The fourth securitization deal of big investor-owned single-family homes for rent is here.
Is this just another Wall Street gamble that will wreck the economy again, or is this time different?
You be the judge.
I'll tell you where I stand....
It's Already Begun
After buying more than 200,000 single-family foreclosed homes resulting from the mortgage meltdown, institutional investors are now spreading their risk through the system.
They're selling the risk of owning inventoried homes through securities with pools of underlying rental properties as collateral... to the same institutional buyers, who in their previous desperate hunt for yield, are back for more.
In the fourth deal of its kind, Blackstone Group L.P.'s (NYSE: BX) subsidiary Invitation Homes will close on almost a billion dollars' worth of real estate owned (REO)-to-rental credit-enhanced structured securities on May 30th.
Last year in November 2013, Blackstone's Invitation Homes packaged up 3,207 of the more than 40,000 single-family homes it purchased for $7.5 billion since late 2011. The first-ever REO-to-rental securitization raised $479 million and was six times oversubscribed.
After Blackstone's successful issuance of securities, two other industry leaders in the REO-to-rental market, Colony Capital's subsidiary Colony American Homes and publicly owned American Homes 4 Rent, followed suit.
The latest deal, with an issuance of $993 million of securities, is the second deal from Invitation Homes and the biggest to date.
Keefe Bruyette & Woods, an institutionally oriented broker-dealer and full-service investment bank, estimates that REO-to-rental securitizations could grow to $900 billion to $1.5 trillion. The bank says their issuance estimates assume 15% of purchases by institutional investors, with just 35% of their inventoried homes going to market.
All four deals are constructed similarly, and all have substantial portions of securities rated top-notch by three major rating agencies.
Bonds Collateralized on Thin Air and Opinion
Let's look at Invitation Homes' first template deal, Invitation Homes 2013 SFR1, to see if anything's different this time.
Invitation Homes structured the deal by getting a non-recourse first-lien floating-rate mortgage loan on the underlying 3,207 rental homes from German American Capital Corporation. German American is a "significant subsidiary" of Deutsche Bank AG, the bank behind Invitation Homes' deals. The mortgage loan gets funded from the proceeds of sale of the securitization certificates.
The certificates represent six different "tranches" that make up the structured deal. The deal is "structured" to provide "credit enhancements" to various tranches up the ladder. Essentially, in structured deals the credit enhancements desired are nothing more than better ratings.
Better ratings on laddered tranches, all the way up to top-notch "AAA," result from redirecting cash flows and principal prepayments and losses in a manner that it is theoretically supportive of a "AAA" bond.
If you think you've heard that before, you're right. Structuring was behind more than $2 trillion in losses suffered by the world's largest financial institutions during the credit crisis and mortgage-backed securities meltdown.
Invitation Homes 2013 SFR1 was issued last November. At the time, according to raters of the deal, the company was borrowing more than the relative value of the underlying collateral homes than any recent vintage residential mortgage-backed securities deals. Their "cushion" was "smaller than apartment complex" deals that had come to market.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
This whole thing is scary, but I think that the scariest part of this whole thing is that certified appraisers are not being used to put a value on the real estate. Real estate brokers do not have any kind of certified training with regard to real estate valuation. I can give you several examples in my own life where I had a realtor give me a value on a property that was 40% out of wack, and the property actually sold for a price that was 40% greater than what the realtor valued it at. And those valuation mistakes can go both ways, up and down. I cannot believe that Deutschbank is financing these deals based on a realtor's valuation.
"Certified" means nothing really. I am a Real Estate Broker and do dozens of valuations/month. I also of course help folks buy Real Estate. One thing most folks don't know about valuations is they are not an exact science. Where I live variation is extreme. Two homes of the same condition, quality etc. can easily sell 20% apart. Variation in motivation of the seller/buyer, cash vs. loan and don't forget cash doesn't always mean a lower sale price, seller contributions, bartering, etc. etc. All this variation adds up to ranges in actual value. Until folks understand everything occurs in ranges and therefore value should be expressed that way we will always have these claims that something was valued higher or lower than what it actually was. Understanding the range of potential values will help generate better ratings and assessment of risk.
PS I stand behind my valuations, I follow certain data analysis disciplines and the guidelines of every entity I work for. Just about every form has a provision for a range of potential sale values: High/low, and usually 30, 60, 90 and sometimes 120 day marketing times.
