
Wall Street's New Financial Product: Your Rent Check - walterbell
http://www.motherjones.com/politics/2014/01/blackstone-rental-homes-bundled-derivatives
======
lumberjack
Maybe these new financial products end up being mutually beneficial for them
and society at large as well and maybe the economy gets hurt and the practice
if forbidden by law.

But this doesn't seem right. They win either way. They always make a buck,
whether their new financial products are eventually banned or not. Meanwhile
the economy suffers at least half the time and nobody is compensated for this
risk that is imposed on them. If fact the rest of us get burdened cleaning the
mess up.

It's akin to letting some cocky hacking superstar mess up with the production
server. If he doesn't fuck up, he gets all the praise. If he fucks up because
well, you shouldn't push things straight from mind to production, the rest of
the developers, are tasked with putting in restrictions in production to
forbid whatever the guy did, and the guy get's let off easily.

Maybe Wall St. should be told to run things on the test server for a while
before potentially fucking up the rest of the economy.

~~~
7Figures2Commas
First, Wall Street players flooded into this market because of the Federal
Reserve's actions following the 2008 market crash. The risky experiment that's
being run in production is global monetary policy. Central banks around the
world are engaging in unprecedented behavior that is causing all sorts of
market distortions.

Second, the mainstream media tends to exaggerate when writing about financial
products. A $479 million bond backed by rental payments? If you're going to
lose sleep over that, are you going to lose sleep over Tesla's $2.2 billion in
debt, which was rated junk by S&P in 2014?

Third, a lot of discussions around Wall Street are presented in a false us-
versus-them fashion. Blackstone is publicly-traded. You can buy shares of
Blackstone stock and collect a ~6% dividend if you so desire. You can invest
in pure-play single family home renters like American Homes 4 Rent and Silver
Bay Realty Trust, which are also publicly-traded. American Homes 4 Rent even
has classes of participating preferred stock that give shareholders the
ability to profit from appreciation in the value of the company's portfolio of
single family residences. Too risky for your taste? You can bet on the rental
trend by investing in well-established REITs like Equity Residential and
Avalonbay Communities, which own lots of apartments and pay ~3% dividends.

Finally, you insinuate that Wall Street is placing risk on the American
economy, but the inconvenient truth about the last real estate bubble is that
many Americans were just as deserving of blame as Wall Street and government
agencies. Lots of people bought houses they couldn't afford based on the
assumption that prices would continue to rise. Lots of people used their home
equity like a piggy bank. Liar's loans? You can't have a liar's loan without
somebody willing to lie.

Bottom line: there was plenty of greed in all corners of the housing market
and while people who didn't do anything wrong did suffer, it's intellectually
dishonest to pretend that everybody who lost a home was a victim.

------
lwhalen
I currently rent from an Invitation Homes property in Seattle. I'd dearly love
to buy the place from them (sketchy hedge-fund backing aside, it _is_ a
gorgeous house that is well-maintained), but they ain't selling and my rent
has a 'guaranteed' increase of 5% per year, with the agent telling me to
'expect closer to 10-15%, unless I sign a multi-year lease'. Definitely a
drag, but ye gods and little fishies is it difficult to put together a 10%
downpayment for a mortgage. Median home prices around here are $300k-$450k,
and $30k in cash is quite the chunk of change.

~~~
hkmurakami
Wait, I was the under the impression that the minimum downpayment was
increased to 20%. Am I misremembering?

~~~
bkjelden
below 20% you usually need mortgage insurance (PMI) in the US.

PMI is usually not too expensive with 10% down - for example when I bought a
house with 10% down, the PMI was 1% of the loan value up front. When you
consider the time it would take a family to double their down payment savings,
it can make sense in high cost markets.

You _can_ go as low as 5% down, but the mortgage insurance gets a lot more
expensive.

The _general_ guidance is still 20%, though, because you're less likely to go
underwater, and it shows you're committed to the idea, the area, etc.

~~~
w4
As of January you can even go down to _3%_ for a conventional mortgage:
[http://www.latimes.com/business/la-fi-fannie-freddie-
loans-2...](http://www.latimes.com/business/la-fi-fannie-freddie-
loans-20141209-story.html)

------
nrao123
Any stream of cashflow that has a reasonable amount of predictability will try
to be and can be securitized given demand from end buyers.

Things that have been securitized include your credit card payments, mortgage
payments, auto payments etc...

The risks outlined by the article is not specific to rent checks alone- it
applies to all forms of securitization.

