How The Obama Administration Quietly Bailed Out Private Equity Landlords At The Expense Of The Middle Class

Tyler Durden's picture

Authored by Yves Smith, originally posted at NakedCapitalism.com,

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

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peddling-fiction's picture

President Camacho could not be reached for any comment.

Jim Sampson's picture

Well, he could but he had Michael's dick in his mouth.

bobbbny's picture

Obomber giving his last blowjob.

Shed light on it & repeal it Donald.

Life of Illusion's picture

as i said in  previous post

 

only after dumping onto public will we find the crime,,,blamed on the public, what a obummer

http://www.forbes.com/sites/antoinegara/2017/01/06/blackstones-big-bet-on-the-u-s-housing-recovery-files-to-go-public/#2120f9296936

jeff montanye's picture

the post says its late disclosure will make trump keep the deal.  i don't see why that would be so.  especially since it is graft and obama did it.

reverse it too, mr. president.

The Saint's picture
The Saint (not verified) jeff montanye Jan 25, 2017 7:08 PM

Obumma is an evil Muslim.  May he rot in Hell or where ever evil Muslims go.

 

steelhead23's picture

He can't - the transaction has already occurred.

Jubal Early's picture

Besides, as the king of real estate speculators, Trump certainly knows all the kikes involved, and he doesn't snitch and he doesn't go against the tribe.

Kidbuck's picture

Don't forget that Section 8 is already bailing their asses out. Double dipping for squids.

Actually they've won the trifecta, as the money they originally purchased with was free from the Fed.

blue51's picture

I bet all of the homes foreclosed on in Dearborn MI ,( whole neighborhoods  are filled with Iraqi 's ) , are paying the likes of Blackstone from taxpayer $$$ through Section-8 .

PresidentCamacho's picture

President Camacho is not amused, will personally make every blackstone executive watch while i breed their wives. When i'm finished I'll sell off all their assets and use proceeds to pay off mortgages of up to date victims of mortgage scandle.

 

Never One Roach's picture

He's a wtich; burn him.

max2205's picture

Fucking Barry! 

Consuelo's picture

 

 

Don't worry, 'he' is...

Twatter's picture

Obama We see thru Your jive, come back from fag capital Palm Springs and and turn Yourself in.

HRH Feant's picture
HRH Feant (not verified) Jan 25, 2017 6:35 PM

Sounds like Blackstone is the largest slum lord in the US. Thanks to Obama.

What is that book by Hayek? "The Road to Serfdom." Ya.

BabaLooey's picture

What worries me is Schwartzfucker is on TRUMP'S economic team.

Giving the wolf keys to the hen house?

Cause for pause. Cause for scrutiny.

orangegeek's picture

The fake news industry bears some responsibility - yes you CNN ya cocksuckers!!!

Seasmoke's picture

Not even Herbert Hoover foreclosed on as many Americans as did Barack Hussein Obama. May he burn in Hell. 

shamus001's picture

So were assuming D.J.T. will leave it in place simplyt because he is in the "building" business?  - and to all those loon-lefties who kept relenlessly vomiting out that Trump would be the "same ol same ol" in Washington, and get nothing done....

I BET YOUR HEAD IS SPINNING NOW!

 

zagzigga's picture

Fucking greedy pigs! Want to hog all the profits, but get backstopped for all losses arising from their dumbass financial decisions. 

spanish inquisition's picture

And no need for upkeep any more. Strip out every dollar you can and let the Fed pay out your investors.

Oberst-Gruppenfuhrer's picture

So many jews, so little time.

Old Hippie Patriot's picture

Of course, the middle class must be impoverished. The middle class threatens to invent bypasses to the elite control mechanisms. The poor have no means to change things, and the elite are satisfied with the way things are.

King Tut's picture

Impoverishment of the Middle Class- *since 1980

FlKeysFisherman's picture

First day out of office he went golfing with Larry Ellison (Oracle). That's the man who stole $240 million of taxpayer money for Oregon's Obamacare website that failed to sign up one person.

What was Obama's percentage of that?

