Tag Archives: life insurance companies

Foreign Funding for Real Estate Projects

Posted on by

Jeanne Calderon and Gary Friedland have posted A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. The paper provides a great overview of a relatively new source of funding for real estate deals. The introduction opens,

From an immigrant’s perspective, the EB-5 Immigrant Investor Program (“EB-5” or the “Program”) represents merely one of several paths to obtain a visa.  The EB-5 visa is based on the immigrant’s investment of capital in a business that creates new jobs. However, from a real estate developer’s perspective, the immigrant’s investment to qualify for the visa creates an alternative capital source for the developer’s project (“EB-5 capital” or “EB-5 financing”).

Despite the Program’s enactment by Congress in 1990, for many years EB-5 was not a common path followed by immigrants to seek a visa. However, when the traditional capital markets evaporated during the Great Recession, developers’ demand for alternate capital sources rejuvenated the Program. Since 2008, the number of EB-5 visas sought, and hence the use of EB-5 capital, has skyrocketed. EB-5 capital has become a capital source providing extraordinary flexibility and attractive terms, especially to finance commercial real estate projects. Consequently, many developers routinely consider EB-5 capital as a potential source to fill a major space in the capital stack. As the financing tool becomes more widely known and understood, this source of capital should become even more popular.

The EB-5 investor’s motivation for making the investment accounts for the relative flexibility and favorable terms afforded by EB-5 capital compared to conventional capital sources. Unlike that of the conventional capital providers (such as banks, private equity funds, REITs, life insurance companies and pension funds), the EB-5 investor’s reason for making the investment is to secure a visa. Thus, his primary objective at the time of making the investment is to satisfy the EB-5 visa requirements. Consequently, so long as the investor believes that the investment will qualify for the visa and result in the safe return of his capital, he is willing to accept a below market, if not minimal, return on the investment. Furthermore, the investor might not require some of the other protections that more sophisticated, conventional real estate investors typically seek.

*     *     *

Simply stated, the Program requires that the immigrant make a capital investment of $500,000 or $1,000,000 (depending on whether the project is located in a “Targeted Employment Area”) in a business located within the United States. The business must directly create 10 new, full-time jobs per investor. Thus, the number of jobs that a project will create is a key determinant of the amount of the potential EB-5 capital raise. (3-4)

This once exotic funding technique is now becoming quite mainstream. Of interest to some readers of this blog, the paper describes at various points how EB-5 funds have been used in residential projects. The paper is a useful introduction for those who want to know more about this program.

A New History of Mortgage Banking — Part Two!

Posted on by

I know, I know, you can’t get enough of this stuff. Yesterday, I noted a couple of highlights from Mortgage Banking in the United States 1870-1940. The last part of the report carefully documents how various players in the urban mortgage market saw their market and their market shares change dramatically as a result, in large part, of the new federal housing finance regime introduced in the 1930s:

All that was required for a historic surge in homebuilding and homeownership was a housing finance system. Local institutional portfolio lenders, now buttressed by deposit insurance and, in the case of S&Ls, the FHLB’s lending facilities, took up most of the business. But the inter-regional flow of credit that arbitraged imbalances across local markets was dominated by life insurance companies and their mortgage banking correspondents. Through 1952, most of these loans were insured under the FHA program, and for good reason — that program had worked well for these intermediaries in the late 1930s. The federally insured and guaranteed home mortgage loan business for life insurance companies and, later in the decade, mutual savings banks preoccupied mortgage bankers until the unusual conditions that fostered the expansion finally ran out in the 1960s. (2)

All of this historical detail brings home a key point for us today. The technical choices we make in structuring the federal housing finance system will alter the incentives of all of the current players. As we watch to see how the Qualified Mortgage, Qualified Residential Mortgage and Ability-to-Repay rules play out when they go into effect next year, we should know that they are likely to shape the mortgage market for decades to come. We already know that some mortgage products will be common and some rare because of these rules. But we should also be aware that some types of originators will be winners and some will be losers because of these rules, although it is too early (at least for me) to tell which will be which. And such an impact may shape the nature mortgage market as much as the types of products that eventually win out when the rules are fully understood by the industry.

A New History of Mortgage Banking

Posted on by

Yes, I know, a dry subject for most. But for some nerds, there are lots of insights in Mortgage Banking in the United States 1870-1940. The author, Kenneth Snowden, highlights this finding, which gives more credit to the Federal Farm Loan Bank system for the development of the modern mortgage market than do many other histories of the industry:

The Federal Farm Loan Bank system and the FHA mortgage insurance programs that restructured both the farm and urban mortgage banking sectors shared three common features:

+     They each encouraged the widespread adoption of long-term, amortized mortgage loans.

+     They each created mechanisms to stimulate the inter-regional transfer of mortgage credit and the convergence of mortgage rates and lending terms across regions.

+     They each established federal chartering systems for privately financed European-style mortgage banks to create active secondary markets for long-term, amortized loans. (2)

This history provides a lot more detail than one finds in standard histories of the American mortgage market, including much about the early history of securitization. Writers in this area (myself included) tend to think that securitization was birthed in the 1970s, but Snowden documents some proto-securitizations in the early 20th Century. I will come back to this report in a later blog post, but I highly recommend it to serious students of the mortgage markets.