Onward back to feudalism!

[Magda Hassan]

Onward back to feudalism!

By Philip A Farruggio
Posted on July 22, 2013 by Philip A Farruggio
From the Tuesday, July 9, USA Today Money Section: Big investors have poured more than $10 billion into the single family home rental market in recent years . . . The biggest, the Blackstone Group, has bought 29,000 homes in 13 markets, 25,000 of them in the past year.'
Of the top 10 cities with the highest institutional investor purchases of rental housing three are in my state of Florida (Lakeland with 29%, Miami with 22% and Orlando with 19%). So, as the subprime and I flip, you flip' bubble bursts, the sharks move in to become like their counterparts from hundreds of years earlier: Land lords! Duh, didn't you all know where that term came from? Search your history books and learn how a feudal society looked way back when. You had the barons and other gentry owning these vast estates of land. They then rented some of the farmland out to their tenants, or serfs. The serf worked the land and either gave part of his crop back to the lord of the manor, or simply paid him his rent in cash. Of course, most of the serfs merely worked for the barons and rich gentry, in their mines or factories. . . . Or as servants in their mansions.
Go and get the 1993 Claude Berri film Germinal , based on the novel by Emile Zola. It captures the essence of life as a serf, renting housing and working the mines owned by the baron of the manor. The film reveals the labor injustices when one lives in a feudal free market with no union to protect him or her. This is the type of society our dear America has been drifting back into these 30 years or so.
To this writer, the weakness of the labor movement goes hand in hand with the rise of residential rental properties. You see, it really is common sense: The less you earn or have in savings, the less likely you will own your place of residence. Or, in another way of looking at things, the more you must pay out of pocket for your health care, the less you can afford to own and maintain your own housing. Isn't that what feudalism was all about?
So, there you have it. When less than 10% of private sector workers are unionized, and the ones that are have unions that suck up to the boss . . . the door is opened for a feudal-like society. When more and more of you and your kinfolk work part-time jobs so the corporation can save on benefits, etc., . . . you get my drift don't you? The low income slum neighborhoods that we all drive past from time to time (as we keep our car doors locked and windows closed) are slowly becoming the poster children for the rest of us.
This writer lived in corporate-owned rental housing when we moved to Indianapolis in the mid 90s. We shopped around and found this really beautifully adorned housing complex. Their model apartment was something out of some Norman Rockwell scene. They even had two racquetball courts at the clubhouse . . . and a little mini gym! So, we signed a one year lease in late November. The week before Christmas, my wife was at the kitchen sink preparing dinner, and suddenly the entire faucet just popped off shooting water all about! At about the same time, there was this tremendous Midwestern storm hitting us. As if in a Woody Allen movie, the ceilings in our living room and master bedroom just rained down water . . . so powerful that we needed to lay pots on the floor to catch it. Bottom line to this story: We realized later on that the Chicago Corporation which had recently purchased this complex two years earlier did absolutely no structural repairs . . . only lots and lots of fresh coats of paint throughout.
What we need in this country, and in every nation for that matter, is no such thing as absentee landlords. The American dream was a great idea when families would buy a two-family home and rent out one apartment to help with the mortgage. That is not what I am talking about. You know what I mean, don't you? My wife and I, before we made the move to Indianapolis, lived in an absentee landlord house on Long Island, NY. The landlord owned 19 such houses, and he would do as little as necessary to upkeep them. We shared this old house (originally built as a one family) with an elderly couple living downstairs. The stairway to our apartment had no banister, so my Mom could not make it up the stairs to visit us. The refrigerator had arthritis, it was so old. The bathroom had tiles on the side of the tub that were falling into it . . . and we were paying top dollar for this place. No lease was asked for, because the landlord knew that he could rent this place within a day or two of advertising it, such was the market for rentals on Long Island at that time ( probably worse now ).
When the first winter blizzard came, the landlord expected me to shovel the walk and steps. I called him up and told him I had a bad back and would not do so. Silence on the other end. So I added "Well John, you must know the law and the codes better than I do. I guess if my wife or myself, or anyone walking by in that one foot of snow outside your house, happens to fall and get hurt . . . YOU will be legally liable." His son came by within one hour with their snow blower.
We need to look at better and more viable ways to house our citizens. Why not have local towns and cities buy up the rental properties and charge the tenants a fairer price? On top of that and this is key, have the local governments that would own the rental properties offer the tenants a deal: "We will put aside a nice portion of your rent toward a down payment for you to own this place in the near future." Do you think that the tenant might very well take better care of that place? Do you think that without a profit being made on all rental properties, that the charges would be considerably less? You want real economic stimulus? Multiply the millions of Americans who now rent housing by the 30 to 40 percent they each will save every month when profit is taken out of the equation. A family that now pays an absentee landlord $1,000 a month for a small home will most likely only have to pay $600 or $700that's an extra few hundred dollars monthly added to their bank accounts.
Call me a socialist, or even a commie radical. Bottom line: the only sharks I wish to see are those in the aquarium.
Philip A Farruggio is son and grandson of Brooklyn, NYC longshoremen. He is a free lance columnist (found on TheSleuthJournal.com, The Intrepid Report, The Peoples Voice, Information Clearing house, Dandelion Salad, Activist Post, Dissident Voice and many other sites worldwide). Philip works as an environmental products sales rep and has been an activist leader since 2000. In 2010 he became a local spokesperson for the 25% Solution Movement to Save Our Cities by cutting military spending 25%. Philip can be reached at paf1222@bellsouth.net.

