No matter how bad things get, it turns out they can always get worse. Wall Street is about to foist a new “innovation” on investors that even the ratings agencies won’t touch.
Greedy, reckless, and just plain lazy mortgage originators, servicers, and trustee took what was actually a not unreasonable idea, that of mortgage securitizations, and turned it into a loss-bomb. Remember, that movie did not have to end badly. First, participants in the private label mortgage securitization market did for the most part comply with the requirements of their contracts for the first decade plus of that product’s existence. It was their wanton disregard for their own products which have led to the chain of title mess and difficulties in foreclosing that still plagues that market. Second, securitization markets that developed later than the US market (most notably, in of all places Russia and Eastern Europe) and featured some improvements on the US template have not seen the abuses of borrowers and investors suffered here and got through the global downturn reasonably well. However, the sell side has completely refused to implement the sort of reforms necessary to make the product safe for investors. So the US mortgage is and is likely to remain on government life support for the next decade.
So what have the “innovators” decided to do? Foist an even worse product on hapless investors. Remember, mortgage securitizations in concept are a decent idea and with proper protections, fees, and incentives, can be a useful and attractive product. Securitizing rental income streams for a large number of single family homes is a completely different proposition. The concept is clearly still being fleshed out, since a story on it in Reuters was unclear as to whether the “bonds” would also be entitled to the proceeds of the eventual sale of the house. I imagine that the private equity investors who are targeting this market are pushing for that, since fobbing off the problem of the home sale to the securitized vehicle is tantamount to a full cashout. They’d get initial tenants in, no matter how good or bad, and effectively flip the house to the securitization.
The newly-found convervatism of the ratings agencies may (stress only may) put a damper on this market. The ratings agencies are not willing to rate the initial deals, and want to see some history before they hazard a rating. Even then, some regard this product as sufficiently risky so as not to merit high ratings even if it were to become established. From Reuters:
Over the past three months, Fitch, S&P, DBRS and Morningstar have each published initial assessments of the potential risks of the new asset class. But no agency has yet published official criteria for the product.
Fitch said that such transactions are unlikely to merit a rating above Single A — and even that would require sufficient historical rental-payment data or a solid record from the property’s operator/manager.
Moody’s issued its first report on the subject on Thursday, but said that since it had not seen a formal proposal yet, it was too early to tell exactly what rating it would assign a transaction. However, it noted that even extra credit enhancement would not mitigate a lack of historical rental-payment data, and therefore some transactions might not merit top grades.
“We would like to see the specific underwriting criteria that the operator is using to choose these tenants,” Kruti Muni, a Moody’s analyst, told IFR.
“Obviously the operators would rely on income information, the existence of security deposits, history of utility payments, etc. The diversity of the geography of the pools of homes is significant as well.”
Moody’s also said that before assigning a rating, it would need to know detailed information about the operator, and would conduct a review of the operator’s performance, its experience and its ability to perform its role in the transaction, which includes determining tenant default rates and re-leasing periods.
As Dave Dayen notes:
It’s simply incredible that, even with so many variables involved, Fitch would give these deals something even as high as single-A. You need data on default rates, vacancy periods, the impact of local economic forces on rentals, the various property managers and operators who would be handling the rental units in the deal, etc., etc…
There’s just no reason to believe that hedge funds and PE firms with no history of being landlords will be able to ensure a steady stream of revenue out of this. Moreover, one economic shock could blow up this market as easily as the housing bubble popped. We already know that the US economy is due to take a step back in 2013 at best, if not a full-blown recession as a result of the fiscal cliff. Add that into the mix with 9% unemployment or above (the expected range in the event of a recession), and suddenly hundreds of thousands if not millions of Americans fall behind on their rent. The securities start to sour. And this could become a full-blown financial crisis just like in 2007-2008.
To amplify Dayen’s concerns, this looks like an effort to fob risk off onto yield-despterate investors. Rental markets are tight now, precisely due to how many homes are behind held in REO inventories or have had the homeoweners leave, yet the servicer had not actually had the trust take title to the home. But those former owners need housing, so we have a real estate version of musical chairs, with families looking for rentals before the forecloses homes have been converted to rentals. Once the conversion process is further along, it isn’t hard to imagine that rent rates will be lower in many markets and vacancy periods will be longer. Similarly, some homeowners lost their houses due to financial stress. Some of them may not even be able to make their rent payments reliably. We saw how in the 2006-2007 period, mortgage were securitized even when the borrower had defaulted in the first three months. It isn’t hard to imagine that we will see equally weak tenant rental streams sold into these securitizations.
The other looming horrorshow is, if you think mortgage servicers were unresponsive, consider how bad rental securitization servicers are likely to be. Their incentives will be to delay in responding to tenant problems in the hope that the tenant will spend the time and money required. And God only knows what happens if they apply payments incorrectly, a not-infrequent problem. One difference here is that mismanaged rentals pose a threat to the home value of the neighbors, and here, the local community does have some recourse, in that it can impose minimum rental standards, which would provide tenants with some recourse. If some communities were to go that route, it might lead to enough uncertainty regarding rental costs and income so as to deter the ratings agencies from ever assigning ratigns, which would presumably limit the size of this product considerably.
As with mortgages, the impulse of the financial community is to find even more ways to skim fees off the top of income streams and leave investors holding the bag. And if investors are dumb enough to be fooled again, after the disaster of mortgage securitizations, they will have gotten what they deserve.
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“One difference here is that mismanaged rentals pose a threat to the home value of the neighbors, and here, the local community does have some recourse, in that it can impose minimum rental standards, which would provide tenants with some recourse.”
