You can hardly turn on the television or open a newspaper without hearing about the nation’s impressive, much celebrated housing recovery. Home prices are rising! New construction has started! The crisis is over! Yet beneath the fanfare, a whole new get-rich-quick scheme is brewing.
Over the last year and a half, Wall Street hedge funds and private equity firms have quietly amassed an unprecedented rental empire, snapping up Queen Anne Victorians in Atlanta, brick-faced bungalows in Chicago, Spanish revivals in Phoenix. In total, these deep-pocketed investors have bought more than 200,000 cheap, mostly foreclosed houses in cities hardest hit by the economic meltdown.
Wall Street’s foreclosure crisis, which began in late 2007 and forced more than 10 million people from their homes, has created a paradoxical problem. Millions of evicted Americans need a safe place to live, even as millions of vacant, bank-owned houses are blighting neighborhoods and spurring a rise in crime. Lucky for us, Wall Street has devised a solution: It’s going to rent these foreclosed houses back to us. In the process, it’s devised a new form of securitization that could cause this whole plan to blow up – again … //
… An All-Cash Goliath: … //
… Securitizing Rentals:
- Wall Street’s rental empire is entirely new. The single-family rental industry used to be the bailiwick of small-time mom-and-pop operations. But what makes this moment unprecedented is the financial alchemy that Blackstone added. In November, after many months of hype, Blackstone released history’s first rated bond backed by securitized rental payments. And once investors tripped over themselves in a rush to get it, Blackstone’s competitors announced that they, too, would develop similar securities as soon as possible.
- Depending on whom you ask, the idea of bundling rental payments and selling them off to investors is either a natural evolution of the finance industry or a fire-breathing chimera.
- “This is a new frontier,” comments Ted Weinstein, a consultant in the real-estate-owned homes industry for 30 years. “It’s something I never really would have dreamt of.”
- However, to anyone who went through the 2008 mortgage-backed-security crisis, this new territory will sound strangely familiar.
- “It’s just like a residential mortgage-backed security,” said one hedge-fund investor whose company does business with Blackstone. When asked why the public should expect these securities to be safe, given the fact that risky mortgage-backed securities caused the 2008 collapse, he responded, “Trust me.”
- For Blackstone, at least, the logic is simple. The company wants money upfront to purchase more cheap, foreclosed homes before prices rise. So it’s joined forces with JP Morgan, Credit Suisse, and Deutsche Bank to bundle the rental payments of 3,207 single-family houses and sell this bond to investors with mortgages on the underlying houses offered as collateral. This is, of course, just a test case for what could become a whole new industry of rental-backed securities.
- Many major Wall Street banks are involved in the deal, according to a copy of the private pitch documents Blackstone sent to potential investors on October 31st, which was reviewed by TomDispatch. Deutsche Bank, JP Morgan, and Credit Suisse are helping market the bond. Wells Fargo is the certificate administrator. Midland Loan Services, a subsidiary of PNC Bank, is the loan servicer. (By the way, Deutsche Bank, JP Morgan Chase, Wells Fargo, and PNC Bank are all members of another clique: the list of banks foreclosing on the most families in 2013.)
- According to interviews with economists, industry insiders, and housing activists, people are more or less holding their collective breath, hoping that what looks like a duck, swims like a duck, and quacks like a duck won’t crash the economy the same way the last flock of ducks did.
- “You kind of just hope they know what they’re doing,” says Dean Baker, an economist with the Center for Economic and Policy Research. “That they have provisions for turnover and vacancies. But have they done that? Have they taken the appropriate care? I certainly wouldn’t count on it.” The cash flow analysis in the documents sent to investors assumes that 95% of these homes will be rented at all times, at an average monthly rent of $1,312. It’s an occupancy rate that real estate professionals describe as ambitious.
- There’s one significant way, however, in which this kind of security differs from its mortgage-backed counterpart. When banks repossess mortgaged homes as collateral, there is at least the assumption (often incorrect due to botched or falsified paperwork from the banks) that the homeowner has, indeed, defaulted on her mortgage. In this case, however, if a single home-rental bond blows up, thousands of families could be evicted, whether or not they ever missed a single rental payment.
- “We could well end up in that situation where you get a lot of people getting evicted… not because the tenants have fallen behind but because the landlords have fallen behind,” says Baker.
