What Could Possibly Go Wrong?

Yes, the folks who gave you complex financial instruments based on mortgage backed securities that nearly destroyed the world, are looking to apply their special genius to the rental market:

You’d think that investors would run away from a new Wall Street innovation as fast as Congress runs away from a good idea.………

Ummmm, no. Wall Street's primary model is to convince a potential investor is that there is another idiot further down the chain that they sell this crap to.

So, no, I do not think that investors would run away.

………But instead, they’re flocking to the latest product peddled by large banking interests, even though they look almost exactly like the mortgage-backed securities that were a primary driver of the financial crisis. These new securities, backed by rental payments, also have real-world implications for millions of renters, who could end up turning in their monthly checks to Wall Street-based absentee slumlords.

Over the past couple years, private equity firms and hedge funds have bought up over 200,000 single-family homes, mostly discounted foreclosed properties in communities wrecked by the housing crash, such as Phoenix, Atlanta, Tampa, Sacramento, Los Angeles and Riverside, California. They have spent billions to scoop up these vacant homes at fire-sale prices, renovate them, and rent them out, promising investors double-digit annual returns on the rental revenue. Private equity firms like Blackstone, which owns more than 40,000 single-family homes, think they can build an entirely new asset class out of this scheme, controlling the rental market for single-family homes. The irony is rich: Wall Street created the conditions for millions of foreclosures, then they sweep in to buy up the homes and rent them out, often to the same people they kicked onto the street.

………

Like mortgage-backed securities, the bonds would get sold in tranches, with the senior levels getting rental revenue first, and the junior tranches taking the rest. Rating agencies like Kroll, Morningstar and Moody’s have blessed the deal, presenting the senior tranches with a triple-A rating, essentially labeling it as perfectly safe for investors. You’ll remember that mortgage-backed securities were bestowed triple-A ratings during the housing bubble, and that this spurred massive purchases, fueling demand for more and more home loans to create more securities. You can see the same thing happening in the rental market if these securities catch on. In fact, while the most attractive foreclosed properties have already been snapped up, homebuilders are constructing new properties specifically for single-family rentals. Some analysts are concerned that this gold rush will create a new housing bubble in the communities where Wall Street firms are purchasing homes.

………

But securitizing rental revenue is beset with unknowns. The rating agency Fitch underscored many of these concerns when they justified their opposition to rating the Blackstone bond.

So, this sh%$ is so toxic that even the massively corrupt ratings agencies won't touch it.

The consequences for 14 million single-family renters in America could be worse. Fears that Wall Street firms would try to trim costs by ignoring maintenance and upkeep have so far been realized. As Ben Hallman at The Huffington Post recently detailed, Wall Street-owned rental homes are riddled with mechanical and plumbing problems. The firms basically freshened up foreclosed properties with a coat of paint and rented them out, ignoring serious deficiencies like broken toilets and even vermin infestations. And predictably, the landlords are impossible to reach to get repairs done. “I’ve been renting homes for 15 years and I’ve never had a landlord be this ridiculous about getting stuff repaired,” said one renter of Invitation Homes, Blackstone’s single-family rental subsidiary.

………

Plus there’s the concern that securitization of rental payments will lead to the same kind of risky, illegal practices we saw with securitization of mortgages. Nobody should welcome a return of innovations like CDOs (where the riskiest tranches get sliced up and repackaged as “safe” securities) or adjustable payments (what if renters were sold “teaser” rates on their monthly payments that reset to prices they couldn’t afford?). And nobody wants to think about the strong-arm tactics that would be applied to force payments out of tenants, regardless of the circumstances. This is a rerun, and the first movie ended rather badly.

We know how the banks handled managing mortgages.  They sucked.  They screwed it up even when all they needed to do was sit back and collect the money.

Their response to tenants demanding that their homes be maintained will be a hearty f%$# you, followed by an aggressive use of bribes political donations so that they can continue to extract rents completely without consequence.

If this sort of bribery worked in DC to emasculate financial regulations, it will work on Teaneck New Jersey zoning board.

Rinse, lather, repeat.