Image: Executives of American Homes 4 Rent celebrated the company’s public offering last August (photo courtesy of Curcio/NYSE Euronext)
Editor’s Note: Despite President Obama’s recent claims of a “rebounding housing market” in his State of the Union address, credit still doesn’t work for the people. Those at the top of the economic food chain are buying up housing assets liquidated during the fallout from the Great Recession. Through securitization of the loans used to buy up these properties, even small-time speculators are able to leverage themselves for significant profits while regular families are still struggling to gain access to affordable mortgages. But there’s a cruel joke at the heart of this story: “Many tenants used to own the houses they are now renting” from the companies buying up these now-cheap properties. With less public involvement in the housing market, we can only expect these problems to become more dramatic. Clearly, even if Fannie Mae and Freddie Mac are left to wind down, none of the structural problems related to housing finance, homelessness, and affordable housing will be going away anytime soon.
Wall Street’s New Housing Bonanza
By Michael Corkery
Originally published in The New York Times.
Wall Street’s latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world.
That might sound a lot like the activities that at one point set off a global financial crisis. But there is a twist this time. Investment bankers and lawyers are now lining up to finance investors, from big private equity firms to plumbers and dentists moonlighting as landlords, who are buying up foreclosed houses and renting them out.
The latest company to test this emerging frontier in securitization is American Homes 4 Rent. The company talked to prospective investors at a conference in Las Vegas last week about selling securities tied to $500 million of debt, according to people briefed on the matter.
American Homes 4 Rent, which went public in August, has tapped JPMorgan Chase, Goldman Sachs and Wells Fargo as its bankers for a debt deal that is expected to be sold by the end of the first quarter, these people said.
While this securitization market is still in its infancy, a recent Wall Street estimate put potential financing opportunities for the single-family rental industry as high as $1.5 trillion. Already some members of Congress and economists are worried about another credit bubble.
“The investment and lending opportunities are immense and perhaps just beginning,” Jade Rahmani, a real estate analyst with Keefe, Bruyette & Woods, wrote in a recent report.
In just the last two years, large investors have bought as many as 200,000 single-family houses and are now renting them out, according to the K.B.W. report.
The private equity giant Blackstone Group sold the first single-family rental securitization of its kind last fall, a $479 million bond, attracting six times as many investors as the private equity firm could accept, a person involved in the deal said.
Investors like mutual funds and insurance companies bought slices of the bond, which are backed by the rental homes owned by Blackstone’s company, Invitation Homes.
The rental business is still dominated by landlords who own and manage only a handful of properties. Wall Street has found a way to finance them, too. Cerberus Capital Management and Blackstone have started businesses that lend to small-time and medium-size investors.
And there are discussions about bundling many of these small loans and securitizing them also.
“That’s the part of the business that will take off,” said Stephen D. Blevit, a lawyer at Sidley Austin. “Providing cheap financing to mom-and-pop investors who save their pennies, buy a few properties and do all the maintenance themselves.”
What the new securitization boom will mean for homeowners and renters is less clear.
Wall Street may be clamoring to lend to investors in single-family homes, but it is still difficult for millions of Americans to qualify for a mortgage. The easy financing could give investors the upper hand in bidding for homes on the market.
Representative Mark Takano, Democrat of California, whose district includes the Inland Empire just east of Los Angeles, which was hit by a tidal wave of foreclosures, has asked the House Financial Services Committee to hold hearings on the impact that single-family rental bonds could have on the housing market.
“Proper oversight of new financial innovation is key to ensuring we don’t go down the same road of the unchecked mortgage-backed security and create an unsustainable bubble that will wreak havoc when it bursts,” Mr. Takano said in a letter to the committee last week.
Securitization, however, could provide a pick-me-up to Wall Street’s mortgage machine, a once-mighty profit engine that has never fully recovered from the financial crisis. Bankers estimate that single family-rental bond deals could total as much as $7 billion this year and eventually grow to about $20 billion a year.
For landlords like American Homes 4 Rent, securitizing debt would provide them with more leverage to buy more homes. It would also increase their profits by lowering their borrowing costs.
With securitization, landlords could in theory put as little as 25 percent of equity into their properties, while borrowing the rest. Credit lines from banks typically require 40 percent equity.
Last month, economists at the Federal Reserve warned that if large landlords took on too much debt, they might feel pressure to hold fire sales of their properties, flooding the housing market with supply.
“Financial stability concerns may become more significant should debt financing become more prevalent or if the share of homes owned by investors in certain markets rises significantly further,” the Fed economists wrote.
They added that it was important to monitor the emergence of single-family rental securitization for signs that it could destabilize “financial markets.”
For now, though, companies like American Homes 4 Rent are earning their early investors big profits. Many tenants used to own the houses they are now renting from the company, said a person with knowledge of the matter.
A spokesman for the company, which owns 21,000 homes, did not return calls requesting comment.
The company, whose executives are based in Agoura Hills, Calif., started out with little leverage when it began buying homes as a private venture founded by B. Wayne Hughes with money from the Alaska Permanent Fund Corporation in the summer of 2012, said the corporation’s executive director, Michael J. Burns.
The Alaska fund draws money from royalties paid by big oil companies and doles out annual dividend checks to every state resident. Last year, those checks totaled $900 each.
Mr. Burns said his investment staff had heard Mr. Hughes was buying foreclosed and other inexpensive houses as part of a private venture. Mr. Hughes, who founded the company Public Storage and is listed on the Forbes 400 richest Americans, agreed to meet the Alaska investment team at his office in Malibu, Calif.
“Wayne said he thought this was the biggest real estate opportunity of his lifetime,” Mr. Burns recalled.
With an initial $250 million investment from Alaska in the summer of 2012, Mr. Hughes’s fund went on a buying spree in Arizona, California and Nevada. American Homes 4 Rent now rents out houses in 22 states.
The company is a real estate investment trust, a structure that has tax advantages over other companies but tends to borrow heavily. Mr. Burns says leverage is “a fact of life” for a company like this. Alaska’s equity investment of $625 million in the company has gained about 17 percent in value.
“We have been very pleased with how this turned out,” he said.
Still, Mr. Burns said that it had been “heart wrenching” at times acquiring homes that families have had to turn over to the bank.
“Some other family is going to move in and make it their home,” he said.