Unless- Mother Jones is claiming that all forms of securitization bad.

~~~
crdoconnor
Securitization is not intrinsically bad, but the fact that we are seeing more
than this is indicative of the fact that the country's wealth is being
hijacked by owners and monopolists rather than workers and builders.

Imagine how big this market would be if homes were affordable nationwide and
Americans could buy them with cash. Not very big, right?

Houses didn't get any more expensive to build over the last 30 years, but they
shot up in value thanks to policies basically designed to fuck the poor and
transfer wealth directly to the rich (ZIRP, de-taxing land/wealth, etc.).
Hence the fact that securitization of rental streams is a thriving market
rather than just an idea.

~~~
kasey_junk
The reason we are seeing more securitization is that the marketplace demands
it. There are lots and lots of market participants that are looking for low
risk, small fixed return style investments.

This financial product, at least for the latter half of the last century, was
almost entirely provided by US governmental debt. The monetary policy of the
last decade+ has caused that debt to no longer be an acceptable investment for
this. Coupled with the increase in number of investors looking for this style
of vehicle (from China and other developing nations) and there is a huge
market need.

Of course, in the face of a huge market need financial product offerers are
going to try new and possibly dodgy means to fill the gap.

~~~
crdoconnor
>There are lots and lots of market participants that are looking for low risk,
small fixed return style investments.

And you think hopping on the next CDO bandwagon is a low risk investment?

~~~
kasey_junk
No of course not. I also don't understand the market for luxury pick up
trucks, but it exists so why wouldn't car manufacturers create products in
that space, even when all other products in that space are clearly stupid?

------
Rainymood
>Blackstone has bundled the rental payments from more than 3,200 single-family
houses, offering investors its mortgages on the underlying properties as
collateral.

This reminds me of the stuff that caused the crisis of 2008 ... however, I am
not that well-versed in these kinds of financial products. Could anyone
explain a bit more to me how this works? They pool the collected rent and then
they create a bond with that? How?

>Invitation Homes has described its strategy as "a bet on America."

Murrica1!

~~~
maxerickson
A bond is a contract to make payments. So they list the properties in the
contract (this might not be exactly correct, but I guess it is a good enough
model of what is going on).

The problems in 2008 weren't directly a result of such securitization, the
problem was that the risk of the underlying mortgages was not at all correctly
estimated, and the way the bonds were traded depended on the pretense that the
risk had been estimated nearly perfectly.

These bonds can do things like list historical occupancy and on time payment
rates of the properties, so they don't need to be anywhere as murky as bonds
backed by mortgages that were handed out to whoever walked in the door.

~~~
crdoconnor
>The problems in 2008 weren't directly a result of such securitization, the
problem was that the risk of the underlying mortgages was not at all correctly
estimated, and the way the bonds were traded depended on the pretense that the
risk had been estimated nearly perfectly.

The problems in 2008 weren't caused by accidental risk mis-pricing. It was
entirely intentional. The securitizers paid the rating agencies for their
opinion and the ratings agencies duly delivered an opinion that the
securitizers wanted: AAA.

That meant all of the shit could get stuffed into things like retirement
portfolios owned by suckers like you and me.

Was anybody punished for this? No.

Will it happen again? Most likely.

>These bonds can do things like list historical occupancy and on time payment
rates of the properties, so they don't need to be anywhere as murky as bonds
backed by mortgages that were handed out to whoever walked in the door.

The money question is what score did the ratings agencies give these bonds.

~~~
yummyfajitas
The AAA rating for the senior tranches was perfectly correct _assuming_ the
risk of the underlying mortgages was properly estimated.

The bulk of the buyers of the AAA tranches were other banks, and the reason
was satisfying requirements for capital reserves. If bank A and B both have
portfolios of mortgages worth $1B, they are treated as having $1B of risky
assets and do not satisfy capitalization requirements. If they securitize the
portfolios and sell each other a $700M senior tranch (while holding the equity
tranches themselves), bank A and B are both considered to have $700M in cash-
like reserves.

This does reduce the risk caused by _regional_ house price decreases which is
why regulators wanted banks to do it. (No one, including regulators, expected
a national/global drop in real estate values.)

Also, the idea that the mispricing was intentional is silly. The issuing banks
mostly held onto the equity tranches and suffered as a result - not the
actions one would take if you knew things would tank.