[Magda Hassan]

Who says crime doesn't pay?

Wall Street firms become landlords in buy-to-rent industry

The foreclosure crisis enabled companies to buy tens of thousands of single-family homes at bargain prices. Now they are filling a growing demand for rentals.

[TABLE]
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[TD] Mark Beisswanger, left, chief operating officer of Invitation Homes, inspects a barbecue center at a Canoga Park home that the company bought with plans to fix up and turn into a rental property. (Mel Melcon, Los Angeles Times / February 8, 2013)
[/TD]
[/TR]
[/TABLE]


By Alejandro Lazo and Andrew Tangel July 31, 2013, 6:13 p.m.

Prepare to send your rent check to a Wall Street address.
After buying tens of thousands of single-family homes in beaten-down markets, major investment firms have quickly become major landlords and they're in it for the long haul.
New research from Morgan Stanley predicts that the buy-to-rent sector will grow from $17 billion now to $100 billion over the next several years. These companies have proved the business model viable and will be able to get debt financing to grow their stake in the suburbs, the analysts wrote.
Blackstone Group, the biggest player in the emerging industry, has already spent $5 billion through a subsidiary on 30,000 homes, according to the report Morgan Stanley published Wednesday. American Homes 4 Rent an Agoura Hills company created by Public Storage billionaire B. Wayne Hughes has spent $3.1 billion on a portfolio of nearly 18,000 homes.
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The foreclosure crisis enabled the firms to buy distressed properties en masse, often at bargain prices. Meanwhile, individual home shoppers have often struggled to get approved for mortgages and compete with investors' cash offers.
The net effect is surging home prices and predictions that more Americans will turn to renting, further boosting the prospects of the new investor-landlords.
"We expect homeownership to continue to decline for the next few years," the Morgan Stanley analysts wrote. "While the stock of distressed housing has declined noticeably, it is still sizable enough to meet this growing demand for rentals."
Now on solid footing, the investment groups should be able to tap new sources of financing including packaging rental income streams into securities, similar to the way mortgages were bundled during the housing boom.
Many of those mortgage bonds went belly up in the subsequent crash. But analysts nonetheless see securitization as crucial for the nascent buy-to-rent industry.
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In what would be the first such security, Blackstone Group is reportedly planning to bundle monthly rental payments on about 1,500 to 1,700 of the homes it owns in a deal valued at $240 million to $275 million, the Wall Street Journal reported earlier this week, citing anonymous sources. Deutsche Bank, a major packager of risky subprime loans during the housing bubble, would structure and market the rental bonds to investors.
American Homes 4 Rent, meanwhile, on Wednesday was prepping the largest public stock offering of a company leasing single-family homes. The firm hoped to raise net proceeds of $770 million to $870 million by offering 50.7 million shares that were expected to be priced at about $16 or $18 each. An extra $75 million worth of stock is expected to be placed privately.
With those proceeds, the company will have no major debt, according to Green Street Advisor analysts, "a major positive that provides for significant flexibility."
American Homes 4 Rent is the third and largest leasing company to become publicly traded, with the first two Silver Bay Realty Trust Corp. and American Residential Properties. Two other companies, Waypoint Homes and Colony American Homes, are also planning initial public stock offerings, according to the Green Street Advisors Report.

