discount rates.

Let's consider a general algorithm for mortgage investment analysis to calculate the value of property, the purchase of which is financed with borrowed capital, and, accordingly, the cash flows of periodic income and from reversion will be distributed between the interests of equity and borrowed capital.

Stage 1. Determining the present value of regular income streams:

– a report on income and expenses is compiled for the forecast period, while the amounts for debt servicing are calculated based on the characteristics of the loan - the interest rate, the full amortization period and repayment terms, the size of the loan and the frequency of payments to repay the loan;
– cash flows of own funds are determined;
– the rate of return on invested capital is calculated;
– based on the calculated rate of return on equity, the current value of regular cash flows before tax is determined.

Stage 2. Determining the present value of the reversion proceeds minus the outstanding loan balance:

– income from reversion is determined;
– the remaining debt at the end of the period of ownership of the object is deducted from the income from reversion;
– based on the rate of return on equity capital calculated at stage 1, the current value of this cash flow is determined.

Stage 3. Determining the value of property by summing up the current values ​​of the analyzed cash flows.

Mathematically, determining the value of an asset can be represented as a formula

where N01 is the net operating income of the nth year of the project; DS is the amount of debt service in the nth year of the project;

TG – reversion amount excluding sales costs;

UM – unpaid loan balance at the end of the project term p;i – return on equity; M – The original loan amount or the current principal balance.

This formula can be used as an equation in the following cases:

– if the amount of reversion of property is difficult to predict, but it is possible to determine trends in its change in relation to the initial value, then in calculations you can use the amount of reversion expressed as a fraction of the initial value;

– if the problem statement does not define the amount of the loan, but only the share of the loan.

Let's consider the main criteria for the effectiveness of investment projects.

Net present value - a criterion that measures the excess of benefits from a project over costs, taking into account the current value of money

,

where NPV is the net present value of the investment project; Co – initial investment; С i – cash flow of period t; i, – discount rate for period t.

A positive NPV value means that the cash flows from the project exceed the costs of its implementation.

Steps to apply the net present value rule:

– forecasting cash flows from the project over the entire expected tenure, including income from resale at the end of this period;
– determination of the alternative cost of capital in the financial market;
– determining the current value of cash flows from the project by discounting at a rate corresponding to the opportunity cost of capital and subtracting the amount of initial investment;
– selection of a project with the maximum NPV value from several options.

The higher the NPV, the more income the investor receives from investing capital.

Let's consider the basic rules for making investment decisions.

1) The project should be invested if the NPV value is positive. The considered efficiency criterion (NPV) allows us to take into account changes in the value of money over time, depending only on the projected cash flow and the opportunity cost of capital. The net present values ​​of several investment projects are expressed in today's money, which allows them to be correctly compared and added up.

2) The discount rate used in calculating NPV is determined by the opportunity cost of capital, i.e. the profitability of the project is taken into account when investing money with equal risk. In practice, the profitability of a project may be higher than that of a project with alternative risk. Therefore, a project should be invested if the rate of return is higher than the opportunity cost of capital.

The considered rules for making investment decisions may conflict if there are cash flows in more than two periods.

Payback period – the time required for the total cash flows from a project to equal the amount of the initial investment. This investment performance meter is used by investors who want to know when a full return on their invested capital will occur.

Disadvantage: payments following the payback period are not taken into account.

Previous

Mortgage-equity models determine the true value of property based on the ratio of equity and debt capital. Mortgage-equity analysis, or capital structure analysis, is an analytical tool that can in many cases facilitate the valuation process. It has been theoretically proven that debt capital plays a major role in determining the value of real estate.

Almost all real estate investment transactions are made using mortgage loans. By using mortgage lending, investors gain financial leverage, which allows them to increase current returns, benefit more from property appreciation, provide greater asset diversification, and increase deductions for interest and depreciation for tax purposes. Mortgage lenders receive a reasonably guaranteed amount of income securing the loan. They have the right of first claim to the borrower's operating income and its assets in the event of a breach of debt obligations. Mortgage investment analysis is a residual technique. Equity investors pay the balance of the initial costs.

They receive the remainder of the net operating income and resale price after all payments to creditors have been made, both during the current use and after the resale of the property.

The period of realization of ownership of real estate can be divided into three stages, at each of which capital investors receive residual income:

1. acquisition of an asset - the investor makes a mandatory cash payment, the amount of which is equal to the remaining price after subtracting from it the mortgage loan, which turns into debt;

2. use of property - investors receive residual net income from the use of property after deducting mandatory debt service payments;

3. liquidation - when the property is resold, the owner of the capital receives money from the sale price after repaying the balance of the mortgage loan.

