I’m fairly certain very few of you have heard of broker price opinions, or BPOs, but it’s something I think we should all become aware of given the influence of BPOs in the market for valuing residential real estate securitized bonds.
Before we get to that, let’s revisit a little contemporary American robber baron history. In the immediate aftermath of the U.S. financial crisis, financial oligarchs immediately got to work helping Main Street climb out of the Wall Street created ditch by buying foreclosed homes from hordes of newly destitute Americans and then renting them back to those same people.
I wrote many articles about this trend over the years, starting with the January 2013 piece, America Meet Your New Slumlord: Wall Street. Here’s an excerpt:
Well they aren’t really your “new” slumlord in the sense you have been debt slaves to the financials system for decades. What I really mean is that it is now becoming overt and literal. Literal because financiers are now the main players in the real estate market and are buying all the homes ordinary citizens were kicked out of over the past few years. Yep, we bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.
Fast forward a few years, and private equity is frantically packaging these real estate rental properties into bonds. In order to value the real estate collateral you need some sort of appraisal, but the normal process of actually looking at properties is seen as too costly and time consuming, so market players are cutting corners by using “broker price opinions,” or BPOs.
As Bloomberg reports, this practice is coming under increased scrutiny and for good reason:
U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.
Radian Group Inc.’s Green River Capital unit is one of the market participants that received a request for information from the Securities and Exchange Commission in March about broker price opinions, or BPOs, the company said in a regulatory filinglate Friday. Green River provides BPOs that are used to value real estate in securitizations.
The agency has been looking at whether BPOs were wrongly inflated, and similar letters were sent to other companies, potentially serving as a starting point for an industrywide probe, according to a person with knowledge of the matter. The person asked not to be identified because the matter is private.
Green River is one of several firms that provide BPOs to the units of private-equity firms and other investors who bought up hundreds of thousands of properties in cities across the U.S. after the housing bubble burst. Many of them focused on distressed homes whose owners were evicted during the Great Recession.
Never forget, what’s good for Wall Street is good for Main Street! Also, they hate us for our freedoms.
Broker price opinions are a cheaper and less-stringent way to evaluate what a property is worth than an appraisal. Property valuations are a sensitive subject in the housing industry because regulators said inflated appraisals contributed to the housing bubble a decade ago.
The biggest private-equity landlords, led by Blackstone Group LP’s Invitation Homes, have sold more than $15 billion in bonds since 2013 backed by some 120,000 rental homes, according to data from Morningstar, and many of those deals were valued using BPOs. One recent bond deal tied to Invitation Homes was backed by guarantees from U.S. taxpayers.
Please tell me this is a joke.
The BPOs are key elements in securitizations, determining basic figures such as how much rent to charge tenants, how much leverage and risk is embedded in the deal and how much investors could recover if the bonds go sour. Many of the securities were assigned AAA grades and sold off to investors such as pension funds.
Is this 2006 or 2017?
No here’s where it gets truly disturbing.
In traditional real estate deals, these opinions help establish sales prices, but in these bond deals, they help estimate how much could be recovered in a liquidation. Some analysts say the BPOs they don’t take into account a possible plunge in home prices, and the values tend to be more optimistic than a full appraisal. Unlike appraisals, BPOs also aren’t necessarily done by a licensed professional, nor does the inspector always go inside to look around, which is standard procedure for an appraisal.
In one April securities offering of about $944.5 million, Green River submitted BPOs that relied on “drive-by” evaluations, and homes were “assumed to be repaired and in good condition,” according to a deal prospectus issued by Fannie Mae. The BPO “is not intended to be a representation as to the past, present or future market values of any of the properties.”
The underlying mortgage in that deal, tied to rental properties owned by Invitation Homes, was guaranteed by Fannie Mae. That’s the first time a taxpayer-backed home finance company has guaranteed such a loan. Freddie Mac is also looking into getting involved in the market by providing its guarantee.
When private equity landlords opted to use BPOs instead of appraisals in their securitizations, some investors expressed skepticism and bond graders applied discounts to the BPOs. Moody’s Investors Service, for example, applied a 15 percent haircut to BPO valuations when grading a transaction last August, citing inherent risks of using BPOs on residential properties instead of an appraisal.
I’m sure it’ll be fine, and if not who cares? The U.S. taxpayer is always available for a good fleecing.
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In Liberty,
Michael Krieger
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The hard working productive class of America is losing its buying power every year. Expenses go up and wages stagnate. Year by year the productive class struggles to make ends meet. If one little thing goes wrong they fall way behind and lose there house. There is no room for error any more. In the old days if you fell behind the wife could go back to work and you could catch up. Now both spouses work overtime and they still cant make it.
So I child gets sick, or needs a lot of dental work, Somebody loses a job. That becomes the final straw and the mortgage falls behind. Then forecloser, and the unproductive wall street investing class snatches up the house for pennies on a dollar.
