What Could Go Wrong?

This may be the most disturbing story I’ve read today.

You should visit Mother Jones for the full report, but the gist is that Wall Street has cooked up a new form of securities that could be just as volatile as the subprime market that sank the economy in 2008.

In November, after many months of hype, [Blackstone] released the first-ever rated bond backed by securitized rental payments. Joining forces with Credit Suisse, Deutsche Bank, and JPMorgan (which recently paid a record $13 billion fine to settle accusations of ripping off mortgage investors), Blackstone has bundled the rental payments from more than 3,200 single-family houses, offering investors its mortgages on the underlying properties as collateral. After investors tripped over themselves to buy into the $479 million bond, Blackstone’s competitors announced that they, too, would develop similar securities. [...]

Dean Baker, an economist and codirector of the Center for Economic and Policy Research, is concerned that Wall Street firms are overlooking the risks of these untested investments. “You kind of just hope they know what they’re doing,”

Rent-backed securities? Yeah, we hope they know what they’re doing.

Mother Jones reports that Blackstone alone has purchased over 40,000 homes that were in foreclosure and, rather than flipping them at a higher price, they’ve decided to become landlords and securitize them. In other words, homes that were foreclosed as a result of the collapse of securities have been turned into new securities.

The 40,000 homes owned by Blackstone is only part of the 200,000 homes Wall Street has vacuumed up.

In an ideal world homes that were left vacant by Wall Street’s implosion would have been converted into affordable housing for victims of the market, but instead they’ve been bought up by competing firms whose competition will price thousands of people out of the housing market.

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  • muselet

    The Masters Of The Universe are buying up houses that were foreclosed on because those selfsame Masters Of The Universe cratered the world economy, then renting them out, feeding investors unrealistically-rosy assumptions about the viability of their scheme, and playing casino games with the rent money.

    Yeah, that should work out just fine.

    Here’s some investment advice for those not in the 1%: buy stock in any company that makes tumbrels.

    –alopecia

  • Victor_the_Crab

    Oh, isn’t that nice! >:(

  • mattpd

    What could go wrong? Well, the first clue will be when they start selling securities that serve as insurance if (when) these investment vehicles tank.

  • Grant Beaudette

    Houses you can’t afford to buy become ones you can’t afford to rent. All through no fault of your own. Fun!

    • Christopher Foxx

      Clearly the fault lies with Fanny Mae.

      And Acorn. Don’t forget Acorn.

  • stacib23

    I can see these guys making another fortune off the US government – they’ll rent a lot of those homes as Section 8 housing. The federal government pays top dollar, and the rent is there every first of the month – guaranteed. For a two-bedroom apartment in Chicago – I know of people who have certificates that pay rent up to $1100.00. It’s ridiculous beyond belief!

    • mrbrink

      The Section 8 program has a pretty fixed budget. There’s only so much there to launder. Average two bedroom rent in Chicago is about $1100. I was paying $1300 a month for a two bedroom on the second floor of a three-flat at one point for a neighborhood that was being terrorized by a serial rapist for months. The big money is in swallowing up supply to manipulate market demand. Buy low, rent high and then gamble on the results. Bottom feeders at the top of the world.

    • http://drangedinaz.wordpress.com/ IrishGrrrl

      It’s not just section 8 housing….investors are snatching up houses here in AZ too…the median rent price where I live is $1,200 per month. That’s a ton of money.

  • ChrisAndersen

    Banks: Lets come up with some new questionable security and sell it as it were a great investment.

    Investors: They wouldn’t sell it if they didn’t think it was good.

    Banks: Rakes in the trading fees.

    Other Banks: Hey, how can we get in that action?

    Other Investors: All those banks and investors can’t be wrong, I should buy into this to while I’ve still got a chance.

    Anyone wanna buy some tulips?

  • JWheels

    I really hope the CFPB finds some way to jump into this and put a stop to it. In a dream world the SEC would act to regulate this before it turns into Subprime 2.0