A California congressman concerned about the trend of real estate-owned properties being converted to rentals recently penned a letter to four separate federal entities urging further regulation of what is known as the emerging asset class.
U.S. Rep. Mark Takano, D-Calif., a noted critic of the REO-to-rental phenomenon that has been particularly evident in his home state, addressed the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, the U.S. Securities and Exchange Commission and the Treasury Office of Financial Research, voicing his concerns about rising rental prices resulting from more investors who have infiltrated the market. According to a HousingWire report, the congressman seeks a detailed investigation into what he sees as a surplus of investors in rentals and rental-backed securities deals, with particular attention paid to the potential for artificially raised prices and their long-term effects on the housing industry in California and beyond.
Causing a market shift
In his letter, Takano cited a Federal Reserve report in which there is apparently evidence that unchecked investor activity could eventually lower the quality of certain neighborhoods while driving rental prices higher. The investor presence has been particularly heavy in California cities such as Los Angeles, Oakland, Riverside, San Diego, San Jose and their respective surrounding suburbs, as well as the Las Vegas and Phoenix metro areas. In those places and elsewhere, many foreclosed or otherwise distressed properties were bought up in mass by institutional investors, who often rehabilitated them for the sake of marked-up re-sale or converted them into rentals.
According to the Fed report, in a typically active housing market about 85 percent of home sales are the result of individuals securing a mortgage, nearly 10 percent are via all-cash sales and the majority of the remainder are some form of distressed sales. In 2013, however, nearly 40 percent of all home sales were of the all-cash variety, with more than 15 percent accounted for by distressed sales and 5 percent classified as "flips." Those figures, as well as others that illustrate the appreciation rates on both mortgaged and rental properties throughout California, are the most glaring evidence of the outsized investor presence to which Takano is referring.
In his letter, the congressman called for answers to a number of detailed questions, including those surrounding how investors purchase their bonds, how riskier tranches are being sold and whether such deals involve the collateralization of debt obligations and re-sales with higher ratings. Those are questions that, presumably, are directed toward the SEC.
From the CFPB, Takano wants answers regarding which housing markets have the highest concentrations of rental properties linked to rental-backed securities, an analysis of common trends within these communities and more information about purchasers. All of this, theoretically, would help establish a better understanding of the impact of REO-to-rental trends on things like mortgage credit availability, rental prices and home value appreciation in the communities most immediately affected. The congressman also requested that the bureau conduct a comparison between the rehabilitation, maintenance and management costs incurred by large-scale investors, mostly focusing on how those costs stack up against those of other property owners who make their purchases through more traditional avenues.
Takano also seeks information from HUD about how single-family rental bonds are structured, with specific attention paid to performance metrics and criteria. More broadly, he has requested information that provides some insight into the impact of investor purchases on the ability of prospective first-time homebuyers to enter the market, both locally and on a national scale. Such analysis would ideally include an evaluation of the trends seen in individual communities, particularly in terms of the rates of FHA-approved mortgages.
The long-term fallout
To this point, as Takano noted, only two REO-to-rental deals have been securitized. They belong to the Blackstone Group, which has built a substantial portfolio of single-family rental homes - mostly under the banner of its subsidiary Invitation Homes - acquiring some 40,000 properties for approximately $7.5 billion. It then packaged its rental income into a "pass-through security," a concept that functionally acts in the same basic ways as a mortgage-backed security.
The other securitization deal was for Goldman Sachs, which began coverage on American Homes 4 Rent - a group that has spent about $3.5 billion on more than 21,000 rental homes.
"If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole," Takano wrote. "Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall."
Such are the potential stakes for the housing market, although opinions vary as to just how serious the repercussions of rising vacancy rates would be. For now, the question is whether Takano's requests will spur any immediate regulatory action or investigations.