I’m not sure that is a difference. The communities can and have imposed standards on home owners and mortgage holders (via banking laws) our employees (elected reps and regulators) have just chosen not to do their jobs. I see this as being no different.
I.E. No different in that it is a train wreck that might be ok with sufficient regulation but that won’t happen until we face a sea change in politics. Right now the rule of law, such as it is, applies only to dope smokers not deal makers.
There could be a very big difference in this instance. banking and securities laws are enforced at the federal and state levels where elected officials and regulators can escape responsibility for any particular instance of regulatory failure. Rental regulations would be enforced at the municipal level where it would be more difficult for government to escape accountability. If you are a US Senator it’s easy to duck responsibility for degrading foreclosed homes on one block in one city of your state, but if you are the mayor of that city and you aren’t enforcing city regs you will fear the voters will take it out on you come election time.
Exactly right, Chris. As Yves notes, landlord-tenant laws are local, both state and municipal. They are hard-fought and deeply-rooted with entrenched advocacy/watchdog groups, including specialty law firms upholding them.
No, although the immunized ratings racketeers could be bribed into rating new issues from Madoff as AAA, this will be too sticky to touch. The liability is glaringly obvious and immediate, even for the most corruptible pension-fund ‘dupes’.
IMO, this is primarily a ploy for indefinite deferral of extend-and-pretend for GSEs and the Criminal Reserve. Rather than forcing writedowns by selling houses at true market value, or holding deteriorating inventory in perpetual dark shadows, why not pretend that mark-to-myth values can be sustained under the TLC of PE slumlords? Of course they can’t and won’t, but this is not about sustainability at all. The whole point now is to delay, deny, and defer while siphoning the last drop of blood from dispossessed homedebtors and taxpayers.
No, you are incorrect.
The OCC has the right to “preemption”, which means they can override state and local laws as far as OCC regulated banks are concerned. Pretty much any bank is OCC regulated.
Securities laws are at the national and state level. Ex New York (which has the Martin Act, in short form, it is tougher in some respects than Federal securities regs), state securities regulators have been pretty inactive as far as securities law violations are concerned (and Schneiderman was bribed, erm, folded). So that is also not a nexus for community level action.
By contrast, rent regulations have always been local.
I was not commenting on the legal structure but on the practical realities.
Wall St. in general has bought free passes through friendly regulations or captured regulatory agencies. What is to say that the local regulations will not be rewritten at their behest or that state and even federal governments will not be prompted to “preempt” local laws in the name of interstate commerce? Or, for that matter, what reason do we have to believe that an individual tenant will stand any more chance in court than say an individual homeowner when both are staring down the barrel of Citibanks’ attorneys?
While it is true that mayors and other elected officials are typically more local the willingness of Bloomberg and Emmanuel to blow off their constituents and approve rather disasterous deals leaves me no comfort.
At the end of the day this looks like another securitization bubble as you noted. Moreover it looks like one, once it is up and running, will ride as roughshod over rental laws as the current bubble has over banking laws.
I can assure you that Bloomberg would love to abolish the rent regulation statutes in New York City. He can’t. But the reality is that those protections have been steadily eroding through incremental weakenings since 1999. Similar to how the Glass Steagall act had actually turned into a swiss cheese of loopholes via obscure, nonpublic regulatory actions well before the Act itself was repealed.
And keep in mind — even though under the Rent Stabilization scheme the increases are “regulated,” the rents increase every single year by a new percentage. That upward curve of rent increases has no relationship to the underlying earning power of (most) of the renters, whose real income has stagnated or declined.
All this to say that, though they exist, the NY rent control and rent stabilization regimes are gradually becoming (de facto) less and less of a guard against the wholesale exclusion of low and middle class new yorkers to live in any of the 5 boroughs.
A public that continues to buy the existing plate of political puppets can be convinced to purchase anything, including the nails for their own coffin.
The persistence of our political duopoly has more complex foundations than just voter gullibility. USians are widely disatisfied with our political leadership, but structural factors like the high financial barrier to entry in politics, the institutional biases of the media, and the quasi-governmental role that the Big Two play conspire to make successful alternatives damndably difficult to mature. Even our social inequality plays a role. As we saw with America Elects, our elites have more than enough money to throw together a party infrastructure almost overnight; the flipside of that is the rest of us being so impoverished that doing the same would be difficult.
I beg to differ. The communities are too diffuse to make this easy. These are not the sort of elections which are won based on lots of paid TV ads, which is where big political money comes in to play. You can’t target TV ads to a suburban community.
And in cities like SF and NYC, even with VERY powerful real estate interests in place, the local rent regulations remain in place.
Yves, thanks.
I would like to hear more from you about how you think this will play out differently in rural versus urban settings, will they be mixed together into these rural/urban rentals together, what are the potential mixes that could be, etc?
Where will the risk be hid?
They call it a vehicle because it’s designed to drive off with your money.
Good one.
Yep.
It’s a stunningly simple strategy that could be effective. I mean, consider the problems —
What’s to be done when things are getting down to where there’s almost nothing left that hasn’t been been looted once already?
How does one blow just one more bubble, however pitiful?
And how, just incidentally, while seeking short-term profit for oneself, does one make everything far worse long-term for large communities of other people and extend the RE collapse even as far, maybe, as 2025?
This is how.
[1] The hedge funds and PE companies buy up REO properties in large numbers at firesale prices with the assistance of the administration. With the assistance of the servicers/banks that are keeping large amounts of foreclosure inventory off the market, they charge excessively high rents.