Bugs in Blackstone’s Housing Dreams:
- Whether these new securities are safe may boil down to the simple question of whether Blackstone proves to be a good property manager. Decent management practices will ensure high occupancy rates, predictable turnover, and increased investor confidence. Bad management will create complaints, investigations, and vacancies, all of which will increase the likelihood that Blackstone won’t have the cash flow to pay investors back.
- If you ask CaDonna Porter, a tenant in one of Blackstone’s Invitation Homes properties in a suburb outside Atlanta, property management is exactly the skill that Blackstone lacks. “If I could shorten my lease — I signed a two-year lease — I definitely would,” says Porter.
- The cockroaches and fat water bugs were the first problem in the Invitation Homes rental that she and her children moved into in September. Porter repeatedly filed online maintenance requests that were canceled without anyone coming to investigate the infestation. She called the company’s repairs hotline. No one answered.
- The second problem arrived in an email with the subject line marked “URGENT.” Invitation Homes had failed to withdraw part of Porter’s November payment from her bank account, prompting the company to demand that she deliver the remaining payment in person, via certified funds, by five p.m. the following day or incur “the additional legal fee of $200 and dispossessory,” according to email correspondences reviewed by TomDispatch.
- Porter took off from work to deliver the money order in person, only to receive an email saying that the payment had been rejected because it didn’t include the $200 late fee and an additional $75 insufficient funds fee. What followed were a maddening string of emails that recall the fraught and often fraudulent interactions between homeowners and mortgage-servicing companies. Invitation Homes repeatedly threatened to file for eviction unless Porter paid various penalty fees. She repeatedly asked the company to simply accept her month’s payment and leave her alone.
- “I felt really harassed. I felt it was very unjust,” says Porter. She ultimately wrote that she would seek legal counsel, which caused Invitation Homes to immediately agree to accept the payment as “a one-time courtesy.”
- Porter is still frustrated by the experience — and by the continued presence of the cockroaches. (“I put in another request today about the bugs, which will probably be canceled again.”)
- A recent Huffington Post investigation and dozens of online reviews written by Invitation Homes tenants echo Porter’s frustrations. Many said maintenance requests went unanswered, while others complained that their spiffed-up houses actually had underlying structural issues.
- There’s also at least one documented case of Blackstone moving into murkier legal territory. This fall, the Orlando, Florida, branch of Invitation Homes appeared to mail forged eviction notices to a homeowner named Francisco Molina, according to the Orlando Sentinel. Delivered in letter-sized manila envelopes, the fake notices claimed that an eviction had been filed against Molina in court, although the city confirmed otherwise. The kicker is that Invitation Homes didn’t even have the right to evict Molina, legally or otherwise. Blackstone’s purchase of the house had been reversed months earlier, but the company had lost track of that information.
The Great Recession of 2016? … //
… (full text including many hyper-links).
Video: The Goal Of The U.S. Government Is To Eliminate ALL Privacy Globally, 24.04 min, on ZVideo (first on MOXnews), by Glenn Greenwald, November 29, 2013;
Poverty Migration: Berlin Backs UK’s ‘Benefit Tourism’ Offensive, on Spiegel Online International, by Carsten Volkery and Severin Weiland, Nov 29, 2013: Germany has now stepped into the UK-triggered fray over introducing new restrictions on migration within the EU. The European Commission is enraged, and even conservative EU parliamentarians warn of pandering to populists. “Free movement within Europe needs to be less free,” British Prime Minister David Cameron wrote on Friday in a guest editorial for the Financial Times. Then he outlined a detailed list of ways the United Kingdom plans to limit access for European Union citizens to his country’s social benefits …;
Deleting Corporate Power: Dominant Media’s Superficial Coverage of Problems with Obamacare, on ZNet, by Paul Street, November 28, 2013;
There Was No Reason EVER For Cannabis To be Illegal, 6.19 min, (Dr David Nutt Neuropsychopharmacologist), uploaded on YouTube by MOXNEWSd0tCOM, Nov 20, 2013;
Collective letter on criteria for UN Special Procedures nominations, on International Network for Economic, Social and Cultural Rights ESCR-Net, Oct 15, 2013 (complete letter here).