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Investments

California Congressman goes on REO-to-rental warpath

Takano pushing four federal bodies to investigate

Congress
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Longtime critic of REO-to-rental U.S. Rep. Mark Takano, D-Calif., is on the warpath Thursday, firing off letters to four federal entities asking for a detailed investigation into the growth of REO operations and REO-to-rental as an investment — and what they are doing to effectively regulate the emerging asset class.

Takano sent letters Thursday morning to the Consumer Financial Protection Bureau, the U.S. Department of Housing and Urban Development, the U.S. Securities and Exchange Commission, and Treasury Office of Financial Research.

Takano is concerned that rental prices are going up, and a surplus of investors in rentals -- along with new rental-backed securities deals -- could have the effect of artificially raising rental prices, making housing even more costly in parts of California and elsewhere.

Takano cites a Federal Reserve report, which claims if unchecked, investor activity in local housing markets may lower the quality of neighborhoods, while pushing up prices. 

Investor purchasers have been an outsized figure in recent years in housing. Normally, about 85% of home sales are individuals purchasing with a mortgage, about 10% are all-cash sales, and about 3-5% are distressed sales. In 2013, something like 40% of home sales were individuals using a mortgage, 40% were all-cash, more than about 15% were distressed sales and 5% were flips.

Takano’s office wants a number of detailed questions investigated by the federal entities, including clarification on how single-family rental bonds are structured, what their metrics are, how their performance criteria could affect operations, and what is the risk that when bonds mature, the borrower would be unable to refinance the bonds and be forced to sell properties to repay bondholders.

From the SEC, Takano wants to know details about the investors who are purchasing the bonds, how the riskier tranches are sold and whether they are being re-packaged into collateralized debt obligations and resold with higher ratings.

He wants the CFPB to provide a list of local housing markets with high concentrations of rental properties linked to rental-backed securities, and analysis of common trends within these communities, so that they can examine the impact of REO-to-rentals and rental-backed securities on mortgage credit availability, rental prices, and housing prices in highly impacted communities.

Further, he wants the CFPB to perform a comparison between the rehabilitation, ongoing maintenance, and management costs that large investors spend on REO-to-rental properties with other actors, and how that impacts local neighborhoods.

From HUD and the Federal Housing Administration, Takano is asking for detailed information about the impact of large investor purchasers on first-time homebuyers’ ability to enter the market, and an evaluation of trends in FHA-approved mortgages in impacted communities.

To date only two REO-to-rental deals have been securitized.

Blackstone Group (BX) spent the past two years building an expansive portfolio of single-family rental homes via subsidiary Invitation Homes, spending $7.5 billion to acquire 40,000 houses. Blackstone then packaged rental income from single-family homes into a pass-through security, which is functionally not unlike a mortgaged-backed security.

Goldman Sachs (GS) started coverage on American Homes 4 Rent at a neutral rating and a price target of $18, reports say. American Homes 4 Rent has spent some $3.5 billion to acquire more than 21,000 rental homes.

"If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole," Takano explained. "Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall."

Jed Kolko, chief economist with Trulia, told HousingWire that the outsized and growing number of single-family rentals' affect on rental rates in general is negligible.

Using American Community Survey data from 2005 and 2012, Kolko looked at the change in metro housing units that were single-family rentals.

Most metros had a large increase in the share of their housing stock that was single-family rentals. Among the 100 largest metros, Kolko looked at the top 10 with the biggest increases in institutional investments (from one to ten) – Las Vegas, Nev.; Phoenix, Ariz.; Cape Coral-Fort Myers, Fla.; Memphis, Tenn.; Riverside-San Bernadino, Calif.; Tuscon, Ariz.; El Paso, Texas; Lakeland-Winter Haven, Fla.; Fresno, Calif., and Sarasota, Fla.

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