~~~
wheaties
No, they sold those too. Look up CDO and CDO squared to see where those things
went. That said, super senior subprime mortgage binds did exceptionally well
as investments. It was the BBB stuff which had near 100% loss.

~~~
yummyfajitas
CDO^2 was a minor part of the market, and again is also a valid thing to do
_provided_ the assumptions are right.

According to the "evil actor/information assymmetry" theory, the people
closest to the mortgage issuance should have been the ones who survived the
crisis best (since their information was the most accurate). In contrast, the
dumb investment banks back in NY should have been hurt the worst. That's the
exact opposite of what happened.

~~~
crdoconnor
>According to the "evil actor/information assymmetry" theory, the people
closest to the mortgage issuance

Several thousand appraisers actually wrote a letter to Congress complaining
that they were being pressured to inflate their home appraisals or face
blacklisting. This went back to 1999.

~~~
yummyfajitas
What, exactly, do you believe this proves?

------
rbobby
One challenge not mentioned in the article is house maintenance. If you do not
maintain your house properly its value can decrease dramatically (worst case
is land value less demolition cost). If they contract out maintenance to a
good firm and have good oversight then no problem... but if they contract out
to the cheapest firm, one that's shady, with poor oversight then in a decade
or so the value of the home could be significantly lower. Not only that, but a
poorly maintained home will be harder to rent and bring in less rent.

And then you've also got legal issues (various landlord and tenant acts,
homeowners associations) that will vary by jurisdiction that could make things
like eviction and rent raising more difficult than expected.

That 95% tenancy number could well drop by a lot, making the investment a real
stinker (also even if they lower rents to increase tenancy the underlying
measure isn't really tenancy rate it's monthly average rent).

------
blfr
I don't see the crucial similarity to the housing bubble: renting out to
people who cannot pay. Actually, their policy seems to be the exact opposite,
strict collections.

~~~
hkmurakami
The article states that they are assuming a 95% occupancy rate at all times.
What happens when they undershoot this number and aren't able to make the
yield payments? Isn't that analogous to "renting out to people who cannot
pay"?

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prestonpesek
If there was ever a perfect plan to widen the gap between rich and poor, this
is it. I predict this will bring about a future of unionized renters, followed
by home-trust-busting efforts as it becomes clear how much potential for the
abuse of the poor is waiting behind this new financial structure.

------
gcb0
> Asked why the public should expect rental-backed securities to be safe, the
> hedge fund investor responds, "Trust me."

I'd love to see the full, actual quote on that.

~~~
j_lev
The entire article is all over the place.

> But what if the security blows up? Investors could demand their collateral
> back, forcing renters out of their homes, even if they never missed a
> 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.

At the risk of invoking the "j_lev Law of Eating Hats" I can't see that
happening. There is ONE private investment company which has a loan with ONE
bank. Investors pull out, the size of the loan just increases by that amount.
All the investors pull out and Blackstone Group is left with a lot of (high-
yield) property and a large loan with DB. Worst case scenario the properties
are sold (potentially at a loss, but the remaining loan is still the problem
of Blackstone Group and DB).

------
rcarrigan87
This article feels very imbalanced. Does anyone have a more legitimate source
that tackles this issue?

------
w4
> But what if the security blows up? Investors could demand their collateral
> back, forcing renters out of their homes, even if they never missed a
> 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.

I'm sorry, but what? This isn't how leaves work, or at least it isn't in most
states I'm familiar with. No one is going to get evicted if investors demand
their collateral back - the leases might not be renewed (like might happen
with any other landlord), but the lease can't be terminated just because some
investors gets antsy.

------
danmaz74
Like every security, this one has its own risk and the investors should take
that into consideration when investing. _Hopefully_ these securities aren't
going to be mixed up with other less risky ones and sold together as AAA
securities...

------
jlarocco
I don't know which is worse... that they're doing this, or that for "only"
$1300 a month, I would probably rent from them if I had the option.

