Wall Street May Be Your New Landlord
Homes being bought by landlords and flippers now account for more than 11% of U.S. home sales, the highest on record. Meanwhile, Wall Street is now trading billions of dollars’ worth of bonds backed by rental payments.
The Great Recession Revisited
I recall a time when I was growing up in the Bronx, in a rent stabilized apartment, that the American Dream was to own your own home. Well, that was a long time ago. About 11 or 12 years ago, during the Great Recession, the American Dream for many became the American nightmare. Many of you remember how Oppenheim Law was at ground zero during that crisis, defending homeowners who had been duped into buying homes that were way overvalued and thinking that they would continue to support those homes in an economy that was propped up by Wall Street shenanigans.
Those bank shenanigans had to do with basically securitizing the mortgage payments that individuals were paying their lenders and stuffing them into all kinds of crazy mortgage-backed securities or bonds. Those bonds were then sold off to unwitting pension plans and investors all over the world, when they thought that these investments were secure and conservative investments backed by the mortgage payments of the American people.
Well, as we all know, that was the furthest thing from the truth and many of these bonds ended up collapsing because the mortgage payments could not be sustained. Thereafter, we had a horrific foreclosure crisis and millions of people lost their homes through foreclosures.
The Current State of the Housing Market
Fast forward to today. Since that crisis, the number of people who are owning homes has dramatically slipped. In fact, more than a third of households in the U.S. live in investor-owned housing units. Many of those individuals and families in those investor-owned properties are, in fact, families that lost their homes during the crisis or are the children of those families who no longer want to own a home for a variety of reasons, in part, because they saw what their parents had gone through just 10 years ago.
So, now we have the largest number of people renting their homes in the history of the United States and once again Wall Street comes to the rescue! In fact, according to a recent article in the Wall Street Journal, we find that Wall Street had already issued $33 billion in bonds secured, not by mortgage payments, but by rental payments. This means that when someone rents a home from a large institution, those rental payments will then be used to back the collateral of the bond itself.
What that does is, for the first time, institutionalize rental payments of single-family homes. In the past, rental payments from multi-family homes have, in fact, been issued into bonds, but this is now the first time that rental payments from single-family homes are being converted into bonds.
A Balancing Act
The good news about the securitization of rental home payments is that it will create more liquidity for large institutional homebuyers and flippers who will be able to continue to buy up homes at a rate that they were not able to before, which could help the economy; but, the bad news is that these large home buyers will continue to freeze out the average middle class family who wants to buy a home. These families will be competing with large institutions who can borrow money at lower interest rates, and in many cases someone who is selling a home would rather sell a home to the large institution rather than the family that is worried about the home inspections report. The rationale might be that the sale to a large purchaser will go faster and will just be more expedient.
The irony of this little story is that the American Dream is alive and well but it may not be any longer to buybut rather to rent your own home.
From the Trenches,