Whodathunkit's picture

Gawd or government officials are stupid. Isn't that what Trump said?

hotrod's picture

Wasn't Moochies pal at CGI out of Canada that was paid the BILLION dollars to develop the software platform for Obamacare for which SEBELLIUS had to step down because the entire roll out was awful

hotrod's picture

Let's hope Trump looks into it.

Mena Arkansas's picture

Blackstone CEO Stephen A. Schwarzman

Schwarzman was raised in a Jewish family in Huntingdon Valley, Pennsylvania, the son of Arline and Joseph Schwarzman. His father owned Schwarzman's, a former dry-goods store in Philadelphia.

Schwarzman attended the Abington School District in suburban Philadelphia and graduated from Abington Senior High School in 1965. He attended Yale University during the same period as George W. Bush, one year behind him (both were in the Skull and Bones society) and graduated in 1969. He then went on to Harvard Business School and graduated in 1972.

https://en.wikipedia.org/wiki/Stephen_A._Schwarzman

Swindle Part 1: Tribe crashes entire economy in 2008. Keeps goy in the dark.

Swindle Part 2: Tribe buys up all goy assets for pennies on the dollar with free money from fellow tribalites at the fed.

Swindle Part 3: Tribe rents goy back their houses for as much as their mortgage used to cost.

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

hotrod's picture

Damn this jewish usury is getting old

Teamtc321's picture

HOPE!!!!! HOPE AND CHANGE!!!!!

I'm so glad that fucker is gone, finally.

WTFUD's picture

With a tear in his eye 'I've been honoured to serve you'; we now know who the 'you' are.

You're a FILTHY BASTARD OBAMA.

Yen Cross's picture

   I'd say who they were... But it would be rayciss.

Bill of Rights's picture

This administration really took this Country to the brink, I see more homeless now than I can ever recall in my 50 years. How these asshole protesters think this was a thriving time in our history is beyond me . The Obama administration actually drove this Country backwards 30 years, and it's up to you little snowflakes to pull your heads out of your collective asses and wake up .

hooligan2009's picture

since when has renting been the same as ownership?

this statement "The GSEs were founded to promote homeownership" means that the GSE's are breaking the spirit of the law by allowing a middle man to own the homes - the government should insist that these landlords immediatlely sell the homes to the renters and stop this bastardization of intent

freddie and fannie, aka, fraudie and funny, ripping off US tax payers for decades.

borrow at treasury plus 50-150 basis points so that banks can lend mortgages at treasury plus 150-300 basis points and the tax payer buys the 100-150 basis point loss on 8 trillion of mortgages

just the odd 80 billion a year payment to the banks so that they can charge mortgagees 150-300 basis points above treasuries - imagine if this was applied to cars, insurance, education - oh wait - it already is, in one way or another

corruption and stench - typical libtard demonrat sponsored legislation.

ichan's picture

Does Trump have to let this deal stand? Would be great to see him strike it down.

Fuck these fuckers. Enough of this Heads I win, Tails I win.

DaBard51's picture

Executive-order repairable? it seems so...

 

 

 

When nine hundred years old you become, look this good you will not.

MrButtoMcFarty's picture

Niggers just gotta nig.

StreetObserver's picture

No one knows why. It's an enigma.

YHWH is greater's picture

Can't wait for the day we never read about ObaMao again.

StreetObserver's picture

I can't wait for Wednesday, February first,  when I can spend money and not feel guilty helping contribute to Obama's economy in January.

StreetObserver's picture

Between supporting these financial parasites that jack everyone's rent up and encouraging milllions of illegals to come here and pack into apartments and pay huge rents, it's no wonder that we have a homeless problem and you can't afford rent.

Whenever you hears someone whining about expensive rents, a lack of livable wage jobs, the homeless and their plight, remind them that illegals are causing much of it, but more importantly, the financial jackals portrayed here. Naked Capitalism is a high class site and you can learn a lot from reading it everyday.

GraveDancer's picture

"Rent-seeking" acquired a whole new meaning here!

gespiri's picture

Are any of these asshole politicians going to be held accountable by indictment and possible jail time for obvious misappropriation of public funds (clearly a violation of the law)?

BidnessMan's picture

Henry Potter from "Its a Wonderful Life" would be soooooo jealous. Slumlord's wet dream.