Wall Street's New Financial Product: Your Rent Check
motherjones.com
motherjones.com
But this doesn't seem right. They win either way. They always make a buck, whether their new financial products are eventually banned or not. Meanwhile the economy suffers at least half the time and nobody is compensated for this risk that is imposed on them. If fact the rest of us get burdened cleaning the mess up.
It's akin to letting some cocky hacking superstar mess up with the production server. If he doesn't fuck up, he gets all the praise. If he fucks up because well, you shouldn't push things straight from mind to production, the rest of the developers, are tasked with putting in restrictions in production to forbid whatever the guy did, and the guy get's let off easily.
Maybe Wall St. should be told to run things on the test server for a while before potentially fucking up the rest of the economy.
Second, the mainstream media tends to exaggerate when writing about financial products. A $479 million bond backed by rental payments? If you're going to lose sleep over that, are you going to lose sleep over Tesla's $2.2 billion in debt, which was rated junk by S&P in 2014?
Third, a lot of discussions around Wall Street are presented in a false us-versus-them fashion. Blackstone is publicly-traded. You can buy shares of Blackstone stock and collect a ~6% dividend if you so desire. You can invest in pure-play single family home renters like American Homes 4 Rent and Silver Bay Realty Trust, which are also publicly-traded. American Homes 4 Rent even has classes of participating preferred stock that give shareholders the ability to profit from appreciation in the value of the company's portfolio of single family residences. Too risky for your taste? You can bet on the rental trend by investing in well-established REITs like Equity Residential and Avalonbay Communities, which own lots of apartments and pay ~3% dividends.
Finally, you insinuate that Wall Street is placing risk on the American economy, but the inconvenient truth about the last real estate bubble is that many Americans were just as deserving of blame as Wall Street and government agencies. Lots of people bought houses they couldn't afford based on the assumption that prices would continue to rise. Lots of people used their home equity like a piggy bank. Liar's loans? You can't have a liar's loan without somebody willing to lie.
Bottom line: there was plenty of greed in all corners of the housing market and while people who didn't do anything wrong did suffer, it's intellectually dishonest to pretend that everybody who lost a home was a victim.
Now I'm not a financial advisor, but imho putting more down is generally better because you'll pay less in financing costs.
PMI is usually not too expensive with 10% down - for example when I bought a house with 10% down, the PMI was 1% of the loan value up front. When you consider the time it would take a family to double their down payment savings, it can make sense in high cost markets.
You can go as low as 5% down, but the mortgage insurance gets a lot more expensive.
The general guidance is still 20%, though, because you're less likely to go underwater, and it shows you're committed to the idea, the area, etc.
Things that have been securitized include your credit card payments, mortgage payments, auto payments etc...
The risks outlined by the article is not specific to rent checks alone- it applies to all forms of securitization.
Unless- Mother Jones is claiming that all forms of securitization bad.
Regarding end-buyers, how much of this demand for yield is one that has been artificially created by the ongoing depressed interest rate environment?
Securitization has existed in high interest environments as well.
However- securitization offers a framework to slice up risk in such a way to meet the demand for more yield. E.g.the Z tranches & CDOs of the 2004-2008 era.
It could be that rental checks could be a higher risk product & they are being securitzed in such a way to meet the need for yield. But- I am not sure how much exactly.
In the last real estate crash, investors didn't understand they were buying mortgages made to people who had no business owning a house as expensive as they did.
We don't know what assumptions have been made about these rent checks (aside from a couple off-hand figures such as the 95% occupancy quote), so we don't know whether or not the buyers understand the risks.
As the article states - "You kind of just hope they know what they're doing"
EDIT: Apologies I really meant he has just about enough imagination, not more not less, to be working on Wall Street. https://www.youtube.com/watch?v=6R00VBj5ehk
For example - say you take part in a peer to peer lending market and give a loan to 100 people. You go through a life changing event (e.g. have a kid) and suddenly want to reduce the risk of lending to 100 people over the internet and prefer to put it in government bonds. What do you do now?
You can resell your loans to another party who will take on the risk and the resulting coupon payments from those 100 borrowers. That is in simplistic terms the process of securitization.
