In the past, Wall Street bought mortgage pools and sliced and diced them into securities that were bought, sold and traded by many large institutions, pension funds and even the federal reserves of some countries.. Is it any wonder that the whole thing finally collapsed in 2007 and brought about a world side recession worse than anything we have seen since the 30’s?
Fast forward to today, and Wall Street is now institutionalizing house rentals, securitizing rental revenue, much like the way they used mortgage-backed securities to ramp up capital in the bubble years. Then as now, Wall Street is busy again slicing up tranches of assorted riskiness, and selling single-family rental bonds to investors around the world.
How could this happen? In years past, it would have been a nightmare to be able to control so many rentals in different areas. However, in 2012, the Federal Housing Finance Administration marketed eight pools of homes, with most of them rented out. But instead of selling in bulk, FHFA entered into three joint-venture agreements with Wall Street bidders. Many foreclosures were concentrated in certain areas. Buying houses in close proximity as well as complete condo complexes made it easier to manage the rentals.
After buying nearly 400,000 single-family foreclosed homes after the mortgage meltdown, institutional investors are now spreading their risk through the system — just like during subprime fiasco. In October 2013, Blackstone sold the first set of bonds. They were gobbled up. Just like subprime mortgage-backed securities were done in the past, these were sliced up into tranches of various risk levels.
David A. Stockman, author of The Great Deformation, has this to say about the REO-to-rent business model. “This time, instead of millions of Main Street speculators who believed up to the very end that housing prices would rise to the sky, we now have a few thousand institutional speculators who will head out of town on their John Deeres as fast as they came.”
According to Alexander Philips, chief executive of TwinRock Partners LLC, an investment fund based in Newport Beach, Calif.,“We view this as a trade not a business,” said Philips, who joined the rush to buy foreclosed home four years ago, investing $40 million to buy 350 residential rental properties, largely in California and Nevada, using money raised from well-heeled “country club investors,” including home builders, accountants, attorneys and other investors. “We’re done. We’re calling it quits. We’re slowly selling our inventory. We want to get out before everyone else.”
So if you unless you are in the rental business for the long haul, BEWARE. If we get these folks heading for the door at once, we have another major problem. When they soon discover that people default on rental payments with even greater frequency than mortgage payments, this will hasten the rush for the exit.
Déjà vu all over again.
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