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Congressman fires up debate on REO-to-rental

Takano wants answers on potential risks

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One of the early alarm-sounders on the rise of REO-to-rental is trying to fire up the discussion over what he sees could be a potential threat to the housing market in the rise of investor-owned rental homes and the securitization of REO.

U.S. Rep. Mark Takano, D-Calif., hosted a briefing Wednesday on rental-backed securities, institutional investors in the home buying market and the potential consequences.

“It’s important for Congress to take its responsibility [seriously], in terms of oversight, and begin to understand these financial instruments and the phenomenon of investor-owned properties that are growing across the country,” Takano said.

He said he believes risks in RMBS sold during the run-up to the housing crisis — which included subprime mortgages that garnered AAA ratings — were hidden from investors.  He said he is troubled now by what possible risks might be lurking in these single-family rental bonds that have yet to surface.

“There are risks that need to be more fully examined,” he said.

Institutional investors began snapping up REOs to convert to rentals in large numbers in mid-2012. Within a year, about a dozen large institutional investors — hedge funds, private equity groups and REITs — had purchased roughly 130,000 homes. Some experts in the housing industry credit this activity with providing a floor that allowed for the housing recovery that quickly followed. 

Takano wants those potential risks fully aired in a public setting and Takano said he’d heard from several congressmen at a recent caucus meeting who also support public hearings.

Notably, in a December 2013 report, the Federal Reserve said investor activity in the single-family rental market “may pose risks to local housing markets if investors have difficulties managing such large stocks of rental properties or fail to adequately maintain their homes.” 

KBW analyst Jade Rahmani estimates the market could reach $16 billion to $22 billion per year in securitizations within the next three to four years, but cautions this depends on the capture rate on total investor holdings. Eventually, annual production could reach or exceed $30 billion, depending on capture rates, he said.

Sarah Edelman, policy analyst for Housing and Finance for the Center for American Progress; Ben Hellweg, head of acquisitions for Hyperion Homes, and Sam Khater, deputy chief economist for CoreLogic(CLGX) participated in the discussion.

“Several of the questions we get all the time is, ‘How big is this market? Do they have an impact?’ From a national perspective, the impact is small, but from a local perspective, the impact is fairly large. And from a price perspective, there is definitely an impact, especially in some of the markets where they [investors] are particularly active,” Khater said.

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