There are two approaches to conducting mortgage investment analysis:

1. Traditional - the premise of the traditional model of mortgage investment analysis is that the total value of the property is equal to the sum of the present value of the equity interest and the present value of the debt capital interest. The value of equity interest is determined by discounting the cash flow before taxes, while the rate of return on equity capital, defined as the market average, is used as the discount rate.

2. Mortgage investment analysis models based on capitalization of income from the use of property. The most common approach to mortgage investment analysis of this group is to determine the overall capitalization ratio using the Ellwood formula. In addition, the investment group method and the direct capitalization method are used.

Traditional mortgage investment analysis technique is a method of estimating the value of property that is based on the determination of the total amount of the repurchase capital, including mortgage loans and equity investments. Under this technique, the value of a property is calculated by adding the present value of cash receipts and resale proceeds expected by the investor to the principal amount of the mortgage. Thus, both the entire projected net operating income and the amount of proceeds from the resale of the property are estimated.

The traditional technique requires estimates of the projected cash flows to be received by the investor, as well as the proceeds from resale. These two elements give the estimated current value of equity. The original loan balance (whether it is a new loan or a vested debt) is then added to the equity value to determine the market appraised value. If the new loan is provided on current market conditions and the final return on equity meets current market requirements, the result will be the estimated market value of the property. This technique does not take into account tax implications.

The principle underlying the traditional technique is that the assessed returns accrue to both investors and creditors.

The combined present value of the income of creditors and investors constitutes the maximum amount of redemption capital; accordingly it is the price that must be paid for the property. This technique improves on the equity cash flow valuation method because it takes into account resale proceeds. The latter includes the amount of increase (or decrease) in the value of the property and the depreciation of the mortgage received by the investor upon resale.

The returns received by both mortgage lenders and investors should include both return on investment and return on investment.

As for a mortgage, the current income on it represents debt service. Self-amortizing mortgages provide for the simultaneous payment of interest (income on the principal amount of the loan) and amortization (repayment of the principal amount of the mortgage) over a specified period. The principal balance at any point in time is equal to the present value of all payments remaining before the loan is fully amortized, discounted at the nominal interest rate of the mortgage. Mortgages are often paid off before the full amortization period has expired. In this case, the balance of the mortgage is paid in a one-time cash payment, thereby eliminating the debt. The par value of a debt obligation is equal to the sum of the present value of periodic cash payments and the present value of a lump sum cash payment when repaying the loan, discounted at the nominal interest rate of the mortgage.

The present value of an equity investment is equal to the sum of the income stream and the proceeds from liquidation (resale), discounted at the rate of return on equity. Under certain mortgage terms, the equity price is justified by the cash flows as well as the resale proceeds that investors expect to receive. Therefore, the current value of equity is equal to the sum of the present value of cash receipts and the present value of proceeds from resale, discounted at the rate of final return on equity, taking into account the associated risks. Thus, the amount and timing of benefits received by investors are taken into account.

The value of property or its price is calculated using formula (1):

Price = Cost of Equity + Mortgage Loan , (1)

The cost of equity is defined as the sum of two elements: cash receipts and resale proceeds. Both elements are discounted at the appropriate rate of return and their present values ​​are calculated using present value factors.

If projected cash receipts are expected to be uniform, then their annual amount is multiplied by the annuity factor. Reversion or resale proceeds are valued using the current unit value factor since the proceeds are received as a lump sum.

The formula for calculating the cost of equity capital (investment in equity capital), taking into account the above - formula (2) - has the following form:

Cost of equity = PWAF * (CF) + PWF * (PS), (2)

where PWAF is the factor of the current value of the annuity at the rate of return on equity,

CF - cash receipts,

PS - proceeds from resale.

To estimate the value of the property, the current mortgage balance must be added to the equity value. All income is assessed in this way. The remaining balance on the mortgage is equal to the present value of the required debt service payments, discounted at the nominal interest rate of the mortgage. Thus, the general formula for estimating property value (3) is as follows:

V = PWAF * (CF) + PWF * (PS) + MP, (3)

where V is the value of the property (initial),

PWAF - factor of the current value of the annuity at the rate of return on equity capital,

CF - cash receipts,

PWF is the factor of the current value of reversion at the rate of return on equity capital,

PS - proceeds from resale,

MP is the current principal balance of the mortgage.

If we accept that

CF = NOI - DS , (4)

where NOI is net current operating income,

DS - debt service (annual), and

PS = RP - OS , (5)

where RP is the resale price of the property,

OS - the balance of the mortgage debt upon resale;

then formula 3 will take the form:

V = PWAF * (NOI - DS) + PWF * (RP - OS) + MP, (3*)

The use of traditional technology involves a three-stage calculation for a certain forecast period. The forecast period is the period during which the owner expects to hold the property being valued.

