In the August 2014 issue of the Housing News Report, we took a look at how Wall Street institutional investors are impacting the real estate market. Here’s short excerpt:
Back in 2008, some of Wall Street’s most venerable investment banks — Bear Stearns, Lehman Brothers and Merrill Lynch — played an important role in the rise and fall of irresponsible subprime borrowing and lending, financing non-bank mortgage lenders — including Countrywide Financial, New Century Financial and Ameriquest Mortgage — that eagerly sold their toxic mortgages to borrowers through non-licensed loan brokers.
Then, the financial wizards on Wall Street packaged subprime debt into an alphabet soup of complex, leveraged residential mortgage-backed securities (RMBS) that helped fell Bear Stearns, Lehman Brothers and Merrill Lynch in 2008. By 2008, 58 percent of all U.S. mortgages — 32 million loans — were subprime, according to The Wall Street Journal. The radioactive subprime securities were sold to yield-hungry overseas investors in America, Asia and Europe, sending the international banking system off the rails, with devastating consequences for both the U.S. and global economies, due to the behavior of those running some of the world’s largest banks. Ultimately, Wall Street’s speculative bubble collectively wrecked the global economy in 2008 and 2009.
Fast forward to today, and Wall Street financial elite are now institutionalizing house rentals, securitizing rental revenue, much like the way they used mortgage-backed securities to ramp up capital in the bubble years. Then as now, Wall Street is busy again slicing up tranches of assorted riskiness, and selling single-family rental bonds to investors around the world.
Here’s how The Wall Street Journal described Wall Street’s latest residential bond gambit: “The creation of a new type of security shows that Wall Street’s financial engineering, blamed for deepening the financial crisis, is revving back up.
Some investors and analysts have said they are wary of a bond backed by rental payments, citing the dearth of long-term data on how often tenants living in previously foreclosed homes pay their rent on time.
Also, some investors and analysts have raised concerns about how quickly firms have purchased thousands of homes, and whether they have the management track record and expertise to oversee the maintenance of properties scattered across the country.”