Hedge funds buy swathes of foreclosed subprimes, force up rents, float rent-bonds

When a giant hedge fund is bidding on all the foreclosed houses in a poor neighborhood, living humans don't stand a chance -- but that's OK, because rapacious investors make great landlords.

Wall Street investors have bought more than 200,000 foreclosed houses in the past two years, bundling together the rents they generate into bonds that are just like subprime mortgage bonds, only without the pretense that the poor people who generate their payments have a hope of ever getting out from under their obligation to enrich the richest people in the world.

Blackstone -- owner of Seaworld, Hilton Hotels, and the Weather Channel -- is the biggest player here, and when they come into town to buy up all the single-family properties, they price actual families out of the market. Their securitized rent payment bonds are backed by some of the biggest subprime criminals, including Credit Suisse, Deutsche Bank, and JPMorgan.

Hedge funds really epitomize compassionate landlording, too. When Blackstone buys in, it jacks up tenants' rents by as much as a third and immediately begins eviction proceedings against renters who can't pay. If there are any troubles with your payments, they assess fines against you and make you miss work to pay the rent and penalties in person.

CaDonna Porter moved into an Invitation Homes property outside Atlanta with her children in September. When part of her monthly payment was rejected because she tried to use a debit card, the company demanded that she deliver the remaining amount in person, via certified funds, by 5 p.m. the following day or incur a $200 fee and face eviction. Porter took time off from work to deliver a money order in person, only to be informed that the payment had been rejected because it didn't include the late fee and an additional $75 insufficient funds fee.

In a maddening string of emails, Invitation Homes repeatedly reminded Porter that it could file to evict her unless she paid the penalties. When she finally said that she would seek legal counsel, Invitation Homes agreed to accept her payment as "a one-time courtesy." Andrew Gallina, Invitation Homes' vice president for marketing, says it treats all of its renters equally: "Under the law, we're not allowed to make changes or exceptions. That's just basic fair housing."

Invitation Homes has described its strategy as "a bet on America."

Wall Street's Hot New Financial Product: Your Rent Check [Laura Gottesdiener/Mother Jones]

Notable Replies

  1. there will never be a governmental WOFT (War On Financial Terrorism) b/c it's the financial industry itself who declares war.

  2. From the article: "It's just like a residential mortgage-backed security," says one hedge fund investor whose company does business with Blackstone."

    The starry-eyed nincompoop who made this analogy is an investor, not a Blackstone, rep; he's a mark, not a dealer. It shows.

    Rental property-backed securities are not "just like" mortgage-backed securities. Renters have no skin in the game and will not kill themselves to keep up on untenable payments. They do not maintain properties as carefully as owners and more often than not, they leave a mess behind when they move on.

    The Masters of the Universe at Blackstone (and its imitators) are betting that renters from our recently decimated middle class will continue to behave "middle class" rather than risking further hits to their credit ratings. That they'll go the extra mile to make rent on time even when they run short of money. Maybe. Maybe some of them will still pony up as readily as "homeowners" did in 2007.
    But, I think what will happen over a few years is that people who used to be too proud to "behave like trailer trash" will find themselves moving frequently, leaving broken crap behind, and generally, incrementally ceasing to care about metrics of social status that used to make them good customers.

    If you put this to Invitation Homes marketing personnel, I'm sure they'll insist that they can maintain renter quality, that they will employ all sorts of credit checks and the like to maintain a high quality renter base. But, they can't over the long haul. They cannot provide the incentives that ownership once did. The incentives that they do provide will drive customer behavior in the opposite direction - towards short-term thinking. They'll set up a dynamic that will degrade the residential property base wherever they dominate the market.

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  4. 1) Revenue streams from mass quantities of SFR rentals aren't as well modeled as apartments yet. They simply can't be when this bundling for securitization is so new.

    2) Securitization of individual mortgages developed into a disaster 7 years ago; a bubble in rental property has every chance of doing the same.

    The problem isn't bundling and securitizing, per se, the problem is unrealistic expectations regarding returns, and the cost of managing vast numbers of separate, formerly individually owned properties. These financial geniuses would like investors to believe that the previously artisanal industry of maintaining all these "little pink houses for everyone" can be scaled up without loss of quality. I doubt it. Neighborhoods will get quietly, persistently shabbier over time as individual units are minimally maintained, rather than ever improved.

    Unlike Boundegar, I don't think it's a total non-story. It is terrifically illustrative of how the wealth of the lower middle class has been transferred upwards en masse over the past ~8 years.

  5. This.

    The primary takeaway here is Blackstone and others like it continue to exhibit parasitic behavior while extorting rents out of the lower and middle classes. People need housing - whether they are homeowners without equity or renters the money flow only goes upwards towards those that already own the lion's share of assets. Rentier capitalism by definition.

Continue the discussion bbs.boingboing.net

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