The sector's long-term profit potential remains somewhat murky. The buying sprees have given some companies a glut of rentals in some markets, lowering the rents they can charge. Once the market stabilizes, however, these companies' profits may begin to rival those of major apartment owners, according to the Green Street Advisors report.
Jade Rahmani, an analyst with investment bank Keefe, Bruyette & Woods, said investors remain skeptical of the single-family-home rental business. Home prices have risen sharply in recent months while increases in rent prices have slowed. It's also unclear whether these companies have the kind of scale it would take to service big swaths of homes over diverse geographic regions.
But even if the long-term rental strategy flops, these companies now hold large portfolios of homes in markets with rapidly rising values.
"Worst-case scenario is they have assets that are worth a lot more than they paid," Rahmani said.

http://www.latimes.com/business/la-fi-wa...4406.story

[Lauren Johnson]

Posted on January 27, 2014 by Yves Smith @ Naked Capitalism

Private equity firms have been playing residential landlord for only a few years, but the impressive amount of capital they've deployed in this strategy means they've had significant impact in the markets they've targeted. And while PE investors might claim they've done communities a big favor by snapping up foreclosed and other distressed properties, playing a critical role in the housing recovery, some of these new landlords are already developing less than savory reputation. That should be no surprise, since PE firms in their traditional business play a numbers game, levering up and squeezing companies for more cashflow, leading to job losses and too often, bankruptcies. It's not just that the math of portfolio returns allow for some failures; more important, as Josh Kosman documented in The Buyout of America, private equity fund managers pull so many fees out of their portfolio companies that they make money even when a business collapses. So there's every reason to suspect them of structuring similar "heads I win, tails you lose" deals in the single family rental business.

Mark Takano, a Congressman who represents communities in California's Inland Empire, one of the areas hit hardest by the housing bust, is concerned, and with good reason. He has noticed that prices for rentals have moves up smartly even as economic conditions in his district remain poor. He hypothesizes that the PE wall of money that washed in is a big, if not the, contributor. He's also troubled by the idea that rental securitizations will only exacerbate the inherent problems of having big fund managers act as landlords: namely, that of not only being too big and removed to care much, but also having the securitization further insulated them from responsibility. He's asked for hearings into rental securitizations.

There certainly is reason to be concerned about conditions in the communities he represents. Even though financial experts recommending spending at most 30% of income on housing expenses, almost 1/3 in two cities in his district, Riverside and Moreno, spend 50% or more. And in Riverside, while median income is $5,524 below its pre-crisis peak, median rental costs rose by $756 in the same period.

Yet at first blush, Takano's charge sounds implausible: if private equity landlords have increased the supply of rental housing, how could that have led to more costly rentals? While stringent bank credit conditions play a big role, Takano believes that some renters would and even could be homeowners, were they not competing with all-cash buyers. His report explains:

When housing prices fell after the subprime mortgage crisis, investors had an extra incentive to buy properties cheap to rent and make a profit. The Inland Empire was particularly impacted because of its high rate of foreclosure. In an effort to help turn around distressed markets across the country, the Federal Housing Finance Agency sold hundreds of homes in bulk sales to large investors. In November 2012, Colony Capital purchased 970 properties in California, Arizona, and Nevada as part of an FHFA bulk sale. The Press Enterprise reported that in April of 2013, four out of every ten home purchases in Riverside County were by participants in an investment strategy, undoubtedly pushing out family buyers of modest means in the process.

