In addition to the phenomenon of “foreclosure stuffing” described here extensively before, one of the main reasons for the artificial drop in housing supply has been the ongoing government-subsidized, GSE/FHFA endorsed REO-to-Rent initiative, through which large asset managers have been encouraged to take advantage of government funded, risk-free financing and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. The REO-To-Rent has traditionally been open to the biggest of financial companies, or at least those who don’t have the stigma of legacy mortgage origination resulting in billions in litigation reserves, which means mostly hedge funds and PE firms. One of the main players in the space, Och-Ziff, decided to pull out of the landlord business in October of last year because, as Reuters reported, “the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California.” In other words, selling while the selling is good.
Of course, there is another, far more traditional way to offload risk while preserving some of the upside: dump the balance sheet exposure to others while giving them a fraction of the potential upside yield. This is precisely what the big banks were doing during the last housing bubble when massive residential mortgage-backed security portfolios were packaged, spliced, securitized (sometime without the feedback of firms like Paulson pre-shorting the MBS courtesy of firms like Goldman) and sold off to other yield-starved investors. Everyone knows how that ended.
So fast forward to today, when this final missing link from the credit and housing bubble is finally here too, following news that mega-PE firm Blackstone is pushing forward with the first ever REO-To-Rental securitization.
Blackstone is preparing a first-of-its-kind securitization of REO-to-rental properties, and the deal could come later this year, according to sources with knowledge of the plans.
Word of the plans comes a week after the private equity giant got an increased bank loan from Deutsche Bank and others to expand its significant holdings of single-family homes.
Market sources told IFR that Blackstone is planning at least one securitization to help underpin its long-term financing in the REO-to-rental sector.
The new Deutsche Bank loan, upsized to US$2.1bn, includes an original US$600m warehouse facility in addition to investments from eight other banks and securities investors.
At least 20 banks and investors looked at participating in the loan, and some passed because their charters would only allow them to participate in bond deals and not bank loans.
Securitization specialists with knowledge of the deal said Deutsche Bank expanded the size of the facility in order to accommodate Blackstone’s increased commitment to purchasing distressed single-family homes with the goal of renting them out.
The missing funding link: the same dumb money that in 2-3 years will be litigating to kingdom come how nobody had any idea the bubble would pop leaving them with nothing:
Starting with equity investments and now warehouse financing from
investment banks, the final step would be involvement of the capital
markets in the form of a securitization, experts say.
The best news is that unlike in 2005-2007, there will be no rating agency scapegoats, as this time the bubble is so big, nobody is even demanding a rating!
Blackstone is the largest asset manager in the sector, and demand for a securitization is thought to be so strong that any deal could go forward without needing credit ratings.
Which is good – finally those imprudent speculators, once known as asset managers, will have no excuse to justify their actions, and blame it all on AAA-ratings by S&P and Moodys.
So what exactly will the dumb money be getting in exchange for a BBB tranche yielding some 6-7%? Why, nothing but the best:
The average size of the houses that Blackstone is purchasing in areas such as Phoenix and Tampa is 1800 to 1900 square feet, typically with three bedrooms and 2.5 baths, according to sources familiar with their investment properties.
Specialists say that once the purchased properties are rehabilitated with a tenant, they become good candidates for inclusion in the traditional securitization process.
Which means that, as our readers know very well, five years after the last bubble, the new bubble is back and it is bigger than ever. Does anyone care? Why, no, of course: the music is playing and one must jump both feet into the dance if one hopes to be paid anything at the end of the year. The lemming dance that is. Because everyone knows how all of this ends every time.