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Meet Landlord Loans: You Too Can Be A Real Estate Speculator

Tyler Durden's picture




 

Just when we thought the news flow around shoddy loan securitizations couldn’t get any better (or worse, depending on how you look at it), we get this headline from the NY Times:  “Equity Firms Are Lending to Landlords, Signaling a Shift.” 

Forget falsifying loan documents  to get underqualified borrowers into new Honda Civics on 84 month payment plans. Forget encouraging unemployed households to borrow $3,500 at 30% to buy a new refrigerator. Those schemes are so two days ago. The smart money is now betting on real estate speculators.

Via NY Times

In the aftermath of the financial crisis, large private equity firms spent tens of billions of dollars buying foreclosed homes across the United States to operate them as rental properties.


Now some of those same firms are providing loans to smaller investors seeking to do much the same.


Three big private equity firms — the Blackstone Group, Colony Capital and Cerberus Capital Management — are betting that so-called landlord loans to small and midsize investors will become the next big opportunity to profit from the rebound in the United States housing market. The private equity firms are providing financing indirectly to hundreds of real estate funds buying single-family homes, something that until recently was not widely available.


Over the last year, subsidiaries and affiliates of all three private equity firms have lent collectively about $1.5 billion to smaller residential real estate investors, enhancing the capability of these firms to gobble up distressed single-family homes, said people briefed on the matter. 

Just to recap, on Monday we got Wells Fargo implicitly admitting that the subprime auto space is beginning to crack when the bank announced a cap on car loans to underqualified borrowers (i.e. the bank is voting with its feet), on Tuesday we got what can only be called a match made in subprime hell when AIG’s subprime unit Springleaf tied the knot with Citi outcast OneMain to form what will eventually amount to a personal loan ABS machine, and today we’re introduced to the “landlord loan”. Of course, this latest development in the world of lending people money to buy things they probably shouldn’t buy wouldn’t be complete if the PE firms involved don’t maximize the riskiness of this endeavor by pooling these “assets” and selling them off to investors. Here’s the Times again: 

All three firms are gearing up to bundle those loans into bonds — with the first securitization of landlord loans expected to come to market in the next few weeks

At least we don’t have to wait long. 

It also comes as absolutely no surprise that the lead underwriter on the first deal is likely to be Deutsche Bank who, as we learned during the Canadian ABCP crisis of 2007 when the bank accidentally ran up around $6 billion in paper losses on the latest leveraged CDO scheme, takes a certain pride in being the first bank to throw its support behind the latest bad idea in structured finance. 

As is the case with ABS backed by pools of auto loans and as is quickly becoming the case with securities based on personal loans (auto deals and non-traditional deals combined to  account for nearly three quarters of U.S. ABS issuance last month), expect demand for landlord loan ABS to be robust thanks to the sinister proliferation of ZIRP and now, increasingly NIRP. Meeting that demand shouldn’t be a problem either as the PE masterminds behind this are seeing quite a bit of interest from borrowers eager to play Flip This House: 

The private equity firms see a rising demand for landlord loans — which can range from as little as $500,000 to $50 million — given that smaller- to midsize real estate investment firms historically have had to rely mainly on cash raised to make purchases.

On a more sobering note, some commentators believe this whole enterprise could be ill-conceived. Here’s what one “housing advocate” (or as we call them, killjoys) had to say: 

Housing advocates, however, are concerned that landlord loans from private equity firms could fuel the purchase of homes by investors ill-equipped to manage rental properties. The advocates are concerned about the due diligence the private equity investors will do to make sure investors are not just good credit risks, but qualified property managers as well.

Time will tell, but one thing is for sure: landlord loan ABS is coming to an investment bank near you. 

 

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Wed, 03/04/2015 - 12:30 | 5854226 LawsofPhysics
LawsofPhysics's picture

Yes, more big liars/thieves being given free money to become landlords encourage more liars/theives to become landlords while no one is actually working to produce anything of real fucking value...

this should end well...

Wed, 03/04/2015 - 12:44 | 5854246 Haus-Targaryen
Haus-Targaryen's picture

(Before you read this put this on; https://www.youtube.com/watch?v=O8Uhn-dU3Gg and this is what I envision when it comes to this new form of RE speculation)

K GUYS SO I HAEV $100000 IN CASH1!!111 OMG WTF LOL WUT SHUD I DO?!!!??! WTF LOL 

1) BUY ONE HOUSE!1!!!1 OMG WTF LOL INCOM3 IS ONLY $1200 PER MONTH BUT I DONT OW3 ANY MONEY AND DONT HAEV 2 PAY INT3REST 2 ANYON3111!!1! 