However- this process became badly mauled in the 2004 to 2008 period when rating agencies (S&P, Moody's etc) didn't do a good enough job of rating the credit worthiness of these borrowers and then buyers who took on the risk of buying the loans of the borrowers based on the judgement of these rating agencies got hammered. I am simplifying what was the issue of 2004-2008 crisis. But this is just to give you a very quick idea.
I'd argue the real issue was ratings agencies giving the securitized debts AAA ratings when in fact the holdings were toxic. When things went sour, the risk premia just weren't there to cover the impact.
The sellers were obviously trying to offload them, the buyers were happy to be told they were no risk securities and the ratings agencies' customers were the sellers.
That the ratings agencies still exist after that meltdown is the single biggest mind blowing thing that happened after the crisis in my mind.
I find it unlikely that what happened wasn't at least partially orchestrated.
Imagine how big this market would be if homes were affordable nationwide and Americans could buy them with cash. Not very big, right?
Houses didn't get any more expensive to build over the last 30 years, but they shot up in value thanks to policies basically designed to fuck the poor and transfer wealth directly to the rich (ZIRP, de-taxing land/wealth, etc.). Hence the fact that securitization of rental streams is a thriving market rather than just an idea.
This financial product, at least for the latter half of the last century, was almost entirely provided by US governmental debt. The monetary policy of the last decade+ has caused that debt to no longer be an acceptable investment for this. Coupled with the increase in number of investors looking for this style of vehicle (from China and other developing nations) and there is a huge market need.
Of course, in the face of a huge market need financial product offerers are going to try new and possibly dodgy means to fill the gap.
Could you elaborate on why that's the case? What happened to treasury bonds? Which part of monetary policy affected the returns and how?
And you think hopping on the next CDO bandwagon is a low risk investment?
This reminds me of the stuff that caused the crisis of 2008 ... however, I am not that well-versed in these kinds of financial products. Could anyone explain a bit more to me how this works? They pool the collected rent and then they create a bond with that? How?
>Invitation Homes has described its strategy as "a bet on America."
Murrica1!
The problems in 2008 weren't directly a result of such securitization, the problem was that the risk of the underlying mortgages was not at all correctly estimated, and the way the bonds were traded depended on the pretense that the risk had been estimated nearly perfectly.
These bonds can do things like list historical occupancy and on time payment rates of the properties, so they don't need to be anywhere as murky as bonds backed by mortgages that were handed out to whoever walked in the door.
The problems in 2008 weren't caused by accidental risk mis-pricing. It was entirely intentional. The securitizers paid the rating agencies for their opinion and the ratings agencies duly delivered an opinion that the securitizers wanted: AAA.
That meant all of the shit could get stuffed into things like retirement portfolios owned by suckers like you and me.
Was anybody punished for this? No.
Will it happen again? Most likely.
>These bonds can do things like list historical occupancy and on time payment rates of the properties, so they don't need to be anywhere as murky as bonds backed by mortgages that were handed out to whoever walked in the door.
The money question is what score did the ratings agencies give these bonds.
The bulk of the buyers of the AAA tranches were other banks, and the reason was satisfying requirements for capital reserves. If bank A and B both have portfolios of mortgages worth $1B, they are treated as having $1B of risky assets and do not satisfy capitalization requirements. If they securitize the portfolios and sell each other a $700M senior tranch (while holding the equity tranches themselves), bank A and B are both considered to have $700M in cash-like reserves.
This does reduce the risk caused by regional house price decreases which is why regulators wanted banks to do it. (No one, including regulators, expected a national/global drop in real estate values.)
Also, the idea that the mispricing was intentional is silly. The issuing banks mostly held onto the equity tranches and suffered as a result - not the actions one would take if you knew things would tank.
According to the "evil actor/information assymmetry" theory, the people closest to the mortgage issuance should have been the ones who survived the crisis best (since their information was the most accurate). In contrast, the dumb investment banks back in NY should have been hurt the worst. That's the exact opposite of what happened.
Several thousand appraisers actually wrote a letter to Congress complaining that they were being pressured to inflate their home appraisals or face blacklisting. This went back to 1999.
Note: Many people brought up how crap these models where both in and outside of these raiting agency's.
This does not change the fact that everyone else - banks, hedge fund buyers, mortgage issuers, regulators - made the same assumptions. Even if everyone independently made the same wrong assumptions, rather than one possibly corrupt party doing it for them, the result would be the same.
