Next mess:

Hedge fund are creating the first security that would be backed by home-rental payments.

The bonds would work similarly to mortgage-backed securities – only the flow of investor returns wouldn’t come from monthly mortgage payments, but rather income from rents of thousands of tenants living in formerly foreclosed properties. Sale of such bonds could help investors, such as Waypoint, repay their lenders and raise funds to buy up more foreclosed houses, helping the broader housing market absorb the inventory of vacant homes.

What’s also less certain is how will the bonds be collateralized, says Lynn Fisher, real estate professor at the University of North Carolina. With mortgage-backed securities, bondholders ultimately have rights to the real estate itself.

Perhaps the biggest issue is that bond buyers would be betting on the ability of large institutional investors to manage rental homes – something that’s rarely, if ever, done. Typically, large Real Estate Investment Trusts and private equity funds focus on apartment buildings and commercial real estate, such as malls and apartment complexes.

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