2) BUY 100 HOUSES WIT 1% DOWN!!1!1!! WTF INCOMA IS A LOT HIGHAR BUT SO R MAH LIABILITEIS1!!!1 WTF LOL 

3) BUY 1000 HOUSAS WIT JUST INTER3ST ONLY1!11 OMG WTF I BTAR RANT TAHT SHIT QUIK OR 3LS3!!11!! 

4) BTFATH & IDGAF

5) GTFO

 

Wed, 03/04/2015 - 12:45 | 5854300 Supernova Born
Supernova Born's picture

Obamahome to go with Obamaphone and Obamacare.

Free shit, bitchez.

Wed, 03/04/2015 - 15:48 | 5854882 BuddyEffed
BuddyEffed's picture

"In the aftermath of the financial crisis, large private equity firms spent tens of billions of dollars buying foreclosed homes across the United States to operate them as rental properties. "

Or was it really to prop up a mark to model accounting methodology?  I find it hard to call it a business model, instead of a methodology because a business model tends to imply stability and profit.

Wed, 03/04/2015 - 19:16 | 5855654 Mr. Ed
Mr. Ed's picture

Whatever you call it, the "large private equity firms" (eg, Black Rock) want to unload their rental properties before prices fall.

Soooooo, how do they (eg, Black Rock) go about finding muppets (bag holders) to sell them to?

Landlord Loans!   Yes!!  Makes sense to me... am I missing something here?

Wed, 03/04/2015 - 12:45 | 5854296 Bemused Observer
Bemused Observer's picture

Anything to keep those values up. God forbid investors should lose a nickel on depreciating assets. If regular folks won't buy the houses to live in, then sell 'em off to suckers who will try and play 'Landlord' for awhile, because the investors who snapped them up have to unload them now for more than they paid.

The problem is, we seem to have more ticks than we do dog.

Wed, 03/04/2015 - 13:57 | 5854563 blindfaith
blindfaith's picture

 

 

correct me if I am wrong here, but isn't Cerberus Capital Management part of the Chrysler bailout?  Aren't Dan Quail former USVP under George Bush, and John Snow former Sec of the Tres., general partners in Cerberus Capital Management. 

If so you know it is a safe bet for them.

Wed, 03/04/2015 - 14:10 | 5854607 KnuckleDragger-X
KnuckleDragger-X's picture

My problem is my perverted  life since I was raised on a farm, my definition of "real estate investment" tends to mean what productive use can I put the land to instead of "how much money can I suck out of the next fools pocket".

Wed, 03/04/2015 - 14:38 | 5854701 doctor10
doctor10's picture

hmmmm-real "big" of Blackstone, Colony, and Cerberus-so generously letting all those little guys in on the game!!

 

I think I'll pass.  Or vomit.

Wed, 03/04/2015 - 12:32 | 5854237 screw face
screw face's picture

...Bullish Homey

Wed, 03/04/2015 - 12:32 | 5854239 AccreditedEYE
AccreditedEYE's picture

Don't get it... Rent-backed bonds I get. They get liquid quick and easy. This is so convoluted and time consuming. Why would they opt to go this way versus rent backed credit?

Wed, 03/04/2015 - 12:34 | 5854247 LawsofPhysics
LawsofPhysics's picture

In a word, "financialization"...  useless fucking paper pushers only make money when paper (now digital documents) are moving.

Think things are bad now, just wait until 100% of the GDP is bullshit paper pushing...

Wed, 03/04/2015 - 12:38 | 5854262 Utah_Get_Me_2
Utah_Get_Me_2's picture

I can't wait! The New Normal is wonderful!

Wed, 03/04/2015 - 16:15 | 5854956 Clowns on Acid
Clowns on Acid's picture

Well LoP - it is just physics after all ain't it ?

Wed, 03/04/2015 - 12:47 | 5854307 taketheredpill
taketheredpill's picture

 

 

Returns in US housing "recovery" were best at the beginning but getting skinnier now and big players want out.  I assume the pool of Institutional buyers for the housing product is stuffed so this opens up another source of fools, sorry buyers.

Wed, 03/04/2015 - 12:58 | 5854338 GittyUP
GittyUP's picture

I sell to the hedge funds all time and they are idiots.  The rent backed bonds are a great idea on paper but its way to hard to make it work in the real world.  Real estate is a bitch to manage and on that scale its almost impossible.  They decided its better to lend the money to local smal investors who know the local market better.   A huge part of their underwriting process is experience,  I know because I looked into these loans 6 months ago.  Its a great product if your business model is buying with all cash, fix, rent. They wil let you cash out on 10 homes or more with a blanket loan at 70% ARV.   COCR is much much higher leveraged then cash even at 70%.  Its a win win for everyone.  30% equity is a safe cushion for lenders and 70% LTV allows investor to get much higher COCR.  Also the homes must be performing for min. time period with hard proof and the rent must cover loan payments by about double. 

