Toward the end of 2012, Mark Alston, a real estate broker in Los Angeles, began noticing something strange. Home prices were starting to rise, and fast—about 20 percent annually. Normally, higher home prices would signal increased demand from homebuyers and indicate that the economy was rebounding. But the home ownership rate was still dropping. Somehow, the real estate market was out of whack.
Then there were the buyers themselves. "I went two years without selling to a black family, and that wasn't for lack of trying," recalls Alston, whose business is concentrated in inner-city neighborhoods where the majority of residents are African American and Latino. Now all his buyers were businessmen in suits. And weirder yet, they were all paying in cash.
Over the last (http://www.bloomberg.com/news/2013-10-23/blackstone-creating-rental-home-bonds-after-buying-spree.html) two years (http://www.bloomberg.com/news/2013-07-08/blackstone-raises-5-billion-rental-bet-with-lending-arm.html), private equity firms (http://www.bloomberg.com/news/2013-04-25/blacktone-buys-atlanta-homes-in-largest-bulk-rental-trade.html) and hedge funds have amassed an unprecedented real estate empire, snapping up Spanish revivals in Phoenix, adobes in Los Angeles, Queen Anne Victorians in Atlanta, and brick-faced bungalows in Chicago. In total (http://www.bloomberg.com/news/2013-10-30/deutsche-bank-said-to-market-479-million-of-rental-home-bonds.html), Wall Street investors have bought more than (http://www.forbes.com/sites/morganbrennan/2013/06/04/wall-street-buying-leads-to-housing-boom-is-a-new-bubble-on-the-way/2/) 200,000 cheap, mostly foreclosed houses in some of the cities hardest hit by the economic meltdown. But they're not simply flipping these houses. Instead, they've started bundling some of them into a new kind of financial product that could blow up the housing market all over again.
No company (http://online.wsj.com/news/articles/SB10001424052702303843104579170020082914900) has bought more (http://online.wsj.com/news/articles/SB10001424127887324170004578638093802889384) houses than the Blackstone Group (http://ir.blackstone.com/unitquote.cfm), one of the world's largest (http://www.bloomberg.com/news/2013-07-08/blackstone-raises-5-billion-rental-bet-with-lending-arm.html) private equity firms. (Its many investments (http://www.blackstone.com/businesses/aam/private-equity/portfolio/show/all/) include Hilton Hotels, the Weather Channel, and SeaWorld. Among (http://www.nasdaq.com/symbol/bx/institutional-holdings) its institutional investors are Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Deutsche Bank, and JPMorgan Chase.) Through its subsidiary, Invitation Homes (http://www.invitationhomes.com/), Blackstone has picked up houses through local brokers, at foreclosure auctions, and in bulk purchases. Last April (http://lcai.org/Chapter-News/ID/61/At-1400-Homes-Blackstone-Makes-its-Largest-Bulk-Purchase), it bought (http://www.forbes.com/sites/morganbrennan/2013/06/04/wall-street-buying-leads-to-housing-boom-is-a-new-bubble-on-the-way/2/) 1,400 houses in Atlanta in a single day. In Phoenix, some neighborhoods have a Blackstone-owned home on just about every block. As of November, Blackstone had acquired 40,000 houses (http://www.bloomberg.com/news/2013-10-23/blackstone-creating-rental-home-bonds-after-buying-spree.html), most of them foreclosures, worth $7.5 billion. Today, it is the largest (http://online.wsj.com/news/articles/SB10001424052702303843104579170020082914900) owner of single-family rental homes (http://online.wsj.com/news/articles/SB10001424127887324170004578638093802889384) in the nation.
http://www.thebellforum.com/files/BlackstoneMap-630.pngKaren Minot; original map and research by Anthony Giancatarino, Symone New, and Jose Taveras

