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Good heavens! REO-to-rentals trying to turn a profit?

NYT: This new asset class thing is new and therefore scary or something

February 10, 2014
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Michael Corkery over at The New York TimesDealb%k seemingly just discovered REO-to-rental as an emerging asset class and it seems like he’s just not sure attitudes towards it are sufficiently negative.

"Wall Street’s latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world."

Not to nitpick, but this isn’t exactly Wall Street’s “latest” trillion-dollar idea. Mortgage-backed securities have been around a very long time. And REO-to-rental as an asset class isn't exactly new – the first securitization was back in October 2013. HousingWire magazine has already published three in-depth features (one here) charting its course.

That first deal took quite a while to put together. The very KBW report Corkery's alarm arises from came out back in October 2013.  

Nor is it really a “trillion-dollar” idea. The total value of asset opportunities may run to $1.5 trillion or more, but single-family-backed rental bond deals (i.e. what is at risk) is only – as the story explains at the end – an amount that “could reach $7 billion this year, and grow to about $20 billion a year.”

But hey, you’ve said the T word and now we’re all paying attention.

So what’s the very second sentence, giving us context for this Wall Street scheme?

"That might sound a lot like the activities that at one point set off a global financial crisis. But there is a twist this time. Investment bankers and lawyers are now lining up finance investors, from big private equity firms to plumbers and dentists moonlighting as landlords, who are buying up foreclosed houses and renting them out."

So it’s exactly like what caused the world economy to collapse, only really it’s worse. Because…dentists?

Look, there are some alarming things about the overall economy to be gleaned from the rapid rise of REO-to-rental operations over the past year.

The fact that about two of every five home sales is an all-cash (presumably investor) buyer may be a sign of a larger weakness in the housing market, and it may be artificially pumping up housing prices. There are a lot of questions the growth of REO-to-rental operations raise. But will they be answered with another GLOBAL FINANCIAL CRISIS?

As an asset class, REO-to-rental is new to many of us, and just because it has to do with “bundling mortgages” doesn’t mean it’s anything like the practice of bundling subprimes and selling them as AAAs.

It doesn’t deserve a knee-jerk reaction like The Dealb%k gave it.

After reviewing the first two securitizations of REO-to-rental deals, an odd objection is raised.

"Wall Street may be clamoring to lend to investors in single-family homes, but it is still difficult for millions of Americans to qualify for mortgages. The easy financing could give investors the upper hand in bidding for homes."

There is some universe where an all-cash investor coming to the table to buy a home would be at a disadvantage to an individual trying to qualify for a mortgage, but it’s not this one.

"If you’re bidding against a cash-rich investor for a property it’s going to be hard to beat them," Rick Sharga, executive vice president at Auction.com, told Housingwire.  "That’s just a fact. And I have questions that those on the (economic) margins will qualify for mortgage under the new rules anyway. I saw a report yesterday that says something like 38% of minorities don’t have the 43% debt-to-income required. So they would be renters anyway."

Sharga is skeptical of REO-to-rental as an asset class because of the challenge of rating such assets, but he says the objection that it puts individual homebuyers at a disadvantage is pointless.

The Dealb%k quotes U.S. Rep. Mark Takano, D-Calif., who has been critical of REO-to-rental operations and the securitization of REO-to-rental deals. Takano is worried about the impact on communities.

Housingwire asked Trulia to help determine the impact of the rise of investor-owned single-family homes on rental rates and home prices, and a survey found no impact on rental rates and only a partial impact on home prices.

“The outsized and growing number of single-family rentals may be a serious indicator of an unhealthy housing market, but the impact it’s having on rental rates in general is nil, and at least part of the price appreciation the market has seen is as much a rebound effect as it is the impact of investor dollars pouring in and snatching up bargains,” said Jed Kolko, chief economist with Trulia.

While Takano may be fretting about community impacts – real or imaginary – at least one community is looking at REO-to-rental as a way to save its housing market.

The city of Milwaukee is looking favorably at the idea of selling upwards of 1,000 foreclosures in bulk to a private equity investment group for rehab and rental.  

REO-to-rental as an asset class is a relatively new investment and it deserves the same scrutiny as any other investment opportunity. Investors at ABS Vegas in January far and away thought it is the class where there was going to be some of the greatest growth in 2014.

But to suggest the asset class as a subprime meltdown 2.0 trigger right out of the gate? That’s just knee-jerk alarmism at best.

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