Table 1. Stages of traditional mortgage investment analysis techniques

The monthly mortgage repayment payment is calculated based on formula (6) for calculating the unit depreciation contribution (self-amortizing mortgage):

where DSm is monthly debt service,

I - initial mortgage loan amount,

i - annual interest rate on the loan,

t is the term (years) for which the mortgage loan was provided.

The annuity factor (formula 7) reflects the current value of a unit annuity at a given discount rate:

where Y is the rate of return on equity capital,

The current value factor of reversion (Formula 8) reflects the current cost of a unit for a period at a given discount rate:

The balance of mortgage debt with equal payments is determined as the present cost of debt service payments over the remaining amortization period (formula 9):

The resale price of a property is calculated taking into account the increase or decrease in the value of the property per year (d):

RP = P * (1 + d) T , (10)

where RP is the resale price of the property;

P is the initial cost of the property;

d - increase (decrease) in property value over the year;

T is the period of ownership of the property.

So, the traditional technique of mortgage investment analysis is an assessment method within the framework of the income approach. When conducting a mortgage investment analysis, either the principal amount of the mortgage loan or the mortgage debt ratio must be known. The analysis should include an estimated resale price or percentage change in value over the forecast period.

This technique can be used if the investor assumes an existing debt or if a new loan is attracted. It can be modified to take into account more than one mortgage and changes in cash flow. If the price is known, the technique can be used to estimate the rate of return on equity.

The traditional technique of mortgage investment analysis is a flexible method that can take into account any situation. However, due to the assumptions made, objectively obtained estimates are approximate.

Mortgage investment analysis based on income capitalization

The capitalization method converts annual income into property value by dividing the annual income by the appropriate rate of return or multiplying it by the appropriate income ratio.

Determination of property value based on the general capitalization ratio is carried out according to formula (11):

Where V- property value;

NOI- net operating income;

k- general capitalization ratio.

To determine the overall capitalization ratio within the framework of mortgage investment analysis, the following is used:

· Ellwood Mortgage and Investment Technology;

· Investment group method;

· Direct capitalization method.

Recently, almost all real estate purchase transactions began to be carried out using mortgage loans, or loans secured by real estate. In such conditions, the value of real estate will be determined as the sum of the mortgage loan, the present value of income from the use of real estate and proceeds from the resale of real estate.

In general, the assessment of the value of real estate encumbered or acquired with a mortgage loan is carried out using the IIA.

Mortgage and investment analysis (IIA) is a modeled income approach to real estate valuation, used in the context of an investor or owner raising borrowed funds to finance the activities of a real estate property. Within the framework of the IIA, both methods of the income approach to real estate valuation are used - the income capitalization method and the discounted cash flow method. But each of these methods has its own distinct features when assessing real estate purchased with a mortgage loan.

IIA allows you to conduct investment analysis and evaluate the effectiveness of investments when using mortgage lending to finance these investments.

To carry out transactions with real estate, the value of which is significant, in many cases borrowed funds are used. The most common provision of borrowed funds is loans secured by the real estate itself. This type of loan is called a mortgage loan.

The IIA is an analytical tool that can facilitate the assessment process in many cases. IIA is a method of real estate valuation within the framework of the income approach. However, this type of valuation has differences that affect all methods of the income approach to valuation, since the market value of the asset does not coincide with the amount of equity capital invested in it, since borrowed capital is partially invested in real estate.

The basis of the IIA is the provision that the value of real estate encumbered with a mortgage is determined as the sum of the values ​​of equity and borrowed capital.

IIA technique is a technique for estimating the income-producing value of property (real estate) based on adding the principal amount of the mortgage debt with the discounted present value of future cash receipts and proceeds from the resale of the asset. Adding the amount of mortgage debt and the value of equity gives an estimate of the price that is expected to provide the investor and mortgage lender with certain benefits.

When conducting an IIA, either the principal amount of the mortgage loan or the mortgage debt ratio must be known. The analysis should include an estimated resale price or percentage change in value over the forecast period. This technique can be used if the investor assumes an existing debt or if a new loan is attracted. It can be modified to take into account more than one mortgage and changes in cash flow. If the price is known, the technique can be used to estimate the rate of return on equity.

IIA is a remainder technique. Equity investors pay the balance of the initial costs. They receive the remainder of the net operating income and resale price after all payments to creditors have been made, both during the current use and after the resale of the property.

The initial data for the IIA are:

§ net operating income;

§ amount, term and interest rate of the loan;

§ rate of increase or decrease in value during reversion;

§ rate of return on equity capital;

§ operating period of the investment.