Blackstone's deep pockets—$248 billion in assets under management and a $3.6 billion (http://www.bloomberg.com/news/2013-10-23/blackstone-creating-rental-home-bonds-after-buying-spree.html) credit line (http://www.bloomberg.com/news/2013-07-08/blackstone-raises-5-billion-rental-bet-with-lending-arm.html) arranged by Deutsche Bank for buying houses—allow it to outbid individual buyers, driving up local real estate prices and pushing families out of the market. "You can't compete with a company that's betting on speculative future value when they're playing with cash," says Alston. "Institutional investors are siphoning the wealth and the ability for wealth accumulation out of underserved communities," adds Henry Wade, cofounder of the Arizona Association of Real Estate Brokers.
But buying houses cheap and then waiting for them to appreciate isn't the only way Blackstone is making money on these deals. It wants your rent check, too. In November (http://www.bloomberg.com/news/2013-10-30/deutsche-bank-said-to-market-479-million-of-rental-home-bonds.html), after many months of hype, the firm released (http://www.thestreet.com/story/12100117/1/wall-street-piles-onto-blackstone-rental-housing-bet.html) the first-ever (http://online.wsj.com/news/articles/SB10000872396390443768804578034821658901916) rated bond (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/11/08/wall-street-figured-out-how-to-securitize-your-rent-should-you-worry/) backed by securitized rental payments (http://www.bloomberg.com/news/2013-10-30/deutsche-bank-said-to-market-479-million-of-rental-home-bonds.html). Joining forces with Credit Suisse, Deutsche Bank, and JPMorgan (which recently paid (http://www.justice.gov/opa/pr/2013/November/13-ag-1237.html) a record $13 billion fine to settle accusations of ripping off mortgage investors), Blackstone has bundled the rental payments (http://online.wsj.com/news/articles/SB10001424052702303843104579170020082914900) from more than 3,200 (http://online.wsj.com/article/BT-CO-20131104-712296.html) single-family houses, offering investors its mortgages on the underlying properties as collateral. After investors tripped over themselves to buy into the $479 million bond, Blackstone's competitors announced (http://www.cnbc.com/id/101183647) that they, too, would develop similar securities.
"It's just like a residential mortgage-backed security," says one hedge fund investor whose company does business with Blackstone. Yet some analysts and observers are uneasy about the idea of a new market for securitized mortgage debt backed by rent checks. Dean Baker, an economist and codirector of the Center for Economic and Policy Research, is concerned that Wall Street firms are overlooking the risks of these untested investments. "You kind of just hope they know what they're doing," he says. In documents sent to investors, Blackstone has stated that it expects that 95 percent of its homes will be occupied at all times, with an average monthly rent of around $1,300. Real estate professionals say that those assumptions may be overly ambitious for single-family rentals.
Plying investors with such upbeat projections creates intense pressure to keep houses occupied—even as residents are squeezed by higher rents and strict collections policies. In Charlotte, North Carolina, Invitation Homes raised rents by as much as a third and filed eviction proceedings against nearly 10 percent of its renters, according (http://www.charlotteobserver.com/2013/11/10/4452995/charlottes-wall-street-landlords.html) to the Charlotte Observer.
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 (http://www.blackstone.com/news-views/press-releases/blackstone-creates-national-single-family-rental-home-platform) its strategy as "a bet on America." Rather than pricing buyers out of the market, Gallina says, the company is helping families who can't get mortgages.
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.
Asked why the public should expect rental-backed securities to be safe, the hedge fund investor responds, "Trust me."
A longer version of this article was previously published by TomDispatch (http://www.motherjones.com/politics/2013/11/wall-street-buying-foreclosed-homes).
http://feeds.feedburner.com/~r/motherjones/main/~4/OlPfcypu0OE

More... (http://feedproxy.google.com/~r/motherjones/main/~3/OlPfcypu0OE/blackstone-rental-homes-bundled-derivatives)

"It's just like a residential mortgage-backed security," says one hedge fund investor whose company does business with Blackstone. Yet some analysts and observers are uneasy about the idea of a new market for securitized mortgage debt backed by rent checks. Dean Baker, an economist and codirector of the Center for Economic and Policy Research, is concerned that Wall Street firms are overlooking the risks of these untested investments. "You kind of just hope they know what they're doing," he says. In documents sent to investors, Blackstone has stated that it expects that 95 percent of its homes will be occupied at all times, with an average monthly rent of around $1,300. Real estate professionals say that those assumptions may be overly ambitious for single-family rentals.