[2] Effectively, they create a bubble in rental income streams that they can securitize and dangle in front of yield-desperate investors. They take the investors’ money and run.
[3] Because it’s short term. Slumlord-style management practices — since nobody wants to invest in those properties’ upkeep and, as C says above, elected representatives and regulators are as likely here as with the banking and original RE boondoggles to fail to do their jobs — will mean that the properties deteriorate, so that people stop paying and do further deliberate damage as payback. Neighbors see their home values deteriorate. Whole communities sink further down.
Well done, Wall Street.
Plenty of local rental companies were ruined by the mortgage bubble as well, due to the unwitting involvement of thier managing trusts in the CDO market. As such, I’d imagine some of the banks are already holding significant rental properties they acquired through foreclosure proceedings.
Plus, with the destruction of real assets by deterioration, there will be increased pent-up demand for new construction, driving net job creation :-D
It’s exciting to be closer to the ground floor with this than I was with subprime. Nothing has really changed so you can see where this is likely to go:
A modest start in the best rental markets including college towns, major urban areas with infrastructure and gentrification where there is no risk because even when the tenants are crackheads you can get them out (is there anywhere in the US outside of Stuyvesant Town where rental law is not proudly pro-landlord?)
Then our friends in the financial industry get stars in their eyes again:
It isn’t the best tenants who are the most valuable! It’s the crackheads!!! It’s the double B’s and C’s, the souteraine tranches where the payoff is tops, and there will be a rush to pack as many junkies, chronically unemployed survivalist Giants fans, wetback, white trash, chocolate thunder, down and out poor, dumb and obese Americans into rental properties as possible.
And then begin to short the avalanche of CDOs and issue more CDOs while simultaneously shorting them and double down on it all one more time until the first shivers start and there’s a silent run on someone like JP MOrgan’s Frankfurt branch and Obama has to do what Bush did and he starts throwing money at them again.
The major problem with introducing consortiums is there is no local legal system to arbitrate owner/agent neglect. There will need to be a local court that is capable of hearing renter complaints, and renters should in fact have the right to withhold a certain percentage of their rent when the owner/agent is in fact negligent. This requires a local precedence which sets forth what percent is rightly withheld for improper heating in Chicago during the winter months versus improper cooling in Miami or Las Vegas during the summer months. Again, it gets back to the fundamental problem that for the most part local government in the USA doesn’t properly function, and is more of an extension of economic development and American Republicanism than a vertically integrated coherent subdivision of the larger Federal and State governments.
A more general agency problem applies to securitized rentals. Most owner-occupied housing is well maintained because the owners themselves have a financial incentive to protect their equity. As a byproduct, this incentive protects the mortgage holder as well.
Since tenants do not have such an incentive, the success of securitized rentals depends on the quality of rental management, which is all over the map. Even with the best of managers, an engaged owner has to ride herd, or corners start to get cut.
Securitized rentals are rife with moral hazard. But they are a perfect vehicle to enable the standard Wall Street model of front-loading fees, cashing out, and leaving the residual returns (if any) to the bagholders.
By the way, will all the titles be registered through MERS?
There are many similarities between this coming fiasco (i.e. broken chain of titles) and the ownership of massive residential housing blocks throughout Berlin after the fall of the wall — in both instances property ownership is unclear, which essentially gives a Consortium no incentive to maintain the property, while also driving up housing prices from private owners. Also by passing on properties to Consortiums the government washes its hands as well, while in the case of the USA, there is the additional benefit to servicers who also escape unscathed. The good news is, in many instances, in the end squatters generally get the upper hand, because ultimately possession is 99% of the law.
I sense a business opportunity here. My associates have warehouses full of money sitting in Panama looking for legitimate places to land. We’ll just buy Phoenix and Las Vegas and hire Blackwater veterans to scare the shit out of any tenants who step out of line by demanding we fix the roof instead of fixing it themselves. If they are late on the rent we’ll just break one finger for each late payment.
The wonders of market capitalism at work, my friends.
this idea will work better in west African, just look for some Nigerian land guards outside of Accra and go to work
Now that bankruptcy is slavery lite, what’s the downside risk?
Comical to say the least, but in the high-speed chase for yield, not surprising. Grasping for straws on a sinking ship.
I’ve got two words for those renters….
Constructive Eviction!
Dr. Housing Bubble doesn’t believe things are all that hot either. That student debt boogeyman –and the slow but steady extermination of the middle-class– does not bode well for the future of the housing market, is his line of thinking.
http://www.doctorhousingbubble.com/indebted-young-shrinking-middle-class-6-charts-housing-market-finance-income-growth/
This chart was interesting:
http://www.doctorhousingbubble.com/wp-content/uploads/2012/08/new-home-sales.png
I thought dirt poor urbanites (aka African-Americans) were responsible for the collapse of the 12 trillion dollar world wide housing bubble, but the blue line seems to indicate that the very middle of the middle class (aka mostly white suckers) created more trouble by thinking –or being perniciously convinced to think– they could afford Double-Wide McMansions, despite making far less money than their modest living parents made, not even adjusted for 30 years of fairly steady inflation.
I’d say it was neither. The real driver of the mortgage boondoggle on the ground floor (besides the originators, of course) was the real-estate industry. In other words, what inflated the housing bubble was a combination of bank demand for mortgage-generating properties and house flippers. The hardest hit markets -California, Nevada, Florida, the Eastern Seaboard excepting DC- were all rife with real estate speculation.
If the bonds don’t get the best ratings, doesn’t that mean a lot of institutional buyers won’t touch them?
