Wolf Richter: How Private Equity Firms Manipulate the Buy-to-Rent Housing Racket

Naked Capitalism has the story Wolf Richter: How Private Equity Firms Manipulate the Buy-to-Rent Housing Racket.

Instead of trying to sell their tens of thousands of homes, Blackstone and American Homes are selling synthetic structured securities that are backed, not by mortgages like the toxic waste that contributed to the financial crisis, but by something even worse: rental payments, based on the flimsy hope that these homes will stay rented out. The already dumped $3 billion of this stuff. Wall Street is jubilating. The fees are going to be huge: the market for this type of synthetic concoction is estimated to be $1.5 trillion.

I have heard the term rent backed securities, but this is the first article that I have read that explains what they are.  If mortgage backed securities were the toxic asset that caused the last crash, I didn’t need an article to tell me that rent backed securities would be even more toxic.  Still, it is better to know the details in order to try to protect yourself from investing in this “asset”.

I am afraid that some investment grade bond funds do invest in these types of “assets”, so it is not that easy to protect yourself if you want “investment grade” bonds.  I know I have some exposure to this, but it is quite small.

As for protecting yourself from the indirect impact of this folly, good luck to you.  Don’t depend on government regulation to save you.  Even if you are not a believer, prayer may be your only hope.

For the doubters to my cautionary tale, I am going to do some research on what the investor actually gets when buying a rent backed security.  Untill I find that information, I found another interesting article about this.

Here We Go Again: Step Aside RMBS, Rent-Backed Securities Are Here, And With Them The Beginning Of The End

I still haven’t found the answer I am seeking, but I did find the Seeking Alpha article The Newest Trick In The Book: Rent-Backed Securities.

Then, there is the issue of managing the properties itself. In 2012, Blackstone formed a subsidiary, Invitation Homes, to fill this role. According to numerous tenant-filed grievances, it is anything but. Reports complain of cockroaches, unaddressed maintenance requests, and even larger structural issues. Meanwhile, an even larger problem looms. Poor management is the primary cause of vacancies, and empty units eat away at an investor’s promised return. If Blackstone, or any other property owner, is ever pushed to default, thousands of families may get evicted, even if they have never missed a month’s rent.

It is just amazing how hard it is to find out exactly what you get in a rent-backed security.

Motley Fool has the article Will Rental-Backed Securities Be a Hit with Investors? which does not answer the question either.

While the whole concept of lease-backed securities sounds a bit shaky, that might be just what investors crave in these times of low-investment returns. Not only can rental checks be counted on less than mortgage payments, but these securities would not have the backing of Fannie Mae and Freddie Mac, as most mortgage-backed securities do. This makes them more risky, but also increases the potential for higher returns. Particularly with the Fed scooping up MBSes, this new type of security will likely have investors lining up to buy them.

OK,I give up. I cannot find an explanation of a rental-backed security that explains what happens when the rents run out, you stop getting your income payments from the security, and the security becomes worthless. In particular, I want to know who owns the real-estate from which the rent was to be derived. My suspicion is that is is not the investor in the rental-backed security.

Does it strike you as odd that there is a huge market in these securities, but you cannot get a definition of what you are buying when you buy one of these securities?

I emailed info@blackstone.com.

Please point me to a prospectus for a rental-backed security.

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