Large investors can be more attractive to sellers, because they're able to purchase homes with cash, rather than financing the purchase through a mortgage. Competition from large investors and a low vacancy level make it more challenging for individuals and families to purchase a home of their own. According to the Inland Valleys Association of Realtors, the percentage of home purchases in the Inland Empire that were purchased outright with cash has doubled since 2008, jumping from 17 percent to 34 percent in 2012.

In the abstract, there's nothing wrong with renting, but whether it's a good deal depends on price and terms. And not only is the price not so hot, but many of the PE landlords look a lot like slumlords. The biggest home buyer, Blackstone, is also reputed to be one of the worst property managers. And Takano is correct to be focusing his concerns on rental securitizations.

Personally, I'm stunned that any investor with an operating brain cell would sign up for the rental securitization launched last year by Blackstone's rental operation, Invitation Homes, last year. However, it was a comparatively small deal ($479 million), Wall Street was eager to get it done (they hope more deals will follow, so it was likely made a priority for the salesmen), and for some investors, participating in a Blackstone deal is like buying IBM (computers, not the stock). In addition, Fitch refused to rate the deal, citing insufficient history.

Of course, using the Standard & Poor's "we'd rate a deal structured by cows" threshold, it's no wonder this deal passed muster. And in fairness, with a 40% cushion, the AAA investors do have a lot of protection. From a Bloomberg infographic (hat tip Lisa E):

But the real question is who will buy the riskier tranches, which account for 44% of the face value of the deal? The riskiest tranche presumably, like the equity tranche or RMBs, will get the upside if loss reserves in the deal aren't used up, so they should attract buyers. But the old RMBS deals, which had much more certain-looking cash flows, found it difficult to sell the tranches that didn't have possible upside, which were the BBB and often the A tranche. The remaining inventory got rolled into CDOs.

And there's a lot more not to like from an investor perspective. It preserves the investor disenfranchisement of requiring 25% of the investors to participate for most types of suits to move forward. And NC contributor MBS Guy points out a real doozy:

In order to provide AAA ratings, the Kroll and Moody's ratings both rely on the value of the underlying real estate, upon a sale of such properties.

Neither rating report addresses what would trigger a sale.

The more detailed Kroll report addresses it a bit more: if performance, in the form of debt service coverage ratio, falls to a low level the loan to the trust (backed by the portfolio of properties) goes into default. If a workout can't be arranged, then presumably the whole portfolio of loans would be individually foreclosed upon. This would be a mess: mass foreclosure of all of the properties. I can't imagine how this would be managed in real life.

So if we are lucky, these rental securitizations won't prove to be popular and the private equity barons will need to make use of other exit strategies. But investors in the US have the right to be stupid, so we can't rely on such a happy outcome.

Needless to say, there's even more reason to be alarmed from the standpoint of tenants and communities. The reports of private equity landlord neglect and misrepresentation are already legion. One staffer at a PE firm told us his firm believed they could shift most maintenance obligations onto the tenant. That is basically a notification that many, and likely most PE homeowners plan to take the concept of "absentee landlord" to a new level.

And even making the highly charitable assumption that PE landlords wanted to be decent property managers, a rental securitization makes it virtually impossible to happen. It uses the same servicing model that continues to be unable to meet legally mandated standards, like stopping dual tracking, even after umpteen settlements. Servicers are set up to be factories, with highly standardized processes. That proved to an abject failure for mortgages when defaults rose above their historically low levels. Servicers utterly lacked the infrastructure and processes to do anything on an individualized basis, when that's precisely what is required with delinquent borrowers. Rental properties are even less well suited, by virtue of property management always being a high touch activity.

The PE overlords will loftily assure the public that these concerns are dated, that residential property management really does scale, and they've hired contractors on a regional basis to do the dirty work. Remember that servicers also hired contractors to perform much simpler tasks like securing property, and they failed abysmally.

So please, call your Representative and tell him or her that you are very concerned about all the stories you've heard about what bad landlords PE firms are turning out to be, and that if they can go ahead with more rental securitizations, it will be even harder to hold them accountable.

[Magda Hassan]

This can only end badly. For people that is. ::notsharing:: :: :htf::