Yes, so any market may remain limited in size if that turns out to be the case.
Why would anyone want to buy such a product, unless truly ignorant (i.e., a muppet)?
Unfortunately, the crisis just past shows there are a lot of them. Another term of art is “stuffees”.
Your intriguing comment, “Second, securitization markets that developed later than the US market (most notably, in of all places Russia and Eastern Europe)…”
I have been waiting for a sage historian to spring from the wings to explain USAID, the Urban Institute and Mortgage Banker’s Association collaboration on the “Central and Eastern Europe (CEE) cee.mortgagefinance.org and other google hits for usaid, the Support for European Democracy (SEED) Act
of 1989.
Dr Google has all kinds of interesting early material on usaid and “the Polish Decade.”
I stand thoroughly ignorant and hopeful that there’s an historian of the. Mortgage debacle – MBA-USAID global version – who can answer the question: Was Poland a dry run for us, or was it the other way round?
I actually like “stuffees” a lot better than muppets because of the visual, which is so accurate.
So isn’t this one of those looming consumer disasters that the CFPB should be jumping on like lightning to get ahead of the disaster and block it? I mean really, how useful is that agency to Consumers (supposedly their only constitutency) if they don’t?
And how about Obama — this seems like another taylor-made opportunity for him to channel FDR and DO something for regular Americans. What a waste of a vote that was in 2008.
Looking at this from a “Boots on the Ground” approach, what an embrase of a complete and total disaster. Just a few thoughts…
The Law of Unanticipated Consequences will most certainly rule. Per Wikipedia, the Law of Unintended consequences can be roughly grouped into three types:
1) A positive, unexpected benefit (usually referred to as luck, serendipity or a windfall).
2) A negative, unexpected detriment occurring in addition to the desired effect of the policy (e.g., More currently vacant properties will be occupied, but there will be more property deteriorization and less ongoing maintenance, as the costs of such preventative maintenance services lowers returns).
3) A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse), such as when a policy has a perverse incentive that causes actions opposite to what was intended.
Just a few thoughts:
1) There’s going to be a number of location related classes of properties which the ratings agencies ‘should’ (probably won’t) take into consideration:
1(a) Urban properties
1(b) Suburban properties located within municipalities
1(c) Rural/outlying properties located within villages and towns (small communities).
1(d) Rural properties located outside of villages and towns.
There are seriously different risk considerations existing with each one of the different categories. And this doesn’t take into account such breakdowns as single family, duplex, condo, townhouse, etc. – because both the marketplace and maintenance/service costs will differ for each category.
When (IF) you are doing this, you had better be really, really aware of the details of both the real estate appraisals and property inspections (not to mention the private well & private septic inspections for properties located both in really small towns and in unincorporated areas).
This is one area where detailed knowledge of the original installation of short term mechanical items (HVAC, plumbing, etc.) and maintenance/life expenancy of such items becomes absolutely vital. Replacing a HE natural gas forced air heating system is several grand easy, water heater’s around a grand+++, cental a/c is more bucks, and repairing/replacing a well and/or septic – well, that’s serious coin.
Basically, what you are talking about is creating a voluntary nationwide HQS (Housing Quality Standards) System – ask HUD how that works for them with local Housing Authorities – “Shudder”. And it’s mandatory for the local housing authorities (and still doesn’t work very well).
Municipal and County governments are going to go totally nuts over this one. If the finance market is really serious about this, then it sounds like the banks and the securities industry have decided to declare war on units of local government, and anybody who thinks these folks are all going to roll over & play dead after seeing the impacts of the subprime crash – well, won’t happen.
This type of ‘plan’ strikes directly at the hearts of their communities, and there will be plenty (not all, but enough) of places gearing up for a fight. They have seen the impact of foreclosures, and vacant, deteriorating bank owned properties, and these days, they don’t having much trust in the banking community. And even less in the securitization markets.
Btw, we are already seeing a small minority of local governments requiring pre-occupancy inspections of rental units in their jurisdictions by units of local governments, mostly through their Code Enforcement divisions. This would certainly accelerate the trend.
I’m also wondering about just how they (the ‘Banksters’) are going to write the “Reps and Warranties” clauses on such securitization.
We’re onto their game – finally. And we’ve seen what happens when things go wrong.
Easy solution to the municipality issue: pass/buy a statewide law pre-empting municipal regulation in this area just like is being done with fracking.
Yup, that tends to be the big boys’ solution; if the municipalities won’t play ball, just take the issue away from them with state and federal law.
Niether should we discount the efficacy of simple bribery. The banks did atrocious damage via the municiple bond market, and they didn’t need to do any fancy end-runs around local govs to pull that off; all they had to do was wave a few tens of thousands of dollars under some official noses and back a few political shills for office. The numbers involved are chump-change compared to what they’re already spending on Federal and State level corruption, and that spending is itself insignificant to our financial oligarchs.
Unlikely to happen, much less be successful. Fracking was a technology development, in most cases not initially regulated. Also, the areas subject to the technology did not easily transulate into municipality, or even county boundary lines (i.e. the technology crossed boundary lines and there was no way to avoid that). So, it’s going to be a default to be statewide regulation.
This is far different situation. The properties will be virtually always be located within defined tax districts. That makes it subject to those tax district’s already current regulations and regulatory authority. Unless the finance folks are ready to go out and try to change a state’s constitution, they are out of luck.
And it’s very unlikely they could do it at the federal level, with one spinoff from the ACA decision being that the federal Commerce clause can’t be used to expand/impose federal laws forcing local government compliance.
