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

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.