Remember the phrase "mortgage-backed securities" and stories about how they helped send the economy into a tailspin? Well, Wall Street has a new and not-so-improved version, this time involving rental homes, writes David Dayen at Salon. Private equity firms such as Blackstone have been buying as many single-family homes around the country as they can (many of them foreclosures), doing superficial upgrades, then renting them out to families. Some nuts and bolts:
- "In order for this to work, firms need cash to outbid the competition," Dayen explains. "So Blackstone teamed with Deutsche Bank, Credit Suisse and JPMorgan Chase to put together the first-ever rental revenue bond, named 'Invitation Homes 2013-SFR1.' Basically, Blackstone took out mortgages with the banks on 3,207 of its rental properties, in exchange for $479 million in cash, and they will forward rental payments to the bondholders to pay back the loan."
Investors seem to love the premise, even though these new vehicles "look almost exactly like the mortgage-backed securities that were a primary driver of the financial crisis," writes Dayen. He emphasizes that a societal shift to renting from home-ownership isn't necessarily a bad thing, nor is securitization in principle. But combining the two seems like a huge risk. "It’s hard to trust that the same financial titans who blew up the economy won’t distort and pervert the rental market to such a degree that people simply looking for a place to live won’t again get squeezed by Wall Street greed." Click for Dayen's full column.