Forum Post: One percent’s rental nightmare: How Wall Street scheme blew up in its face

Investors – and their trade-group allies – have pitched single-family homes as a salve for this crisis, bringing more supply online and stabilizing the rental market. But it would be extremely difficult in this environment to put homes out for rent and then see the vacancy rates explode upward. Nevertheless, that’s exactly what’s happening to the properties in Invitation Homes’ rental securitizations. And there are only a couple of possible reasons here, all of them pointing to poor property management. We have plenty of anecdotal information about substandard remodeling, shoddy maintenance and difficulty in contacting managers. The higher relative vacancy rates put some data-driven meat on those bones.

Word is getting around in these communities about the pitfalls of renting from Invitation Homes, leading renters to seek other options. To take one example, in May, a couple in Los Angeles sued Invitation Homes over the slumlike condition of their rental property, which featured mold and rotted plumbing. The couple got sick from the mold, moved out and then could not retrieve their contaminated belongings for months. The company still contacts the couple, demanding back rent for the months when they didn’t occupy the home.

Rep. Mark Takano, who has been one of the few members of Congress to question the Wall Street rental scheme from the start, told Salon that the report of rising vacancy rates “highlights one of the concerns I had with these types of bonds in the first place.” He added, “Just how accurately can these private equity firms predict vacancy rates, and what happens to the bondholders and local communities if rates rise faster than expected?”

The bondholders should be fine – at least some of them. Like mortgage-backed securities, rental securities are purchased in tranches. The senior bondholders in the highest tranches get paid first with the rental revenue streams, while the junior bondholders in the lowest tranches must wait. They get a higher potential reward for taking on more risk, but with vacancy rates growing, they will likely lose money on the deals.

The real losers here are the local communities. If investor purchases put a floor on housing prices, as economists like Dean Baker have suggested, a faltering market where investors bug out will send prices collapsing through that floor. And that’s starting to happen, earlier than previous expectations. Early investors like Waypoint Real Estate are shopping thousands of properties acquired in California to investors, many of them in Rep. Takano’s Riverside County district. Och-Ziff Capital Management and Oaktree Capital already sold off their properties. And the scale of purchases for those staying in the market has slowed. As demand sinks, the housing market suffers in the biggest investor-purchase areas, which could feed back into the local economies and cause a slowdown.

Price reductions obviously have an impact for those who managed to recently purchase homes at the market rate and may now find themselves underwater. But the bigger concern is what happens to those rental properties in a fire sale, and the tenants in them. Under the contracts of the rental-backed securities, if performance falls below a certain level, the entire portfolio goes into default, which may lead to evictions for thousands of renters. The more vacancy rates rise, the closer we get to those performance targets, and policymakers and regulators have not prepared for an uncertain aftermath. http://www.salon.com/2014/07/09/one_percents_rental_nightmare_how_wall_street_scheme_blew_up_in_its_face/

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I know we have posted on this before. There are all kinds of problems that come with this. These folks are slum lords.