This is a way safer product for banks then lending 97% on owner occuied loans to people who have no experience owning a home and no money in the bank to cover unexpected expenses. 

Wed, 03/04/2015 - 13:33 | 5854477 Bananamerican
Bananamerican's picture

Agree with Gittyup?

Agree with Toolshed? (from below)"Sounds to me like the guys providing the loans have a bunch of real estate they don't want to be sitting on when the SHTF. Your private equity firm comes to the realization that the landlord business is not such a cash cow afterall, and decides it needs to unload the crap before it gets seriously burned in a downturn. They try to sell, ...but can't find a buyer with deep enough pockets to put much of a dent in their inventory of garbage. So, they brilliantly decide to be the source of the funds out the front door and the garbage out the back door. Pure criminal genius."

Wed, 03/04/2015 - 12:35 | 5854251 philosophers bone
philosophers bone's picture

It's called LOAN TO OWN.  Give excess financing to borrowers where default is assured if there is any market correction to real estate prices or interest rates.  It's a "bad" lending strategy but a potentially good acquisition strategy.

Wed, 03/04/2015 - 13:06 | 5854380 homebody
homebody's picture

"acquisition strategy"

Sure what you are left with is a trashed house with no fixtures or copper piping.

Just invest more in demolition and then only have to mow the weeds.

Wed, 03/04/2015 - 12:37 | 5854260 NoDebt
NoDebt's picture

Don't even try to tell me this is people not learning from the past.  That's hoseshit.  This is being done AGAIN, ON PURPOSE.  When the next crash comes, it will be anything but bad luck that nobody could have forseen.

 

Wed, 03/04/2015 - 12:43 | 5854271 Haus-Targaryen
Haus-Targaryen's picture

This shit it getting so out of control -- 

I just sold my car for cash no liabilities.  

Bought a cheap beater to play with.  

Took out a loan for a CPO Lexus.

Stuffed the rest into AG and AU.  

The coming collapse will be so sudden, I might as well enjoy life while I can.  

Wed, 03/04/2015 - 13:17 | 5854423 cornfritter
cornfritter's picture

I mostly advocate sobriety.  Having said that, consider purchasing a fifth of Glenmorangie and put it under the sink (for colds and such).  The Scots made/make some decent spirits.

Wed, 03/04/2015 - 12:45 | 5854266 Chuck Knoblauch
Chuck Knoblauch's picture

Retired derivative traders buying fix it upers in retirement communities.

Old people are the only ones with money left.

Read the writing on the old folks home.

Last stop on this American chew-chew train to no where.

Wed, 03/04/2015 - 12:40 | 5854272 NOZZLE
NOZZLE's picture

This is the gASS we've been waiting for, ShitStone bought these houses for 50% of their current value and paid $10,000 a door for multi family properties, without this kind of easy financiing they have no bagholders.  

This is the final chapter in making things look like all of the problems have been solved.  

Wed, 03/04/2015 - 12:51 | 5854286 homebody
homebody's picture

Ya bullish on Detroit houses - very good risk - no rental management or maintenance needed 

 

Get in on the ground floor on this one - hurry - supplies won't last

(do I really have to say - sarc)

Wed, 03/04/2015 - 12:45 | 5854290 Dead Canary
Dead Canary's picture

Ahh... I get it. They need suckers to buy the houses they're selling.

Wed, 03/04/2015 - 12:54 | 5854325 buzzsaw99
buzzsaw99's picture

^this^ as in, i'd love to buy your crapshacks but i can't get financing...

the hilarious part is that they can sell those securities to the rubes so soon after the last bubble burst.

Wed, 03/04/2015 - 12:47 | 5854304 Toolshed
Toolshed's picture

Sounds to me like the guys providing the loans have a bunch of real estate they don't want to be sitting on when the SHTF. What a scam. Your private equity firm comes to the realization that the landlord business is not such a cash cow afterall, and decides it needs to unload the crap before it gets seriously burned in a downturn. They try to sell, at a profit of course, but now the other PE guys have wised-up as well, and they can't find a buyer with deep enough pockets to put much of a dent in their inventory of garbage. So, they brilliantly decide to be the source of the funds out the front door and the garbage out the back door. Pure criminal genius. Exactly what we have come to expect from Wall St. I am not sure if there are enough lamp posts to go around.