~~~
hkmurakami
Which real estate market are you in? The article states that many of the
purchases were done in areas hit hard by the recession. I can't imagine
$1300/mo is actually that good a bargain. Also, as other posters have
mentioned, you aren't likely to keep that $1300/mo price tag for long if the
area does recover.

~~~
jlarocco
Boulder, CO.

------
binarray2000
The game is played again and again and again: How to suck out the common man
and make him dependable. "We the people" are silent. Mostly.

------
sytelus
Lot of people think tech crowd in Bay area is driving up housing, but that's
not true - at least not entirely. Tech crowd is actually small fraction of
population even in Bay area and housing is on similar steep incline rate
pretty much everywhere.

My theory was that much of the demand for housing is from investors. I've read
tons of reports that wealthy people from China had been descending on US soil
and gobbling up pretty much everything on their way with entire deals in cash.
My real estate agent told me she is completely stunned how many deals are
coming from foreign investors in cash. On a typical house that comes in
market, it gets viewed by 200 buyers and gets about 10 offers within 1 week
involving bidding wars more often than not. I also show these giant investing
funds sweeping entire areas with their billions (my area was gobbled up by
Berkshire, for example). I also have few colleges who are now owning as many
as half dozen real estate properties - all bought from mortgage then rented
out through agencies. They are saying business has never been better and I
suspect they might soon leave their jobs to retirement. Many other people I
know overseas are putting larger and larger savings in buying real estate. In
most big cities, you can find buildings upon building with super expensive
apartments that only gets bought and sold but no one lives there.

I think what has happened is 2008 crash actually made real estate more
stronger then any other time in history because of the way it has bounced
back. In essence, real estate is a new cow. You can milk it forever by renting
it out and are thus guaranteed certain % of return. Plus it goes up in value
on pretty much any long stretch of time. Plus you can actually use it unlike
gold or stock. Plus it's virtually inflation protected. The biggest advantage,
however, is that you are almost guaranteed never to loose your entire
principal - even in the tough times. Even if 2008 repeats, you might lose
5-25% of value unlike stocks where anything is possible. Traditionally
investors thought of real estate as lousy investment because of non-liquidity,
auxiliary expenses, less rate of return than stock etc. The modern investor
thinks real estate as highest yielding best bet among all other safest bets.

I feel trend is going to continue at least for another 2-3 year if not more. I
can easily imagine 10-30% of all urban areas bought out by investors and only
available for rent. This would be a really bad thing on many levels. First,
money tied up in real estate doesn't go toward economy growth. Second, rental
market will get worse and worse because it will be controlled by few players
who will dictate prices to make sure they get highest return. Third, owning
house would become too distant a dream for pretty much anyone except top 1%.

The funniest thing is that you and me are technically funding above process.
All our 401Ks and retirement funds ultimately ends up at groups like
Blackstone to buy up real estate and then rent it back to us at highest
possible rate :).

~~~
pcurve
"All our 401Ks and retirement funds ultimately ends up at groups like
Blackstone"

I really think we should abolish tax-deductible/advantageous defined
contribution plans like 401k, IRA, Roth, college funds, etc. This automatic
investing scheme is giving inordinate amount of power to wallstreet, and force
money to chase after equities and securitized products because that's all they
know how to 'invest'.

If you're going to invest in stock market, you should make conscious choice to
do so using after-tax earnings just like other forms of investment. The only
reason why people plow money into these accounts is because of tax benefits.

Take that away and people will find more creative ways to put their money to
work.

That could ultimately be a good thing for this country

~~~
vitriol83
i would be slightly more targeted- abolish tax incentives for investment in
real estate. investment in real estate is literally rent-seeking, unproductive
and is widening inequality , particularly between young and old.

~~~
creativeone
If by rent-seeking, you mean: using resources to obtain an economic gain from
others without reciprocating any benefits back to society through wealth
creation.

Then real estate is not "rent-seeking".

Real estate owners take the burden of home ownership off the shoulders of
renters. Renteres choose to rent because they have an economic incentive to do
so. Instead of a buying a home cash, or putting down a deposit, a renter can
use that money for investing in other activities, spending on themselves or
their family, or save. Of course, there are many renters who cannot afford a
down payment at all. For them, the landlord is playing an even more important
role by letting them rent in areas where purchasing would be impossible.

I do agree that most tax incentives for investing should be abolished. But I
disagree that real estate is less productive than other types of investing.

~~~
vitriol83
In general you're right it's unfair to say that real estate investment is
always unproductive and rent-seeking. However for major cities like London
with tight supply, the flows of real estate investment that followed QE and
zero interest rates haven't been matched by appropriate levels of home
building. As a result affordability and ownership levels have reached historic
lows, and many more people are becoming 'unwilling' renters, only able to
service the financing costs of real estate investors. At this stage it becomes
rent-seeking and unproductive, in my view, and there ought to be appropriate
policy responses from government.

------
owly
Why don't we have an Air BnB or Uber for the rental market?

~~~
ceejayoz
Most jurisdictions have heavy, hardcore regulatory protection for rental
tenants. AirBnB and Uber only exist because they're temporarily able to dodge
regulation and it is already starting to catch up to them.

