Are rental bonds driving up the rent?

Rep. Mark Takano asks House Financial Services Committee to investigate

Bonds backed by rental payments may be gaining investor attention, but they’ve also caught the eyes of a few critics along the way.

Some lawmakers are beginning to fear this new asset class, with one even asking the House Financial Services Committee to investigate.

Rep. Mark Takano, D-Calif., sent a letter to House Financial Services Committee Chairman Jeb Hensarling and Rep. Maxine Waters, D-Calif., asking for an investigation into rental-backed securities deals.

His fear: 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.

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. 

Takano is simply asking for an investigation into the overall concept, but does say the deals he’s interested in closely mirror the single-family rental securitization concept set up by the Blackstone Group. The private equity firm spent years building a supply of single-family rentals with the intent of selling bonds backed by lease payments. Of course, such bond represent a tiny portion of the rental market, but still there are concerns.

Takano worries the market and regulators are not yet sure how these structured deals would perform in a real housing downturn.

"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," he 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."

His other worry: rising rental prices. The representative noted that residents in Riverside County, Calif., are already paying more than half of their incomes on rent. With purchasing a home becoming much more difficult, a lack of balance spurred by investors could make the lives of lifetime renters and those unable to buy homes much more difficult in his opinion.

"These new products deserve thorough review before they become common place," Rep. Takano said. "Ratings agencies are at odds over how to assess the risk of these new bonds. Moody’s Investors Service gave the bonds in the highest traunch a Triple-A rating, but Fitch has refused to rate the bonds citing their limited track record and vulnerability due to the intricacy of maintenance expenses, capital expenditures, property tax fluctuation, and the potential for local municipality involvement."

With these questions unanswered, Takano wants the House Financial Services Committee to jump in and be the first to ask questions.

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