Plying investors with such upbeat projections creates intense pressure to keep houses occupied—even as residents are squeezed by higher rents and strict collections policies. In Charlotte, North Carolina, Invitation Homes raised rents by as much as a third and filed eviction proceedings against nearly 10 percent of its renters, according to the Charlotte Observer.


Invitation Homes has described its strategy as "a bet on America." Rather than pricing buyers out of the market, Gallina says, the company is helping families who can't get mortgages.

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.

Asked why the public should expect rental-backed securities to be safe, the hedge fund investor responds, "Trust me."

You know, you just have to hand it to these robber baron sons a bitches, they just do not give a good goddamn. "Hey, bail us out? Great! Do it again! Or don't, who cares, we will get ours!" How many time to the trough can these swine go? Only one way to find out!

You know, you just have to hand it to these robber baron sons a bitches, they just do not give a good goddamn. "Hey, bail us out? Great! Do it again! Or don't, who cares, we will get ours!" How many time to the trough can these swine go? Only one way to find out!

Ain't just the big booj either, from what I've seen a significant portion of professionals, doctors, lawyers, even teachers are landlords. It is these little sharks along with the big boys above who are entirely driving the housing market. Friend of mine who sells houses sez that almost all buying is for investment. Working class cannot afford to buy and even if ya can raise the down payment the lack of job security makes buying scary.

$1300 a month is about take home for a worker making 20K, but who needs to eat?

Ain't just the big booj either, from what I've seen a significant portion of professionals, doctors, lawyers, even teachers are landlords. It is these little sharks along with the big boys above who are entirely driving the housing market. Friend of mine who sells houses sez that almost all buying is for investment. Working class cannot afford to buy and even if ya can raise the down payment the lack of job security makes buying scary.

$1300 a month is about take home for a worker making 20K, but who needs to eat?

Toughe$t year I have had in twenty.

Landlord now pressing for 28% raise in the rent and the craigslist ad for a roommate is running...

Said landlord surely doesn't owe any interest payments on his two-month EuroMed vacation last summer.

Are those plane fares for the last minute bookings to the Florida condo when it gets too cold in other parts of the deep South going through the roof?

What gives?!

Oh yeah. Me.

Update from Financial Times:

Zeal for Blackstone home rental bond fades By Tracy Alloway, Anjli Raval and Arash Massoudi in New York
Blackstone Group (http://markets.ft.com/tearsheets/performance.asp?s=us:BX) hired the go-to New York public relations company Sard Verbinnen when it launched its house rental business, Invitation Homes, in early 2012.


Through property tours for local media, Sard sought to acclimatise residents in states from Arizona to Florida to the idea of a faraway investment company owning and managing tens of thousands of rental houses for average American families.


But two years on, after spending more than $8bn on 43,000 houses and creating a bond (http://www.ft.com/markets/capital-markets) backed by the rental proceeds, it seems Blackstone needs to kick-start a PR offensive on its home turf – Wall Street.


Some investors and market participants have soured on “single-family rental” securitisations (http://www.ft.com/intl/cms/s/0/b4d3a65a-4731-11e3-b4d3-00144feabdc0.html) in recent weeks, even as new deals prepare to come to market.
“The Street is looking for another product to sell,” James Grady, bond manager at Deutsche Asset & Wealth Management, said at a securitisation conference held in Las Vegas last month. “Back in the day we had the CDO machine and I think they’re looking to replicate something along those lines.”