I spoke with a few Mortgage issuers in this time period they could generally resell the whole mortgage fairly easily so throughput quickly became more important than quality because they where just selling them to someone else. And often wondering who the bleep would buy this crap.
The buyers where often working with other peoples money, sure it might tank in a few years but they had little exposure to the downside. Making a few years of slightly above average returns worth it.
Finally, I am not sure US regulators dropped to ball on this one as much as you might think. A huge chunk of these security's where sold outside of the US, so over a 20 year period this extracted a lot of foreign money 'for free'. As in we sold paper and got paid for it.
AAA is not just a label. It's about being allowed to sell to unsophisticated buyers who can't tell that you're taking them for a ride.
It's also about being able to use the asset to count towards your capital reserves, so you can take more risk (as a bank) and get higher profits.
We've been over this before. Banks are not people. The people in the banks were trying to sell these things so that they could collect commissions. They didn't give a shit if the bank suffered.
I suggest you read this:
https://en.wikipedia.org/wiki/Control_fraud
And then this:
https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...
And then reconsider your notions of what is 'silly'.
You are correct that the sympathetic voters who engaged in mortgage fraud/etc are not being prosecuted, and are in fact being rewarded by craven politicians.
My apologies - I misread your first comment as somehow suggesting that ratings agencies and securitizers were deliberately attempting to cause mispricing.
http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/...
It's a huge document, V.D, pdf page 274, document page 267, doesn't really dance around the issue:
The Subcommittee’s investigation uncovered a host of factors responsible for the inaccurate credit ratings assigned by Moody’s and S&P to RMBS and CDO securities. Those factors include the drive for market share, pressure from investment banks to inflate ratings, inaccurate rating models, and in adequate rating and surveillance resources. In addition, federal regulations that limited certain financial institutions to the purchase of investment grade financial instruments encouraged investment banks and investors to pursue and credit rating agencies to provide those top ratings. All these factors played out against the backdrop of an ongoing conflict of interest that arose from how the credit rating agencies earned their income. If the credit rating agencies had issued ratings that accurately exposed the increasing risk in the RMBS and CDO markets, they may have discouraged investors from purchasing those securities, slowed the pace of securitizations, and as a result reduced their own profits. It was not in the short term economic self-interest of either Moody’s or S&P to provide accurate credit risk ratings for high risk RMBS and CDO securities.
(But I agree that there were 2 parties involved in each of the bad loans, the evil bank story is an appealing populist narrative, but not at all the full story.)
It's exactly like that, yes. This is another form of CDO.
In this case it sounds rather like Blackstone are trying to offload their risk (renters not paying on time, etc.) on to hapless investors but still getting a cut of the check.
And then you've also got legal issues (various landlord and tenant acts, homeowners associations) that will vary by jurisdiction that could make things like eviction and rent raising more difficult than expected.
That 95% tenancy number could well drop by a lot, making the investment a real stinker (also even if they lower rents to increase tenancy the underlying measure isn't really tenancy rate it's monthly average rent).
I'd love to see the full, actual quote on that.
> But what if the security blows up? Investors could demand their collateral back, forcing renters out of their homes, even if they never missed a payment. "We could well end up in that situation where you get a lot of people getting evicted—not because the tenants have fallen behind, but because the landlords have fallen behind," says Baker.
At the risk of invoking the "j_lev Law of Eating Hats" I can't see that happening. There is ONE private investment company which has a loan with ONE bank. Investors pull out, the size of the loan just increases by that amount. All the investors pull out and Blackstone Group is left with a lot of (high-yield) property and a large loan with DB. Worst case scenario the properties are sold (potentially at a loss, but the remaining loan is still the problem of Blackstone Group and DB).
I'm sorry, but what? This isn't how leaves work, or at least it isn't in most states I'm familiar with. No one is going to get evicted if investors demand their collateral back - the leases might not be renewed (like might happen with any other landlord), but the lease can't be terminated just because some investors gets antsy.
My theory was that much of the demand for housing is from investors. I've read tons of reports that wealthy people from China had been descending on US soil and gobbling up pretty much everything on their way with entire deals in cash. My real estate agent told me she is completely stunned how many deals are coming from foreign investors in cash. On a typical house that comes in market, it gets viewed by 200 buyers and gets about 10 offers within 1 week involving bidding wars more often than not. I also show these giant investing funds sweeping entire areas with their billions (my area was gobbled up by Berkshire, for example). I also have few colleges who are now owning as many as half dozen real estate properties - all bought from mortgage then rented out through agencies. They are saying business has never been better and I suspect they might soon leave their jobs to retirement. Many other people I know overseas are putting larger and larger savings in buying real estate. In most big cities, you can find buildings upon building with super expensive apartments that only gets bought and sold but no one lives there.
