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

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.

The Rest…HERE

This entry was posted on Thursday, January 26th, 2017 at 1:38 am and is filed under Conspiracy, Corruption, Economics, Government Evil, New World Order. You can follow any responses to this entry through the RSS 2.0 feed.