The distrust is a far cry from the excitement (http://www.ft.com/intl/cms/s/0/8fae08fa-390f-11e3-a791-00144feab7de.html) that surrounded Blackstone’s bond, known as “Invitation Homes 2013-SFR1”, when it was offered to eager investors (http://www.ft.com/cms/s/0/d5fd71ce-43cd-11e3-9438-00144feabdc0.html) in November. Bankers sold the top tranche of the $479m deal for just 115 basis points over Libor – much less than initially expected – and the offering was five times oversubscribed.


Yet in recent weeks that aggressive pricing has come back to haunt the private equity group. In Las Vegas, bankers involved with the first Blackstone deal found themselves fighting a rising tide of investor criticism.


The bond was “mispriced terribly”, Vincent Fiorillo, global sales manager at DoubleLine, said during one panel discussion. Ryan Stark, a Deutsche Bank (http://markets.ft.com/tearsheets/performance.asp?s=de:DBK) director who worked on the Blackstone deal, pushed back against critics.
“We don’t normally get complaints from investors that something was too cheap,” he quipped at a panel on developments in the so-called “Reo-to-rental” market.
He pointed out that the Blackstone deal had for three months been trading in the secondary market at or above face value, indicating that it was not priced too expensively.


Yet days after Mr Stark’s comments, traders at JPMorgan Chase (http://markets.ft.com/tearsheets/performance.asp?s=us:JPM) offered the riskiest slice of Invitation Homes for about 99 cents on the dollar, according to people familiar with the pricing. The discount raises the question of whether new issuers may have to offer investors a juicier yield for future SFR bond deals.
For other investors, the exit strategy for the “Reo-to-rental” industry itself is in doubt. Private equity and specialised investment firms have spent an estimated $20bn buying 150,000 houses – often homes that had been foreclosed on during the crisis – and need to monetise and generate returns on their investment.
“Now that there’s been a groundswell of purchasing properties, are we now not seeing the major funds trying to offload?” one Las Vegas attendee asked Mr Stark.


Those who championed the sector early on may be feeling a little worse for wear.
The Reo-to-rental story has so far been a losing one for equity investors as the handful of publicly traded companies in the sector have traded poorly. Shares in Silver Bay Realty Trust and American Residential Properties are trading below their initial public offering prices, while American Homes 4 Rent has done slightly better.


The relatively poor run has curtailed investor interest in IPOs from the sector, bankers say, further complicating the exit paths for big institutional investors such as Blackstone and Colony Capital. “People decided this is not the best way to play the housing recovery,” says one senior capital markets banker.
In Washington, there are pockets of scepticism (http://www.ft.com/intl/cms/s/0/c1424114-7c63-11e3-b514-00144feabdc0.html) too.


While securitisation experts were gathered in Las Vegas, Mark Takano, a Democratic congressman, penned a letter requesting government hearings into the new SFR securitisations. “It’s unclear how these new financial products could react to a downturn,” Mr Takano said.


In Las Vegas, attendees were asked in an interactive poll whether the Reo-to-rental trade was in the early stages of becoming a new industry, or, with US house prices up sharply in recent months, nearing its end game. About 59 per cent of respondents said the trade was over, while 41 per cent said it was just beginning.


For SFR’s proponents, the will to make the business work remains strong, as does a belief in the housing market fundamentals which underpin it. “The properties in the securitisation are performing quite well and providing capital for a growing industry,” said a Blackstone spokesperson.


Both Blackstone and Colony have formed new businesses that will provide mortgage financing for independent landlords. American Homes 4 Rent and Colony have teamed with Goldman Sachs (http://markets.ft.com/tearsheets/performance.asp?s=us:GS) and JPMorgan, respectively, to sell their own rental-backed bonds in the coming weeks.


Oliver Chang, who left his job at Morgan Stanley (http://markets.ft.com/tearsheets/performance.asp?s=us:MS) to start his own Reo-to-rental business, said in response to the results of the poll: “I like being the underdog, so that’s good.”