Wed, 03/04/2015 - 12:54 | 5854322 Dead Canary
Dead Canary's picture

And when they are stuck with non-performing loans.... Save up your pennies everybody. There are banks that are gonna need another bailout on the horizon!

Wed, 03/04/2015 - 13:11 | 5854399 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

Pure criminal genius is right...!!

As the post stated, look for ABS on these loans shortly.  Just offloading the real estate by funding the landlords still leaves these guys exposed to the loan itself (albeit to a lesser extent than the full value of the property).  I seriously wouldn't be surprised to see them bundle together a bunch of these loans and pawn them off. 

Landlord-loan ABS definitely coming to a pension fund near you soon....!!

Wed, 03/04/2015 - 12:47 | 5854308 besnook
besnook's picture

liquidity in the housing market isn't a bad thing. spreading risk amongst other professional investors instead of individual buyers is a better model but it is not immune to abuse by everyone involved except the buyers of the mbs'.

 

what i find funny in a stupid human nature way is the renter who has rationalized renting as better than owning ending up creating a reflexive trend confirming a biased rationale for renting(as there was for buying). in the end the renter will end up paying more for renting than buying while vociferously arguing the benefits of renting outway the benefits of ownership. in other words, buying rental property is probably a good long term bet right now.

Wed, 03/04/2015 - 12:56 | 5854339 Mike Honcho
Mike Honcho's picture

No (big word) benefit (bigger term) to renting, got it, thanks professor.

Wed, 03/04/2015 - 12:59 | 5854355 buzzsaw99
buzzsaw99's picture

egad

Wed, 03/04/2015 - 14:24 | 5854634 Blankenstein
Blankenstein's picture

Spoken like a true realtard.

" in the end the renter will end up paying more for renting "

Really? How about the enormous amount of people who bought at extremely inflated prices during the bubble?  They have to make interest payments for the life of the loan, pay property taxes and maintain the home.  If they can't sell for a great deal more than they paid, they were essentially "RENTING" the home - they don't get their interest, taxes and maintanence costs back. Also, we are in housing bubble 2.0 and when it pops, good luck getting the sales price you paid for the home. Your "rent" will be even higher for that home you "bought."

Wed, 03/04/2015 - 17:46 | 5855326 gimme soma dat
gimme soma dat's picture

It's never been a better time to buy/sell/rent/invest. Consult your local REALTOR®.

Wed, 03/04/2015 - 12:54 | 5854333 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Sounds like phase II of Georgism being put into action. Phase I was the idea of individual property ownership (but no allodial titles). Only problem you can't tax land if no one has any money to pay for it, including the landlords when you go away from individual property ownership. If you can't get an allodial title for your property you don't own it period regardless of taxation because the property can always be confiscated without using force. You are always renting one way or the other.

https://en.wikipedia.org/wiki/Georgism

Wed, 03/04/2015 - 13:18 | 5854344 Kasperfx
Kasperfx's picture

I seen this coming years a geo when the private equity firms started  buying up and inflating the overpriced SFH market,  their plan is to now dump the overpriced SFH to the "joe Real estate investor  and keep the inflated notes/debt . this is a sure sign thats its time to pass the hot potato !.  

Wed, 03/04/2015 - 12:58 | 5854349 Lmo Mutton
Lmo Mutton's picture

We have to create the bubble to see if it pops.

Wed, 03/04/2015 - 13:04 | 5854369 venturen
venturen's picture

do we have to rescue them when it blows up...I assume the Federal Government backs all of these loans? Getting tired of rescuing billionaires

Wed, 03/04/2015 - 13:03 | 5854375 markar
markar's picture

This should be amazingly profitable for the small/mid sized landlord. On top of maintenance costs, vacancy rates, and mgt. fees now they can add mortgage payments to the mix. Not to speak of the lack of economies of scale managing single family homes scattered around.

Wed, 03/04/2015 - 13:05 | 5854376 Handful of Dust
Handful of Dust's picture

"Just walk away...."

 

Why pay rent? Live for free for months before you get thrown out just make sure you have sumthing lined up elsewhere first.

 

But....many landlords and aprtment complexes simply don't care if you have stiffed the last guy 'cause they're hurting so bad for renters right now in many places. I read somewhere occupancy rates in places like South Dakota and the Houston area have plunged so apartment complex managers are desperate. I saw this in the DFW area during the 1980's recession...the area turned downward very badly and pretty nice apartment complexes became trash by handing out those "first-3 months free" deals. It attracts a certain crowd.