And if you have had any experience dealing with municipal governments in virtually most states, the units of local government tend to have an extremely powerful and very potent legislative arm that usually has a very, very high level of influence at the state legislative level. In other words, when those folks come knocking at the door of both state and federal politicians, people pay attention to their needs.
Remember what Tip O’Neal said: “All politics is local”.
He wasn’t wrong.
Was predatory lending a technology development?:
http://www.sconet.state.oh.us/PIO/summaries/2006/1120/050160_050161.asp
Ha! I’m sure somewhere along the line it was presented as an “engineered product.” A synonym for “structured vehicle.” Both synonyms for a truck driving away with your money (see Lambert’s comment elsewhere today).
So long as the central bank will take ’em as collateral or purchase them outright it doesn’t really matter if they’re rated for broader consumption or not.
The Fed is pushing this plan. I guess this means it doesn’t want to set up some more Maiden Lanes. And reportedly the Fed owns some of this stuff outright. (It must not want to take any more garbage as collateral.) The GSEs are drowning in titleless REOs. So they are going along. The Banksters, including hedge funds and P E investors are also pushing this. Private Equity has been diligent enough to ask their fellow partners in crime if they (PEs) will receive the proceeds of the eventual sale of these “rentals.” It is such a legal problem there really isn’t any answer. The whole scheme is just a title laundering operation. It is likely that these “rentals” will be bulldozed after 10 years of neglect and abuse. In fact they are probably planning to let the municipalities condemn and bulldoze and then sell the lot for compensation. A similar fate to that explained above by Tyzao, in Berlin. But if some properties are valuable, they will probably be kept that way and receive proper attention. This whole thing is just an end run around property law. That’s all. At least in Berlin when the wall fell and east and west came together, West Germany paid a huge amount to the Russians. They literally bought East Germany back.
True, but west Germany is clearly reaping a reward from its investment, as evident by the incredible growth of Berlin. Bonn may be wealthy, but Berlin is the powerhouse of Europe. The interesting thing about all those properties where issues of title ultimately resulted in squatters becoming rightful owners, ownership information in the property books at the land court is general not available to the public. I believe this was mostly a result of local government officials being elected who were in favor of squatters rights. It will be very interesting to see who wins some of the upcoming elections for Property Appraiser and similar positions of local authority at County courthouses across Florida, Nevada and other states.
Oops, while PA is important, I was actually thinking of Clerk of Court
“Green said his choice not to run again is completely unrelated to the revelation that his wife received $100,000 from the Bonita Bay Group and failed to declare it on financial forms as a gift.”
http://www.naplesnews.com/news/2012/jan/25/lee-clerk-of-courts-will-not-seek-re-election-27/
It amazes me how little stories like this just float on by — Bonita Bay is only one of the largest Property Development and Management companies in the country.
Well, if the Fed is pushing this plan then we know for a fact its purpose has nothing to do with helping people obtain decent affordable housing (ownership or rental). It’s just another device to get “liquidity flowing in the markets,” with the societal role of housing as merely a “vehicle” to make this happen.
Right?
This just won’t work. Dead in the womb. I know that a lot of money will really really try to make it work, but, it’s such a mess to start with, and, as you point out, local politics won’t let it, in the end. That is not to say that some will not make money, but, very little, compared to the mortgage market.
As a renter, it has reminded me to screen my future landlords as carefully as they screen me, though.
“Remember, mortgage securitizations in concept are a decent idea and with proper protections, fees, and incentives, can be a useful and attractive product.”
Pure unadulterated baloney! Or, what they they would say in the tent cities, “This is bulsh!t!”
Vanilla Greed Lament!
Control of usurious interest and the money supply by the self anointed elite sociopathic Xtrevilist FEW, and their Evilism forebears is the problem.
Deception is the strongest political force on the planet.
This is ad hominem. Mortgage securitization DID comport itself well from its inception (late 1960s) through the mid-late 1990s. Your yelling does not disprove the historical record.
It is ad hominem if you are a champion of good old fashioned Vanilla Greed for Profit controlled by the wealthy elite Evilism few which this article supports.
Layering greedy mortgage origination extraction on top of extraction is not ‘comporting itself well’, it is rather the immoral wellspring of the Xtrevilist conditions that you now lament.
Yes, I am ad hominem about drone bombing and gang rape also. I think the rationale for it is pure self serving baloney and over the top bullsh!t. It is immoral, like having control of granting credit amassed in the wealthy self anointed elite Xtrevilist few.
Deception is the strongest political force on the planet.
An encomium to ad hominem
The gist of what Warren is saying seems to me to be that these economic abstractions such as securitization suck in the present circumstances.
Was it securitization products that worked from the 60’s through the 90’s or was it securitization products well regulated by an independent party, that is government? From the eyes of this profane, at least, they seem to be two different animals.
“[…]Controlled by the wealthy elite Evilism few which this article supports.”
Never mind, my mistake.
Brooklin Bridge — What I am saying clearly is that these securitizations of today do “suck in the present circumstances”, and they also sucked in the sixties, but less so, and in no way did securitization ‘comport itself well’ at that time.
Both periods, when compared, represent an increasing escalation of the co-option of government and a mutation of the disease of Evilism into Xtrevilism. The self anointed sociopathic morally diseased few in humanity have gained and consolidated more ground (and it is not limited to just finance). But the wellspring of the present securitization problems — Vanilla Greed for Profit Evilism — was no righteous socially beneficial model to be put on a pedestal and extolled as “a not unreasonable idea”, and, “Remember, mortgage securitizations in concept are a decent idea and with proper protections, fees, and incentives, can be a useful and attractive product.”