PPS Most experienced agents are familiar with the neophyte claiming our valuations are "out of whack". They oftentimes get their information from "reliable" sites like Zillow or the county and if those sites don't tell the story they want, they'll add up the cost of all the improvements they made, what they paid for their home and add an emotional premium or "what I need or want" premium. Hardly a reliable way to come up with value!
Sooo, are you saying sell BX?
What is there to worry about? The continuous "Banker Bailout" started when Bernanke refused to account for 9 TRILLION dollars. He didn't go to prison for that. So he continued the "Banker Bailout" at a cost to the Taxpayer of 85 BILLION each and every month. He still isn't in prison.
Now Yellen is continuing the continuous banker bailout at a Taxpayer cost of 55 BILLION per month. She isn't in prison yet.
Isn't hard to figure out where all the "yield" is going.
Hey Shah,
Do pigs fly?
Several years ago, I attended a retirement party for my former boss and as a retirement gift he received a large flying pig figurine. I thought it was inappropriate because as far as I was concerned he was an ok kind of guy. We worked together for more than 25 years and he was a good boss.
The woman who planned the party and bought the gift was conspicuously absent. What goes? The pig with wings has perplexed me all these years and I still can't figure it out. His feelings were hurt when he opened the gift and I felt sorry for him. He is not that kind of guy and did not deserve that kind of shabby treatment, especially at his retirement party.
Talking about prison the Motley Fool quoted Warren Buffett and his partner Charlie Munger at their annual Berkshire meeting in Omaha, Nebraska:
"Charlie Munger suggested that criminal prosecutions can change behavior a lot. Buffett added that he favors prosecution of people more than prosecution of companies, because it changes behavior more. It's easier to prosecute companies because they will often just settle by writing a check."
Why one might ask? It is written: "Vengeance is mine saith the Lord, I shall repay it." Why would he you might posit? "God is not a man that He should lie, nor the son of man that He should repent."
In closing: we must know, believe, and receive: "All things work together for good to those who love the Lord and who are the called according to His purpose."
Disclaimer: Spiritual views expressed above.
I work for one of these "guys" at the moment. Here's what I happened to hear in a conference call the other day. These guys seem to think that they can keep raising the rents as much as 10% annually to improve their bottom line; cutting their personnel and wages to the bone happened last week across the board. They are merciless in the way they handle their "underling" personnel, they come in, turn off the computers and escort you out the door in an hour. You're just done and the door slams on your "you know what".
Here's what I know – the renters can't afford it. Their budgets are already stretched. I can see this bottoming out very quickly in some areas. I see renters moving down to more affordable properties with only a $20 increase and new renters coming from areas where the rents are higher areas and not being able to stay because they couldn't "cut" it in their new environment, or never getting a position that fits their previous lifestyle; depleting any savings they might have had and leaving early. (we've had a lot of that lately). I'm also seeing a lot of new buyers that are able to get back into the home ownership market because they don't have so much competition from these investors – with interest rates so low, their payments are less than rent and they don't have to worry about the astronomical rent increases in the future.
I am also seeing homes that are trashed by renters and enormous costs to get them back on line. Just saying…
I just ended a lease with American Homes 4 Rent. Most miserable 2 years of our life. Continual maint. Issues. Nothing was ever their fault you should have noticed in your walk thru. Keep your deposit plus add charges. You owe them bogus charges you don't get that info via mail and before 30 days have passed you've been turned over to collection agency. Check zillow and huff post for other people with issues. Several of us are putting together a class action lawsuit against these predators, bottom feeders, cheaters, theives. I thought the FTC was formed to protect consumers. These people are rotten wood painted white to look good
I have never ever had a company that handles business like they do. I have literally become physically ill from being scammed out of money because you have no one to talk to. When you everything is supposedly forwarded the property manager. You are supposedly given direct numbers that the voicemails are always full. They do not fix anything. I 100% want in on a class action lawsuit because if I continue to live in these conditions and mental and physical distress they are going to kill me. I can't take anymore. How do I get in on this lawsuit. We have to come together on this. I'm begging anyone out there to help me stop American Homes 4 Rent from hurting people for the greed of making money. I've never seen anything like this in my life. And all the complaints I read on many sites from all 22 states are the same exact issues I'm living with. How are they getting away with this.