Securitization: Wall Street’s new housing boon

New York TimesFebruary 2, 2014 

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 month 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.

American Homes 4 Rent owns 21,000 homes in 22 states, including more than 700 in Wake and Durham counties, according to property records. The company has been scooping up properties in the Triangle since late 2012, paying all-cash for both existing and new homes.

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 KBW 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.

Impact unclear

Investors such as 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.

Rep. Mark Takano, D-Calif., whose district includes the Inland Empire region 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 effect 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,” Takano said in a recent letter to the committee last.

More leverage to buy

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 such as 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 such as American Homes 4 Rent are earning their early investors big profits.

A spokesman for the company did not return calls requesting comment.

Staff writer David Bracken contributed.

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