They were never a decent idea, they were, even at that time, a parasitic securitization extraction scheme layered over a parasitic mortgage extraction scheme. Keep in mind, Vanilla Greed for Profit Evilism too, gained its status by incrementally institutionalizing graft and corruption and co-opting the rule of law to put the control of credit granting and the money supply in the hands of the sociopathic greedy few. I personally barf at the Orwellian language used that describes and ‘dignifies’ these parasitic extraction and exploitation schemes as — drum roll here — “products”.
The root problem here is a declining morality and usurpation of the now blatant scam ‘rule of law’ which has been used to further enslave and exploit us all by culture shaping and forming us to love, and think normal of — like dysfunctional children — our aberrant sociopathic masters. That is the real “looming horror show” here.
Yes, it is an ad hominem attack on the culture, its kool aid, and those who drink of it so deeply.
Deception is the strongest political force on the planet.
Let’s see:
The banks drive people into debt – “bank loans create deposits” but those deposits are also certain liabilities of the bank backed by the uncertain loan assets. So the banks find investors to buy the loans and so obtain certain reserves to back those certain liabilities? So the risk is dumped on the investors?
I’d say the investors have bought stolen goods and if they are being cheated there is a certain justice to it.
The author lost confidence from this reader with “ratings agencies.”
Any integrity left is wasted talking about ratings collusion and racketeering. Might as well be talking about the next shit out a bull’s ass.
Next blog…
I think there’s a pretty good reason why ownership of single family rental properties has traditionally been a mom and pop operation. The properties are highly idiosyncratic, Not centrally located, and good management is labor intensive. Bundle thousands of them together can’t achieve efficiencies or economies of scale. Just single family hash. What a nightmare.
The only exception I can think of would be if investors purchased entire failed subdivisions and set up management on a multifamily model. But still, entire subdivisions fail for a reason…like nobody wants to live in it. Bad location, bad schools, whatever.
Blech
so you still have the two underlying causes of the currant depression in place and giving the causers/initiators open reigns to take out the third leg of the income streams of the US public. One closest to the people.
If this was done by a second country, people would call for war with that country. But this is being done with little fanfare, by a few internationalist corperations, now called people, I wounder, could that “person” go to jail? for their misdeads? how about the titular head of that person?
I object to the notion that securitization is a reasonable idea. When you separate those that administer a loan from those with an actual financial interest in its performance, I don’t think you can ever straighten out that conflict of incentives. Not to mention the problem of separating the note from the security instrument, a necessary part of slicing the notes into tranches.
The fact that it worked badly in RMBS in the US does not mean it has not worked well in other markets. It has worked very well in Russia. And go read Adam Levitin’s paper in which he looks at how the servicer’s role is structures in commercial mortgage backed securities, which are a securitization and have also not had derelict servicers.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1324023
Residential mortgage servicing presupposed very low delinquency rates. The problems have occurred as a result of failure to design the servicer relationship for a high delinquency scenario and resulting servicer behavior (including underinvestment in the servicing platform).
This wasn’t a design fault, it was an assumption when the systems were built-it’s normally the case that the design is based on the assumptions, requirements (both functional and non-functional), and what is currently deployed to interface with external systems. Everybody seems to forget the triple constraint.
We saw how in the 2006-2007 period, mortgage were securitized even when the borrower had defaulted in the first three months. It isn’t hard to imagine that we will see equally weak tenant rental streams sold into these securitizations.
I agree, things will be tough. And this is particularly the case with monthly rents that are sitting close to Peak Bubble monthly mortgage payments. It’s this persisting gap between average monthly rents and average monthly mortgage payment on tbe same property that is creating this exciting opportunity for so few.
A standard practice with poor (and no) credit risk tenants is to collect 2 months’ rent plus a security deposit equal to a third month’s rent. “First-last-security”.
Well, why not raise this sum to four months’ rent for greater security? With zero interest paid this amounts to a tidy sum. After all, keeping “skin in the game” is the new watchword per Frank-Dodd. Isn’t this a major factor in forcing so many ex-homeowners into being permanent renters?
Granted, many of these former homeowners won’t have that much money up front. Therefore provide E-Z financing of the deposit at sub-sub prime rates of interest. We could even make this a first lien on the escrows or build in a fund to pay this back first. I’m sure Goldman-Sachs will be happy to find funding for this newest wrinkle in payday loans.
And if investors are dumb enough to be fooled again, after the disaster of mortgage securitizations, they will have gotten what they deserve.
Which dumb ‘investors’ are these? Are you perhaps referring to the same municipalities whose officials:
a. Caved in like soggy souffles and agreed to unionized public employee pension terms yielding $100k + pensions for beach lifeguards, school crossing guards and similar hard skill persons with solid family-political connections?
b. Then underfunded these pension obligations with pension funds that assumed 7.5% to 8% annualized returns ala CALPERS, Calstrs et al.
The crooks never got jailed. They are still crawling around doing same crooked stuff and Barack Obama is wondering no matter how much I cut it just keeps getting shorter. The only people who can stop this kind of nonsense will be investment fund managers if they refuse to buy such products. But that may not happen because a lot of fund managers were probably bred in the same snake pit as the bankers.
Securitization of rental properties will do nothing except make more money available to pooled investors to purchase rental properties. What was the result of the last round of easy money ? Oh, that’s right, we still don’t even know how badly things are wrecked and for how long. Regardless – easy money will will translate into higher prices and rents for individuals and will provide no benefit that I can see.