 

If you are plannin gon buying a house [as crazy as that sounds] be sure to stay as far away as possible from apartment complexes since this downturn may cause the same apartment ghettoes i saw in the 1980's.

Wed, 03/04/2015 - 13:20 | 5854430 shovelhead
shovelhead's picture

Brilliant idea.

Timesharing your overinflated, soon to be NPL's, to the chumps on the other end of the Bigger Fool conga line.

Wed, 03/04/2015 - 13:34 | 5854469 Kasperfx
Kasperfx's picture

Good example of craziness this Fed funded SFH market has become, take a look at this18,000 Sq Ft beauty http://www.realtor.com/realestateandhomes-detail/3600-Estate-Oak-Cir_For... , now look at were it is, google maphttps://www.google.com/maps/place/Estate+Oak+Cir,+Fort+Lauderdale,+FL+33...!3m2!1e3!4b1!4m2!3m1!1s0x88d9a98ef140b907:0x79336292b4417c3a it's in a gated community of 3/4k sf homes with great views of the powerlines lines .. who the f would live it that place? WTF ,, anyone have a suker for this one? lol 

Wed, 03/04/2015 - 13:38 | 5854487 Lin S
Lin S's picture

Cathay Bank has been promoting this for awhile to mainland Chinese with cash. 

More recently, I noticed a For Sale-type sign in front of the house on my block (suburban Los Angeles area), which instead read, "for lease."  After sitting vacant for three months, a Caucasian family with nice cars has moved in.

Maybe that's the trend now: wealthy Chinese landlords living somewhere else, buy up houses and rent them to Americans who cannot afford a house of their own, and who are instead forced to pay exorbitant rents.

How will all of this end?

Wed, 03/04/2015 - 13:40 | 5854505 GreaterFool1965
GreaterFool1965's picture

From the PE firms' perspective, this is brilliant.  They want out, so they are providing vendor financing.  I.e. they are willing to accept their cash over time instead of all upfront to sell their properties to other 'investors'.  Then, to get out of the credit risk they have taken on, they securitize this vendor financing and sell it to other investors, who want the yield from lending money to small investors who want to get into the RE market.  Briliant!  They get out of their RE investments, with one 'investor' owning the property and other 'investors' holding the note from the first investor. Rinse. Repeat.

Wed, 03/04/2015 - 13:48 | 5854530 treasureX
treasureX's picture

As a landlord, I think this is a useful product. Having to come up with a 30% down payment, I feel, eliminates the "speculators". When you have the ability to come up with that kind of cash it changes you decision making process.

Wed, 03/04/2015 - 13:50 | 5854531 treasureX
treasureX's picture

Sorry, Im a newb.

Wed, 03/04/2015 - 14:00 | 5854577 Eastwood
Eastwood's picture

Suzanne researched this!

Wed, 03/04/2015 - 14:02 | 5854587 fastrakn1
fastrakn1's picture

"Time will tell"...I don't need 'time' to 'tell' where this is headed.

Here we go again bitchez!

Wed, 03/04/2015 - 15:37 | 5854864 mendolover
mendolover's picture

There's a rebound in the housing market?

Wed, 03/04/2015 - 18:51 | 5855561 gimme soma dat
gimme soma dat's picture

The housing market has been recovering for the past 6 years. 

Wed, 03/04/2015 - 16:58 | 5855146 Clowns on Acid
Clowns on Acid's picture

It's pretty simple. Dodd Frank makes it too onerous for the criminal banks to synthesize motagegs / loans.. so the scumbags that structure these legal labyrinths just move opver to a PE firm who can access the free QE funds from the Fed and voila ! We have a new bubble with PE being the skimmers rather than the Banks ... 

And when the Hedge funds and pension funds get fucked whe the housing market reurns to just crazy from insane... The Fed will have to bail them out... because... well you know the story.

I told ya ..simple. 

Wed, 03/04/2015 - 18:03 | 5855383 Coletrane
Coletrane's picture

Sounds like the real estate investors who've been buying up all the housing invetory to use as rentals, are starting to feel claustophobic and want to get rid of that property before the shit hits the fan.

Sun, 03/29/2015 - 14:09 | 5939474 JenniferS
JenniferS's picture

This affects everyone. If people can't buy a property in their lifetime there will be lots more people needing housing benefit when they retire. Your taxes are going on higher housing benefit claims now because rents keep rising. If lots of people are renting it means those houses and flats are generally not upkept so well, you can see it in all the gardens that aren't nicely maintained (why obtain payday loan in UK, spend hours and your money on a garden when you can be asked to leave at any time with a couple of months' notice). People are putting off having kids because they can't have the stability of their own home. Something needs to change.

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