So how much did Blackstone promise to give to the Obama library for this huge grift, um, parting gift?
As regular readers may recall, private equity firms piled into buying foreclosed single family homes on the belief that if the government (in this case, Fannie and Freddie) was selling, they wanted to be buying. And they also convinced themselves that technology would somehow allow them to manage geographically dispersed single family homes, which is inherently a hand-on business, more efficiently than mom-and-pop or small scale operators, many of whom had a cost advantage by having some of the principals provide services (as in doing their own plumbing and electrical, so effectively “buying” those services at wholesale prices).
The most disciplined operators did well by getting in early and buying only very discounted properties, so that they had a good cash on cash return on the rentals. It would be attractive for them to hold long term, which would also give them lots of latitude regarding an exit. The lack of time pressure would mean they could sell the homes individually, even through “rent to own” deals with the higher credit quality tenants.
But many of the early entrants kept on buying long after prices were bargain basement, and it was clear due to the press reports of widespread mis-management and tenant abuses that they were cutting corners on maintenance due to having underestimated costs and complexity. Any real estate manager will tell you that running down the asset is foolhardly.
The logical time to start to exit was 2014, but the private equity property owners were whacked by the Bernanke taper tantrum. The most straightforward exit was to turn the properties and the management compan into a REIT, but only a couple of deals got done before that window closed. The next strategy was rental securitization, which we regarded as a terrible idea given the awful track record of mortgage servicing, and that a rental securitization involved much more in the way of moving parts that mortgage servicing. Again, a few transactions got out the door, but the market foundered after a Blackstone securitization saw a big drop in rental income in the quarter immediately following the public offering.
So in its waning hours, the Obama Administration gave a completely unjustified bailout to private equity landlords, that Fannie Mae is guaranteeing the income of all but the bottom tranches of Blackstone’s latest rental securitization.
Let us stress that there is absolutely no policy justification for this. The mission of the government sponsored agencies is to promote home ownership, not to give real estate speculators a “get out of losses or underwhelming returns for free” card. Even worse, rather than forcing the private equity industry to take some well-deserved lumps for miscalculation, it will encourage them to continue to compete with lower-income prospective homeowners for purchasing properties. That means it will be even more difficult for young people to buy homes. Lambert has pointed out repeatedly in his stats wrap in Water Cooler that real estate markets are suffering from a shortage of homes. Having private equity continue to be on the prowl for lower priced properties that they know they can unload from an economic perspective means that the pauperization of the middle class is now official policy.
Even though this guarantee clearly had to have been worked out during the Obama Administration, Blackstone did not make it public until it updated its filing with the SEC this week. It looks an awful lot like the timing was designed to make sure that the disclosure came after the new Trump team was in charge, meaning Obama would be unlikely to face the criticism he deserves, and the Trump Administration would be certain to let the deal stand.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
Invitation Homes, the 2012 buy-to-rent creature of private-equity firm Blackstone, and now owner of 48,431 single-family homes, thus the largest landlord of single-family homes in the US, accomplished another feat: it obtained government guarantees for $1 billion in rental-home mortgage backed securities.
The disclosure came in an amended S-11 filing with the SEC on Monday in preparation for Invitation Homes’ IPO. Invitation Homes bought these properties out of foreclosure and turned them into rental properties, concentrated in 12 urban areas. The IPO filing lists $9.7 billion in single-family properties and $7.7 billion in debt.
Some of this debt will be refinanced with the proceeds from the sale of the $1 billion of government-guaranteed rental-home mortgage backed securities.
The government agency that has agreed to guarantee the “timely payment of principal and interest” of these “Guaranteed Certificates,” as they’re called, is Fannie Mae, one of the government-sponsored entities (GSE) that has been bailed out and taken over by the government during the Financial Crisis.
This is the first time ever that a government-sponsored enterprise has guaranteed single-family rental-home mortgage-backed securities, issued by a huge corporate landlord. It’s an essential step forward in financializing rents: taxpayer backing for funding the biggest landlords.
Government guarantees allow the mega-landlord to sell these securities at a lower yield and thus offer landlords like Blackstone’s entity even cheaper financing for future home purchases, and thus lower costs and greater profit potential.
During the next severe economic downturn, Fannie Mae and its sister Freddie Mac would need between $49 billion and $126 billion in taxpayer bailout money, according to the stress test conducted by the Federal Housing Finance Agency. The results were released in August last year. So why fret about one more billion?
Blackstone is the trailblazer in financializing rents. It pioneered the post-Financial Crisis buy-to-rent scheme, explicitly encouraged at the time by Fed Chairman Ben Bernanke and the Department of the Treasury, as they were trying to bail out the banks by finding willing and able buyers for foreclosed homes – big institutional buyers that could feed at the nearly-free money-trough the Fed had put out there.
And Blackstone was a trailblazer in the next logical step: issuing the first rent-backed structured securities in November 2013. The deal was collateralized by rental income from 3,207 homes. Moody’s, Kroll, and Morningstar – all paid by Blackstone – rated nearly 60% of the securities AAA. The remaining tranches carried lower ratings. The deal flew off the shelf. Now all larger buy-to-rent companies are using rent-backed structured securities for funding.
This too is going to happen with government guarantees on rental-home mortgage-backed securities. It’s a sweet deal for the issuer: low-cost funding, made possible by government guarantees, is always welcome. Other corporate landlords will follow in Blackstone’s footsteps.
Not all of it will be guaranteed by the government: To satisfy “credit risk retention requirements,” Invitation Homes “would purchase and retain the Subordinate Non-Guaranteed Certificates,” amounting to 5%, or $50 million, of the $1 billion in securities. That’s all the cushion the taxpayer has before losses begin to hit home, so to speak.
The GSEs were founded to promote homeownership by subsidizing it with at first implicit, and since the Financial Crisis explicit, government guaranteed mortgages. But this deal represents a big shift: now, in a delicious Wall-Street irony, the government subsidizes the largest landlords and enhances their profits from renting out single-family homes that individual homeowners had lost during the housing collapse and foreclosure crisis.
There is a darker side to corporate ownership of single-family rental homes and the financialization of rents: soaring evictions, according to the Atlanta Fed, which explicitly blames the Fed and Bernanke. Read… Evictions by Wall-Street Mega-Landlords Soar, Financialization of Rents Cause “Housing Instability”: Atlanta Fed