The benefit is to increase the accumulation of property ownership by the global inherited rich while at the same time fleecing the public with new hide-the-risk, transaction fees and bankrupt the retirement pension fund schemes.
You are just looking at this from the wrong end of the stick……
Thinking in the Spirit of Frank-Dodd, isn’t there a tremendous double dip opportunity here for the fortunate few?
Obviously we first sell these properties in bulk to a REIT and then securitize it for distribution to the California Lifeguard and New Jersey School Crossing Guard pension funds. The foreclosed r.e. sales prices to the REIT will be above our own 50% bulk discount purchase price, but still way below current anemic r.e. prices paid by remaining live-in home buyers. This is the equity side.
But why should the proposed REIT use 100% equity to buy the rentals? Why can’t the REIT create a high-grade mortgage bond and use just 30% cash down or less? Here will finally be an investment grade mortgage bond with conservative collateral valuations. Every one of the collateral properties will have significant real equity, thanks to a real down payment and the magic of a purchase price between the foreclosure bulk bid and local retail ask. Here is “skin in the game”, just like the Democratic Congress and Democratic President demanded with Frank-Dodd.
We can always set the bond yields at an irresistable rate for the “yield hungry” School Crossing Guard Pension Funds.
And here is leverage and more front-end loader size front loaded fees.
So what if these bulk sales cause anemic current local home prices to decline another 35% for the remaining live-in home owner suckers? They should default and become serfs with eternal land rents like the rest of the deadbeat trash. And the affected municipalities with vanishing r.e tax bases can do like Vallejo, CA. This is default and create still more opportunities trading distressed municipal debt.
Any male of age that is killed in a drone strike is now defined as a “militant” which takes care of collateral damage (you go to jail or an embassy room if you report on women and children being killed).
So I assume here, if renters have complaints, they would be defined as “militant” to the economy and therefore subject to drone strikes or perhaps just debtors prison if the lessor of two evils happens to be in the WH at the time?
“Militant” sounds so harsh. I suggest “non-compliant.”
Obama prefers “militant”.
One aspect of a program like this would be that many units of local government would expand their existing regulations specifically on rental homes, and would probably expand to have a very intrusive bi-annual inspection of all rental homes (not necessarily apartments), with substantial compliance penalities.
If you have ever seen a ‘Housing Court’ environment, think of it being expanded a 1,000 times over. Under those circumstances, somebody needs to explain to me how anybody thnks such a securitization process of rentals could possibly make money. All profits would probably be spent on court costs, fees, and fines.
And if properties already securitized are now subject to impairment due to court orders, wouldn’t that be grounds for such properties to be ‘put back’ to the originating entity of the securities?
This is insanity! Wall Street continues to act as though Real Estate Law as applied to securities, doesn’t exist. In most cases, the criminals don’t even hold clear title to the properties. Just diggin the hole deeper … destroying Real Estate as a profession and making RE Title of ownership obsolete. An example of investor hell …. once you put yourself there … no gettin out.
“if you think mortgage servicers were unresponsive, consider how bad rental securitization servicers are likely to be.”
See the example of GrandView apartments where the absentee landlord is (if I have this right) themselves owned by an absentee rentier (a private equity firm).
Adding another “layer” to the process guarantees a train-wreck of epic proportions.
The investor/securitized mortgage/bank/servicer/borrower model hasn’t worked so well.
And look at what has happened to the healthcare business in the U.S. That used to be direct between the doctor/patient. Then it was doctor/insurance company/patient. Then we tried doctor/provider/HMO/patient. The result is a system that is NOT best in the world, not even close.
My point is, we don’t need to add layers to the cake; the renter/landlord scenario is the most efficient and least likely to break down.
I thought the whole premise of securitizations (of anything) was to create money flows out of nothing so that (1) whatever good/service is securitized becomes more expensive and (2) to eliminate any de facto recourse for the consumer because of the endless layering and “dispersion” of accountability. It appears to have succeeded over the past 40 or so years.
So now we have a society in which Curve 1 is the astronomical continual increase in prices for everything (with no end in sight) and Curve 2, which is the plummeting purchasing power of the 99%, ad infinitum.
In a very real sense securitization has stripped the real economy (just like Private Equity Firms do with individual asset-rich companies) in which human beings live to extract rich cash profits for the few who play this securitization game as a way of “making a living.”
Sorry, but I can’t see where securitization should have any place or role in a functioning egalitarian society.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson
I am currently considering investment in a limited partnership to buy REO properties in a few specific zip codes of a certain city. We expect to but 20 of these properties, which are currently vacant, for ~$40K each, invest ~$10K and rent them out for ~20%+ yield ($850-900/month). We know this market well and plan to work with a local property manager to help us screen the tenants and manage the property. We have reserved ~$2K/yr in escrow for each property to meet maintenance and are (conservatively we think) factoring in 2 months/yr in vacancy. We hope to generate a 10-12% unlevered yield. We are using this as a proof of concept and think we can scale this up to $20M.
My questions for you: if we effectively deployed $20M to this strategy, wouldn’t all be better off? I mean, inventory would be coming off the market, tenants would have upgraded rental units, formerly vacant (wasted) properties would now be occupied, and rents would eventually decline.
What if we sold this package of loans to Springfield pension fund at an 8% implied yield (we gain from appreciation from our 12% yield at investment), wouldn’t that be a win for all? Assume that the pension fund retains control of the portfolio management company.
I can see how securitizations can result in warped incentives but I think pension funds owning rental properties (in some form) makes sense.
