Blackstone rental bonds revive fears of mortgage-backed crisis

[AlphaQuant]

History always repeats itself....

***************
The private-equity firm Blackstone and Deutsche Bank are considering selling the first bonds backed by home-rental payments. The new security shows Wall Street financial engineering, blamed for deepening the financial crisis, has become more creative.

Blackstone is among the firms that have spent billions buying homes out of foreclosure, helping to bolster demand and strengthen the US housing market, the WSJ reports.

The private-equity giant has spent $5.5bn buying more than 30,000 houses to rent out. It is now working with Deutsche Bank to create securities tied to about 1,500 of the properties to form a rental bond deal worth up to $275 million.

The “securitization” vehicles would be backed by equity and property worth between $300 million to $350 million, according to the article.

The structure of the deal would be similar to better-known securities, such as those backed by home or commercial mortgages, the WSJ reports.

Investors say the new Wall Street-engineered income idea raises concerns over the stability of the rental market itself and the structure of these instruments, investorplace.com writes.

“Distressed inventory” — which is what Blackstone calls its properties — might come back with stronger valuations, or they might not, and while Blackstone might love its tenants, it probably would be quick to hand the keys back to any lenders (or bondholders) if “distressed” turned into “hopelessly underwater,” writes Marc Bastow, Assistant Editor at InvestorPlace.com.

Analysts say one of the causes of the global financial crisis of 2008 was the production of mortgage collateralized bonds. These tools were not adequately evaluated and caused billions of dollars in losses in the entire U.S. financial system as the house market fell.

[GreedandFear]

History always repeats itself....

***************
The private-equity firm Blackstone and Deutsche Bank are considering selling the first bonds backed by home-rental payments. The new security shows Wall Street financial engineering, blamed for deepening the financial crisis, has become more creative.

Blackstone is among the firms that have spent billions buying homes out of foreclosure, helping to bolster demand and strengthen the US housing market, the WSJ reports.

The private-equity giant has spent $5.5bn buying more than 30,000 houses to rent out. It is now working with Deutsche Bank to create securities tied to about 1,500 of the properties to form a rental bond deal worth up to $275 million.

The “securitization” vehicles would be backed by equity and property worth between $300 million to $350 million, according to the article.

The structure of the deal would be similar to better-known securities, such as those backed by home or commercial mortgages, the WSJ reports.

Investors say the new Wall Street-engineered income idea raises concerns over the stability of the rental market itself and the structure of these instruments, investorplace.com writes.

“Distressed inventory” — which is what Blackstone calls its properties — might come back with stronger valuations, or they might not, and while Blackstone might love its tenants, it probably would be quick to hand the keys back to any lenders (or bondholders) if “distressed” turned into “hopelessly underwater,” writes Marc Bastow, Assistant Editor at InvestorPlace.com.

Analysts say one of the causes of the global financial crisis of 2008 was the production of mortgage collateralized bonds. These tools were not adequately evaluated and caused billions of dollars in losses in the entire U.S. financial system as the house market fell.

I don't think there is a lot of financial engineering here. Blackstone owns a portfolio of single family homes that they have rented out. Instead of going to the bank and getting a separate mortgage on each home, they are essentially attempting to issue a bond that acts as a mortgage against the whole portfolio and is serviced by the rental payments. Pretty straight forward. Allows Blackstone to raise some debt and allows bond investors to "lend" against a portfolio of credit risk. Blackstone still owns the homes via the equity so have skin in the game. The problem with the mortgage bust was that banks originated mortgages and then sold them off completely. Hence no one cared about the quality of the mortgages....

[freedom]

Securitization is not the devil. It has been here for decades already. It creates cheap liquidity companies desperately need.

But assigning a bad asset with a good rating is evil. That's called fraud in a lot of places.

[felixleong]

like they always say
"this time its different"
haha

[GPD]

Why share the gain if it is giving good and creditable returns? And one might ask if they are so kind as to invite investment on their lower risk assets.

[freedom]

There is nothing wrong with securitization. Securitization enables banks to lend more to the economy. In the last 2-3 decades, that's the main driver of credit creation.

Similarly securitization enables black stone free capital to launch more funds and manage more assets.

[GreedandFear]

[quote='GPD' pid='57748' dateline='1375526670']
Why share the gain if it is giving good and creditable returns? And one might ask if they are so kind as to invite investment on their lower risk

Gross rental yield to Blackstone is 10% (these properties were bought at distressed levels and then fixed up). Net yield is 6-7%. They can probably borrow at around Libor +3%, so call that 3.5% which leaves 2.5-3% current yield to Blackstone on their leveraged portion plus 6-7% on their unleveraged portion. At 67% loan to value, Blackstone's current income on their equity is 2 x (2.5-3%) + 6-7% = 11-13% plus the potential appreciation of the house prices. Quite compelling

[flinger]

“Distressed inventory” — which is what Blackstone calls its properties — might come back with stronger valuations, or they might not, and while Blackstone might love its tenants, it probably would be quick to hand the keys back to any lenders (or bondholders) if “distressed” turned into “hopelessly underwater,” writes Marc Bastow, Assistant Editor at InvestorPlace.com.


So if the distressed inventory does not do well in terms of returns from rent, then then they would just move the risk to the bondholders and let themselves be free from any burden.

Is that taking a big risk , especially you know that they are distressed inventory and because the set up is such that the bondholders will be left holding the underwater assets.

[GPD]

They are only packaging 1,500 out of that 30,000 properties for the bond so this gives them lots of room to determine the mix of credit-worthiness tenants in the mix. Whether they can or want to attach a proper risk rating to the bond is another big question.

Unlike mortgage, rental is shorter term commitment. Tenants can move to other rental property if the cost worked out cheaper for them. Those tenants with good credit rating are those who can get a mortgage and a better deal to move off into owning their own property. So if the housing market improve, who are most likely to be left in that 30,000 or 1,500 properties and they will have to lower rent to attract tenants as well?

This will probably work well in a low interest rate environment, high house prices and high deposit required for down payment. If interest rates go up or house prices drop, then the bond may have problem generating enough rental income.

[raiden]

At this current situation, better to rent than to commit to a mortgage. When the interest rate goes up. Many Owners will have to start topping up when the banks starts calling.