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Wall Street’s teetering new rental empire

March 14, 2016

The rise of rent-backed securities ensures we’ll have another crash

History may repeat itself, but in few places are its cycles so maddeningly short as on Wall Street, where the recent advent of rent-backed securities has whipped financiers into another feeding frenzy. The innovators of this hot new financial product have found a way to slice, dice and repackage debt tied to thousands of real-estate-owned (REO) homes — a process that may sound awfully familiar.

That’s because it is: Rent-backed securities are the direct descendants of the mortgage-backed securities that crashed the economy in 2008. This time, however, investors’ income streams are coming not from monthly payments on frequently predatory mortgages but from the rent checks of thousands of ordinary tenants in single-family homes.

When rent-backed securities premiered on the market in October 2013, the $479 million offering from the private equity giant Blackstone Group generated more demand from investors than the private equity firm could accommodate. Since then, Blackstone and several other firms specializing in the rental of single-family homes have sold more than $3 billion of these bonds. REO-to-rental securitization has been hailed as an exciting new asset class, with financial analysts at Keefe, Bruyette & Woods estimating that it could swell into a nearly $1 trillion industry over the next six years.

The market reached a fever pitch this summer. In July and August alone, three firms have introduced three new REO-to-rental securitization deals, ranging from $310 million to $720 million in value. The companies issuing bonds backed by their single-family home rentals have assured investors that this strategy is a perfectly safe way to return some liquidity to the recovering housing market while providing a boost to the economy at large…

Cut Wall Street out?

Rep. Mark Takano, D-Calif., has joined the chorus of housing advocates calling on Congress to hold hearings on rental-backed securities. Groups such as the Right to the City Alliance, meanwhile, are advocating policy solutions such as a financial transaction fee on rental bonds and just-cause eviction laws that better protect tenants from being thrown out at the whim of the market. Such measures could help stem the tide of risky securitization and hold investor-landlords more accountable to tenants and communities… (more)

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