It’s been about two years since securitization of REO rental income streams came onto the radar screen of the securitization world. October 2013 saw the first such offering from Invitation Homes, a subsidiary of Blackstone Group, an investment house with a portfolio of 40,000 homes bought out of foreclosure, many of them in areas of the country that saw particularly high losses in value-on-paper and resultant foreclosure rates.
Investors’ near-term effect on the REO market appears to have bolstered housing prices, and the drive to put empty properties back on the tax rolls, and filling a demand for rental housing, is all for the good. But investors aren’t in this for their health – or yours, or mine. Invitation Homes’ nearly $500 million pass-through securitization deal is a logical outgrowth of investors’ drive for a quick ROI, rather than waiting for rents to accrue. Think of it as taking a big, big cash advance, using other people’s money. And they’ll eventually want to exit the deal with their gains intact.
Securitization of rent streams allows bondholders to benefit both from current rental income streams and the eventual sale of the rental properties – without having to actually own the homes.
The Blackstone deal is a REMIC (real estate mortgage investment conduit). Its bonds’ generally high rating hinges on Blackstone’s financial stability and its use of a property-management company to oversee its rentals – but it doesn’t drill all the way down to the economic strength of the renters who would make the payments or the real-life costs of maintenance and property management. No worries — if the REMIC fails, it can be repackaged, unlike many of the neighborhoods which make up the portfolio.
In the last two years, government-sponsored enterprises have put more REO properties on the market for investors, HousingWire has reported, and this would appear to fill a growing need. But just about a year ago, Moody’s Investors Service warned that rental securitization poses greater risks than those of mortgage backed securities. It’s easier for tenants to walk when the local job market is weak, than it was for “homeowners.”
During 2013, several large financial institutions have jumped into the REO-to-rental securitization lending business, among them, Deutsche Bank, which served as the lead manager for the Blackstone deal (and which on December 20 got let off the hook in New York state from a $330 million lawsuit related to 2006 and 2007 sales of residential mortgage backed securities to investors) FeatherStone Investment, American Homes 4 Rent, and Blackstone Group, which launched B2R Finance to provide residential buy-to-rent mortgages for mom-and-pop property investors with portfolios of five to 500 homes.
Call it a function of chasing any opportunity for higher yields in a low-interest-rate market and trying to find a simple, elegant solution to get out from under the REO burden. Both noble aims, but ultimately it may be the equivalent of trying to pull a habit out of a rat. And as Rocky said to Bullwinkle, that trick never works.