Go ahead. But just know this. American wages are going down.
And long-term Disemployment is going up.
This is where one of those Masters of the Universe (Ms. Masters, for example) will propose using a mandate (like the Obomney Care one) to force people to borrow money at interest so they can pay rent they cannot afford because penniless. Then those loans can be securitized, monetized, sliced, tranched, triple-AAA’d and dumped on the remaining few hard working persons who still have a pension or a retirement savings account.
The Circle of Zero.
Pension funds and 401(k)s buying “high yield” MBS derivatives either directly or through funds or through Securities Lending Programs, accounted not just for vast losses in those holdings but (via externalities) to all other holdings, including equities.
Who knows about this new scheme you have, Yossarian, but are you going to explain what could go wrong and what the changes of things going wrong and how wrong they could go, to potential pension fund clients and/or other managers who ultimately control retail accounts? Have you made that calculation yourself and was it ascertainable?
I’ve also never heard of any investment based scheme that claimed that rents would decline as a result of the investment where rents declined, rather than skyrocketed. Rents and home prices should have collapsed to levels affordable by regular working people after 2007. The number of markets where there were declines were quite limited. Everywhere else, working people (tenants or buyers) never had a chance.
Perhaps housing needs to be reconceptualized as a public good that is not handled efficiently by “markets” (or “finance”) and should thus be allotted and regulated like as a public good and shielded from the predations of investment and speculation.
I suppose it depends on who you are asking, as with everything.
Yes, precisely- rents and home prices should have come down to lower levels affordable by all but that is a goal that runs counter to the bankster/NAR/government nexus whose goal is to prop up insolvent financial institutions and real estate in general. We all know that very little of real estate finance or banking these days is “market-driven.”
But that is what is presenting this anomalous 20%+ gross yield- the banks have been propped up and are selling in small bundles so as to keep up the charade of solvency. Thus capital is organizing to eventually take away this anomaly. Although I like getting 20%+ yields now, I am under no illusions that is will continue- either property prices will rise to erode these yields as more capital comes into follow previously successful transactions; or a mass of rental properties will hit the market, causing rents to fall. If the prices rise, we sell. If the rents fall, we ride it down- I will do far worse in a bank getting 0% than I will in a property yielding 12%->10%->8%->6%…
As far as what can go wrong- there are several things, as there all with all assets the pension fund holds. I would expect that a $10B fund could spend a tenth of 1% or $10M on some sort of semi-competent staff to conduct some due diligence on their investments. After all, a residential rental property is not quite as complex as a high-tech subordinated debt/private equity investment in a solar manufacturer called Solyndra.
I’m a little blurry on what “capital is organizing to take away this anomaly” actually means (I think it’s a concept from the “Efficient Markets” and “Invisible Hand” doctrines).
But since the bank strategy is synthetic anyway and not efficient, why isn’t the solution to force the banks to sell the real estate at real distressed market value IN SINGLE PARCELS to end users, i.e., people who will live in the properties or mom and pops who will own and rent a portion of the properties.
Why isn’t it considered market manipulation for the banks to be engaging in these tactics — hoarding properties and artificially inflating their values and then only agreeing to sell them in bundles to “organized Capital”?
The only obstacle to a law requiring banks to liquidate at real (distressed) prices via sales to Individuals (not speculators or investors) is politics (more specifically, kleptocratic policy).
You don’t really seem to know what you are talking about- you just seem to want to rant about something. In fact, banks are selling one at a time to whoever is able to buy. Go to an auction and get involved- you have to know what you are doing, though. It’s not free money- one must bring skills/knowledge to the table.
Of course, banks are also happy to sell to buyers who want to buy in bulk because the time and transaction costs are lower. So what?
No, you are wrong about that. I do know what I am talking about and if this were a rant your would notice.
The “so what” pretty much gives away where you are coming from. As well, it is disingenuous to suggest that individuals have access to bank sold properties via auctions — it you are as knowledgeable about that space as you claim to be, then you know full well that those are not truly open affairs and that they are controlled by groups of regulars/insiders making side deals on who is going to get the property (or properties). I’ve had direct reports of such even from someone who is a high level RE broker in this city.
Anyway, best of luck to you in your chase for yields and investments in and amongst the carnage of our post 2008 society.
The investors deserve to lose very last shilling. Every last one.
warning LIVE/WORK warning
For soem time, developers have pushed “loft” or “live/work” apartments. What most tenants do not know is that very few cities have protections in place for tenants renting under these designations. Live/work and loft are NOT apartments. They are not covered by most of the apartment laws on the books.
Attention renters; move in and stop paying.
Rentalfraud from last january
http://hofj.org/default.asp.pg-LatestNews
pick from list- fannie home bulk sales
Flaspionts 1/23/12 Obama foreclosure homes FHA give to hedgefunds to rent
http://www.kpfa.org/archive/id/77175
Yves on KPFA Radio audio on this subject 8-29-12
http://www.kpfa.org/archive/show/80637
pick 8-29-12 is not posted till 8-30
new word for English language
fraudrental like fraudclosure
one point on Yves interview why fannie would sell homes in bulk cheap
is it makes money for their friends the same fraudsters
fannie freddy fha are all corrupt working for the crooks
not 2 separate gangs all one gang
its not a rental problem it’s a criminal problem
any honest person has been run out of government
Mark P. has it right and Yves interview small guys home buyers are cut out
Guys Without investors there will be no work for employees. The whole idea is to balance and organize the wealth distribution through laws
Some people collect stamps and rare items while other people also collect properties. You can find different properties and estates all over the internet.