I think what has happened is 2008 crash actually made real estate more stronger then any other time in history because of the way it has bounced back. In essence, real estate is a new cow. You can milk it forever by renting it out and are thus guaranteed certain % of return. Plus it goes up in value on pretty much any long stretch of time. Plus you can actually use it unlike gold or stock. Plus it's virtually inflation protected. The biggest advantage, however, is that you are almost guaranteed never to loose your entire principal - even in the tough times. Even if 2008 repeats, you might lose 5-25% of value unlike stocks where anything is possible. Traditionally investors thought of real estate as lousy investment because of non-liquidity, auxiliary expenses, less rate of return than stock etc. The modern investor thinks real estate as highest yielding best bet among all other safest bets.
I feel trend is going to continue at least for another 2-3 year if not more. I can easily imagine 10-30% of all urban areas bought out by investors and only available for rent. This would be a really bad thing on many levels. First, money tied up in real estate doesn't go toward economy growth. Second, rental market will get worse and worse because it will be controlled by few players who will dictate prices to make sure they get highest return. Third, owning house would become too distant a dream for pretty much anyone except top 1%.
The funniest thing is that you and me are technically funding above process. All our 401Ks and retirement funds ultimately ends up at groups like Blackstone to buy up real estate and then rent it back to us at highest possible rate :).
Similar things are said about London.
I really think we should abolish tax-deductible/advantageous defined contribution plans like 401k, IRA, Roth, college funds, etc. This automatic investing scheme is giving inordinate amount of power to wallstreet, and force money to chase after equities and securitized products because that's all they know how to 'invest'.
If you're going to invest in stock market, you should make conscious choice to do so using after-tax earnings just like other forms of investment. The only reason why people plow money into these accounts is because of tax benefits.
Take that away and people will find more creative ways to put their money to work.
That could ultimately be a good thing for this country
I am sure there are more.
You might be thinking about 1031 exchanges of business assets (including rental properties). IMO, that serves a generally beneficial purpose as compared to the others that you mention.
Then real estate is not "rent-seeking".
Real estate owners take the burden of home ownership off the shoulders of renters. Renteres choose to rent because they have an economic incentive to do so. Instead of a buying a home cash, or putting down a deposit, a renter can use that money for investing in other activities, spending on themselves or their family, or save. Of course, there are many renters who cannot afford a down payment at all. For them, the landlord is playing an even more important role by letting them rent in areas where purchasing would be impossible.
I do agree that most tax incentives for investing should be abolished. But I disagree that real estate is less productive than other types of investing.
It's insane that I got to give the U.S. Government 30% of my earnings from two jobs and I don't even live in the United States! The U.S. And Eritrea are the only countries in the world that tax worldwide income. If I worked less hard, I'd pay less taxes. That's completely backwards. Hard work and risk ought to be rewarded not penalized. So te reason people use these tax advantages accounts is because otherwise they'd be just throwing money down the taxation drain. With a simple and uniform tax policy: 10% of your earnings, no deductions, no credits, then the need for these complex tax advantaged "schemes" would disappear. However, Demicrats would never allow that to happen; they need the tax code as a means to penalize those that wouldn't vote for them in order to give things to those that would. If I hear "fair share" one more f'ing time from someone that pays zero income taxes while living in a rent stabilized apartment watching satellite TV, I'll probably kick a puppy. Meanwhile, it's Satrurday; I have work to which I must get back.
That depends on the market. Palo Alto or Atherton won't budge in the next crash, but look what happened to Las Vegas.
A mortgage payment on a SFH with a reasonable commute to the big tech companies (i.e. anywhere on the peninsula) is pretty much out of reach for a household with an income below $200-$250k, or without a huge down payment.
That's an incredibly high household income and basically requires both partners to be working in high income fields - or one partner that is incredibly successful - so overall a small portion of the population.
