Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
2000-02-09
2003-09-02
Millin, Vincent (Department: 3624)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S03600T, C705S037000, C705S038000, C705S039000, C705S001100
Reexamination Certificate
active
06615187
ABSTRACT:
FIELD OF THE INVENTION
The present invention relates to a process for monetizing an aspect of the real estate sale transaction and a method of speculating on real estate values. Particularly, the invention relates to a method of securitizing the brokerage fees typically collected upon the sale of commercial and residential real estate, and trading these brokerage fees by creating a futures and options market based on the value of these brokerage fees.
BACKGROUND OF THE INVENTION
Millions of new and existing homes are sold each year in the United States. The residential mortgage market in itself is a trillion dollar industry. However, one of the largest obstacles to purchasing a home is amassing the relatively large amount of cash needed for up-front closing costs. Large downpayments and closing costs prevent many potential homeowners from being able to buy a home, even at attractive mortgage rates. Therefore, the need exists to develop a financial vehicle and method of selling real estate that can alleviate some of the burden faced by potential home purchasers.
The most common and critical function which facilitates the sale of real estate so that, for example, home buyers can purchase homes and home sellers can, in turn, also buy homes, is the brokerage function. The brokerage function is the process whereby real estate agents represent and assist buyers and sellers of real estate in their searches and transactions associated with finding a suitable property and effecting a transfer of ownership. While property prices, characteristics, and other functions can vary widely from one real estate transaction to another, the brokerage function and the commission earned by the broker for that service (typically 6% of the sale price in the United States) remain constant. However, despite its importance and constancy, the brokerage function remains one of the least efficient, underutilized, and improperly valued aspects of the real estate market. Therefore, a need exists for a method of using the real estate brokerage function and, more specifically, broker commissions as a tracker of real estate values, an investment opportunity, a method of easing the closing cost burden on purchasers, and for various other purposes.
During the 1970s, Wall Street developed and popularized new techniques for financing home purchases by providing capital to fund the purchase of residential mortgages. Banks and Savings & Loans were no longer required to fund and hold the hundreds of billions of dollars of mortgages being originated each year. Instead, the securities industry perfected techniques to pool millions of mortgages and sell them in pools to financial investors. Liquidity was injected into the mortgage system, economies of scale were achieved, rates to borrowers decreased as pools spread out risk and made capital more readily available, and a trillion dollar industry emerged. The securities industry acted as the conduit for buying, pooling, and re-selling mortgages.
The benefits of financing mortgages through the pooling of originated loans and selling them in tranches (prioritized, individually priced, and credit-rated segments) to sophisticated investors are now well proven. The real estate market has seen hundreds of billions of dollars in capital become available through securitizing mortgages. The real estate market has been infused with new capital and increased liquidity. As a result, more Americans have been enabled to buy real estate at better interest rates.
In the past 30 years, securitization—the technique of financing cash flows generated from individual or pooled assets such as residential mortgages—has also been used to finance numerous other statistically-predictable cash flows. Examples of such statistically-predictable cash flows include commercial real estate mortgages; oil, power, and telecommunications accounts receivables; cross-border earning remittances; credit card payments; and retail accounts receivables. Securitization enables investors to invest in securities with a calculated risk/reward profile commensurate with their goals and objectives. Rating agencies assess the relative risk profile of each transaction and rate the different tranches of securities, providing various levels of returns for investors. Securitization, as a financing and investor vehicle, has become a trillion dollar business in this country and is gaining popularity overseas. It is the perfect investment tool when historical information is available. Statistical analysis can be used to gauge risk and return, and large volumes of securities can be amassed to achieve economies of scale and lower costs while increasing returns.
Pools of future cash flows can be securitized so long as the cash flows have been engineered to conform to pre-established standards, and investors can statistically determine the payment characteristics of the cash flows so that the various tranches can be sold at rates commensurate with the investment's risk. The aggregation of large pools of cash flows enables statistical analysis by rating agencies and sophisticated investors leading to standardized ratings and buying levels. Commercial properties are also financed using this technique. Even construction and interim loans can be financed using securitization. In today's economy, securitization can be used to finance any cash flow that can be statistically measured by investors who will be able to assign a risk level to the timing and probability of receiving such cash flow.
Since the brokerage function is a necessity in most real estate transactions, and since the associated brokerage commissions are predictable, they lend themselves perfectly to the securitization process. Information on factors such as average time to sell a property, time on the market, median and average property prices, and commissions earned are all readily available and can be used by rating agencies, investment bankers, and investors to structure such transactions. As such, the timing of the sales commission, the amount of the commission, the value of the income stream, and the likelihood of income realization can all be statistically projected using the plethora of historical information available from government institutions and other recognized sources. As a result, a new process may be developed to serve real estate buyers and sellers whereby the right to future real estate brokerage commissions (hereinafter referred to as the “Real Estate Brokerage Option” or “REBO”) can be purchased, assigned, sold, and traded.
The REBO would be purchased from the natural holder of that right, namely the existing property owner. Moreover, that right can be purchased in exchange for compensation at the time when the owner needs it most, namely when he or she is purchasing the property or soon thereafter (although the right may be purchased at any time during the owner's ownership of the property). Moreover, the compensation may take any of a wide variety of forms acceptable to the owner.
Given the predictability of the future value of brokerage commissions and their utility as a valid real-time measure of property value, the process of securitization can be used to “monetize” the value of future brokerage fees in the present. In other words, brokerage commissions to be earned in the future can be converted to securities with a present-day cash value. The amount of the actual compensation necessary to acquire a particular REBO will vary depending upon factors such as the value of the property at the time the REBO is purchased, the statistically predictable time to resale, and the statistically predictable future value of the acquired REBO, among others; but is ultimately a future cash flow that can be estimated within an acceptable degree of statistical certainty. As such, the REBO lends itself well to the asset-backed securitization process and provides a financial vehicle capable of many benefits including assisting real estate property buyers in funding their new purchases and providing new investment opportunities for investors to diversif
Ashenmil Warren S.
Berns Daniel S.
Drury John W.
Bashore Alain L.
Howrey Simon Arnold & White , LLP
Millin Vincent
LandOfFree
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