Wall Street's Entry Into Residential Rental Market "Might Not End Well"

When the Great Recession struck the nation with full fury, the residential housing market suffered some serious blows. The most significant damage was done in the low-end residential segment, where strung out owners found themselves staring at foreclosure. At the time, the reigning thought was that foreclosures would depress housing prices. That event did not happen, with certain exceptions. What stemmed the foreclosure tsunami was Wall Street intervention. No, this was not done for the benefit of the Republic. Rather, sharp-eyed financiers saw an opportunity to buy low and, presumably, sell high at some point down the road. In the meantime, Wall Street firms such as Blackstone became landlords. The irony, as Prashant Gopal points out in a thoughtful Bloomberg opinion piece, is that the foreclosed owners have often become rent paying tenants.

Image: daytondailynews.com

The deal for Wall Street is a sweet one, as firms such as Blackstone have access to Federal Reserve funds at a rate roughly half of what mere mortals pay for a routine home mortgage. The chutzpah does not end there. Another Bloomberg article notes how Magnetar Capital, an Illinois-based alternative asset manager that's a new player in the foreclosed residential rental world, demanded a tax rollback on the foreclosed properties it recently purchased in Huber Heights, Ohio. Magnetar real estate representatives promised the money would be used to spruce up the acquired properties. Of course, unstated was that the "improvements" would benefit Magnetar rather than Huber Heights' neediest citizens.

Placing much faith in the promises of indifferent, Olympian financial firms does not seem a way for a community to survive, never mind thrive. Should one trust Magnetar's promises? The Bloomberg report on Dayton noted that

In 2006 and 2007, Magnetar helped banks create complex securities backed by risky mortgages. At the same time, the hedge fund [Magnetar] made bets that would profit if the homeowners defaulted. The U.S. Securities and Exchange Commission investigated the deals after housing imploded and has fined some of the banks involved. The government hasn't filed a complaint against Magnetar.

The notion that one should trust the lofty sentiments of a hedge fund that created dodgy mortgage-backed securities and bet against them seems downright stupid. The reality is that the Huber Heights tenants' financial assets are essentially being strip mined. Meanwhile, this dark scenario is being played out against a steady drumbeat of  economic "recovery" assertions from East Coast major media players, DC politicians, and Wall Street spokespeople. A glance at Huber Heights' new tenant class strongly argues otherwise.

Wall Street Firms Concoct Bond Backed By Home Rental Income

Like a moth to a flame, Wall Street has returned to creating dodgy real estate securities. In this case, Blackstone and Deutsche Bank are about to market a bond backed by home rental income. However, as the Financial Times reported, the two firms are not packaging Manhattan residential building income. Rather, they are using rental income from foreclosed homes Blackstone and others purchased for pennies on the dollar and transformed into "affordable" housing, often marketed to those who lost homes via the rancid, corrupt foreclosure process.

Blackstone has been a major player in the foreclosure/rental market. The general sense was that Blackstone would rent the homes and sell them for enormous profit when real estate "recovered." In the meantime, Blackstone and Deutsche Bank can leverage their property ownership into funky securities. One catch in the process is the need for a credit agency to provide appropriate blessing to the bonds. Apparently, and unsurprisingly, one such firm has been found.

Let's see if federal regulatory agencies, which have essentially played matador to Wall Street's bulls, ask questions about this new scheme.

Housing Bubble Worries Start to Bubble Up

Housing has become a significant part of the action in the recent, Fed-stimulated economic recovery. The happy talk around the upswing features cheerful notes about increased home values and multiple bids. However, some wise heads are considering whether this so-called recovery is in fact becoming a housing bubble. According to a story in bloomberg.com, "investors" are fueling the housing market, rather than single-family home owners. These players include deep-pocketed firms such as Blackstone, which purchase foreclosed homes on the cheap and transform them into rentals. The dirty secret in this arrangement is that rents in these homes turn out to be higher than the mortgage payments the homes' former owners could not afford to make.

The Bloomberg article cited a Wells Fargo housing analyst's view of the market. Investors, the expert noted, "are buying properties as quickly as they can and when they leave, housing will take a hit. Investors accounted for 19 percent of sales in the U.S. in March and even more in some former bubble markets, according to the National Association of Realtors." Guess who will take the fall when the next bubble bursts?