Foreign investment is driving up real estate prices, which is driving up rents by keeping those who would otherwise buy in rentals. Tech salaries are a factor at play, but they aren't the only one.
I would like to see severe limits put on Real Estate Investment trusts. I would like to see them regulated out of existence.
I would like to see mandatory rental of properties after the third purchase. Example--A person buys a home and a vacation property. The third residential, or commercial property bought should be rented out if the particular county needs more rental property.
Personally, I don't like Realestate speculation if it involves renters. I always felt it was a slimy way to make money. That goes for mini-storages too. Yes, it's legal; I just don't respect Investors who make money off renters. If you are going to rent at a reasonable rate, and not nickel and dime the renter--fine, but I have never met a landlord who didn't get greedy with a good market.
I do understand buying a home to live in. I know a lot of you will say it's the same thing as buying rental property. I see nuances which make the two transactions different.
While, I'm at it, why are we still relying on realestate agents and brokers? It's 8 courses, a simple test, dubious experience, and a cheezy smile--and they have the nerve to ask for 3%? I have never quite figured out the full commission game. It just seems like a profession that should be extinct by now? Sorry Realtors--just don't understand your role in most transactions these days, other than your errors and omissions policy, which I can go after if things don't go smoothly?
Just venting people. I have seen long term residents being forced to move from the county they raised their kids in because of escalating rents. These are just regular people. They don't have fancy credentials. They don't have jobs that transfer. Many are on a fixed income. These are people who just want to be near their family, and friends, but are being kicked out of their county because of this crazy market.
- Shifting cultures. In 1900 humans all over the planet were relatively collectivistic. That's moving towards individualistic societies. That means kids leaving homes sooner, getting married less, live in their own apartments despite having relationships. Partly that's due to wealth (an enabler), but more so due to culture (the driving force). After all in some cultures we still see wealthy enough people who live with their parents (e.g. lots of Chinese middle class who can afford living individually).
This means that the square footage per person radically increases.
- Population growth which adds demographically driven pricing pressure
- Lure of cities. Cities have always been concentrated areas of population, but never more than today. In 1870 about 50% of people worked in agriculture (and you can correlate it with where they lived: where the farmland was, i.e. spread out all over the US). Today that figure is generally deemed less than 2% in most OECD countries, and urbanisation is huge, growing from 25% in 1870 to 80% today. It's no surprise then that the value of these areas continues to skyrocket.
And that makes sense. Our value added isn't from the land. It's mostly in the services industry. (i.e. wheat costs 10 cents a pound, but a pound of cereal in nice packaging etc is 310 cents per pound). Crude example but this needs no explanation really.
Land prices being cheap elsewhere doesn't factor in the insane economies of scale and existing infrastructure in cities. Want to build a new house on cheap ranch land, be prepared to build your own sewage, water, electric, satellite internet etc. In that sense overpriced city apartments may actually be considered cheapish sometimes.
- Existing landowners tend to have political power in the area where they own land (and often thereby the buildings, shops, industry etc on top of it). It's in their interest to keep their land scarce, this increases the value of their land. So you now have people with power to keep something scarce, who have a reason to keep something scarce. Often this is pretty artificial, while some property owners oppose loosening restrictions for genuine non-financial reasons (e.g. I don't want a skyscraper in my backyard), many land owners don't really care for building limits if they increased their property prices, but because they usually don't, they oppose them.
On the one hand it seems like a very safe bet: real estate. On the other, here's what I wonder sometimes. Let's take a 50-70 year view, right? We're seeing pretty big leaps in sustainable energy and storage. (enables off the grid). We're seeing big leaps in information networks and coverage. (enables off the grid). We're seeing new generations growing up with ideals of authenticity, renewed mainstream appreciation for hiking, community based tourism, community supported agriculture etc. And finally we're seeing very interesting movements in VR and AR to the extent that working from home etc can get standardised into a human (read: not skype convos) experience closer to regular cooperation in an office. With housing prices growing faster than income, there has to come a point where, say in 20 years from now, a cheap, less urban location, enabled by new technology (less reliant on the grid, able to be very productive using VR/AR) etc will be much more appealing than living downtown in a $1m closet.
These are some extremely unsophisticated thoughts, of course, quickly written up as a layman in these technologies, real estate and sociological trends. Just want to put them out there to think about. I wonder if housing prices will be as safe a bet the next 50 years as they were the last 50.