Wall Street Investors Buy Up Neighborhoods

Rental Homes: Next Wall Street Idea?

Wall Street is at it again

Have you read the recent media reports about Wall Street firms buying up homes in order to create rental portfolios and then securitize the rental payments?

If it sounds familiar- it is.  This is the same strategy that backfired so miserably when Wall Street sliced and diced mortgages.

This week, the Center for American Progress released a report, “When Wall Street Buys Main Street” that more closely examines the first mortgage-backed security supported by income from single family rental properties.  The authors note that the bond is set to mature in two to five years.  If Invitation Homes (a subsidiary of Blackstone) is unable to pay back the bond holders, there could be negative consequences. For example, Invitation Homes could be forced to sell all of the rental homes to pay back the bond.  This sudden flood of homes onto local housing markets would hurt property values, and tenants would also be impacted.

The California Reinvestment Coalition, Housing and Economic Rights Advocates, and other advocates will be calling on federal regulators next week to address this issue.  In the mean time, if you’re interested in learning more about how this new strategy could affect current tenants, homeowners, communities, and prospective homeowners, here’s a few selected articles and resources:

  1. Home Loan Servicing Solutions Ltd. buys mortgage servicing rights from Ocwen and then hires it to collect loan payments. Altisource Residential Corp. (RESI:US) purchases delinquent loans, including some from Ocwen, to turn into rental homes. It’s managed by Altisource Asset Management Corp. And Altisource Portfolio Solutions provides services to Ocwen’s portfolio. “If a mortgage goes into foreclosure and you lose those servicing fees, so what,” said Christopher Wyatt, a housing consultant and former vice president at Goldman Sachs Group Inc.’s Litton Loan Servicing. “You can funnel it to one of your other businesses and still make money from it.” Billionaire Erbey Fails to Halt Ocwen Slide on Probe: Mortgages  (BloombergBusinessweek)
  2. 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.  How Wall Street Has Turned Housing Into a Dangerous Get-Rich-Quick Scheme—Again  (Mother Jones)
  3. Doretha Johnson, 59, had rented a home near North Graham Street and Interstate 85 for nearly four years when her landlord sold it to a subsidiary of Blackstone, a Wall Street private equity giant. The house’s new owner, Invitation Homes, raised the rent by a third, beyond what she said her fixed income would bearCharlotte’s Wall Street landlords move quickly to evict renters (Charlotte Observer)
  4. The report by the Oakland-based Urban Strategies Council entitled “Who Owns Your Neighborhood?” said that 62 percent of the 10,508 completed foreclosures in Oakland since 2007 are either still owned by a financial institution or acquired by an investor. It said that as of October 2011, investors had acquired 42 percent of all properties that went through foreclosure in the cityReport Finds Investors Buying Up Foreclosed Oakland Homes (CBS San Francisco)
  5. Fitch’s concerns are further heightened by the number of operators concentrating their investments in a handful of states and metropolitan statistical areas (MSAs), which, based on most business models, are at the neighborhood level. Because of the specific demographic targeted by these institutional buyers and the inelasticity of rents, transactions are highly vulnerable to unknown variables that could potentially impact the cash flows and yields. Among them include repair and maintenance expense, capital expenditures, rising property taxes, homeowners association restrictions, or the potential for municipality involvement. Unlike other asset classes, SFRs do not have the benefit of historical performance over several business or housing cycles that would otherwise flush out some of these uncertaintiesRPT-Fitch: Too Soon for ‘AAA’ on Single Family Rental Securitizations (Fitch Press Release)
  6. Nicole Borden, a real estate agent with Coldwell Banker in Atlanta, said she was told this month by representatives from Invitation Homes and American Homes 4 Rent that the companies aren’t offering any of the homes on the market to Section 8 voucher holders. “This is not homeownership,” Borden said. “I don’t understand how so many people are being turned down from rentals.”  Wall Street’s Rental Bet Brings Quandary Housing Poor (Bloomberg)

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