We Americans that are part of the productive class built this country and made it the strongest nation in the world. And now these pencil pushing wall street guys that provide nothing to productivity end up buying up all the assets.
It happened to me I was a Goat (Greatest of All Times) Heating Designer, Inventor, Green Building Contractor and I am now deep in debt and losing everything including my house. I was very very productive to society. I have a World Wide Building Energy Efficiency Standard that I developed and it will reduce huge amounts of CO2. But I no longer have the funds to advance the project.
So now I changed careers. I was a great self made Heating Engineer and now I have become a Self Made Trader of Stocks and Options. The only thing left after bankruptcy will be my Roth IRA. So I spend most of my time growing it. Up 51% in 2016. As much as a years wages. I will do even better than that once I get some more experience. I have now joined the dark side and become a financial engineer. Totally unproductive to society but building more wealth for my family then before.
That is the exact reason America is failing and Im not going down with the ship.
If I understand correctly the revenue stream from rents based on the appraisal is packaged as a bond, rather than a derivative, and then sold? Something like this should be suspect from the beginning if I am understanding this offer correctly?
I started and ran a booming business at one time. The Goat was for heating design. A radiant heating project that I designed and we installed won “Best in Show with the highest points total ever”. My wife didn’t need to work and we had money for weekend trips. I had achieved the American Dream. I worked hard for it. I made a mistake of adding a addition to the house for my growing family and business back in 2005 and completed 2008. When I went to try end expand my business to pay for it, the great re-session hit. The business shrunk instead of growing. Contractors were bidding half of my price to under cut me and get the job. I fell deep in debt . The business survived living hand to mouth Then late 2014 finally everything just collapsed under all the debt. Now that jerk with a big smile on his face standing next to the “For Rent Sign” is going to end up with my American Dream and my house.
I AM SO MAD RIGHT NOW. I JUST CAN’T STAND LOOKING AT THAT GUYS SMILING FACE.
These Elites ruined a great country and me in the process. But I will come back. Stronger then ever. I will beat them at there own game and become a great trader.
Running a small business is hard hard work and the hours are long and the rewards should match the effort but sometimes even with all the effort and doing everything right they fail as the investment – debt taken on- and the revenue from sales don’t even balance in the end. You sound like you are made of the ‘right stuff’ so I wish you every success in bouncing back. Learn your new trade thoroughly. and remember the big boys are trading with other people’s money or free money from the Fed if they’re really Really big.
As discissed by Krieger in the post, there is no margins, or no antifragility as Nassim Taleb would say (reccomend his book btw, very good for adapting your mindset to a system that by its nature want you to loose and become enslaved). The debt bubble can only burst, and the only thing they can do is to ride the catastrophe as it plays out. That means ensuring the loss is directed on someone else. Be it the entire community as in 2008, or a certain country, like Greece. Creating wealth out of nothing requires loosers (in strictly financial sense of the word). I would say dont give into anger or despair, but find your own way to support the dismantling of a corrupt and sick system, because when many enogh do, it wont last long.
You see when this all collapses, which it will, my heating business will be forced to take jobs well below the cost of doing business like in 2009 to 2011. So it is not even worth it to build my business back.
But when the system collapses, I will be ready. I will know it. I will short everything in sight. I will be rich again and I will by my house back.
In the end the ORDINARY, middle-class “Joe Taxpayer” ALWAYS gets stuck paying the costs!!!
The trick, even though you may NEVER become one of the “elite”, is to find enough methods (e.g., tax breaks; tax-free investments. subsidized investments, offshore investments hidden from the IRS, and so-called “tax loopholes”, etc.) that you are NO LONGER an “ORDINARY, middle-class “Joe Taxpayer” – using both legal and illegal means.
JHH,
I have thought about this for a long time. I wish I knew how to form a collective corporation where ordinary people could park everything they have and “legally” avoid paying for wars and bankers. I also wish the collective corporation could provide education, housing, healthcare, alternative energy etc.. for all.
If Bechtel can do it while letting plutonium leak all over the place, why can’t we the people do this while accomplishing actions for the common good?
The avoidance of taxes is not allowed the proles though there is no law that says you must file if you are working for wages-salary if an employee. If you do file you had better make sure every penny is accounted for. For the wealthy that write tax law the escape routes are many. Kinder Morgan bills itself as a type of co-operative and profits simply pass through to its members and who knows of the various other tax dodges afforded the rich. What the people need to do is hire some high power inventive tax lawyers and your plan might bear fruit.
BRF,
When I get time I’m going to put in the pitch(fork) 🙂 at GoFundMe! We need us a high falutin’ tax atty! Seriously, we do need several actually.
Jill,
Have you ever viewed Arron Russo’s documentary on the IRS?
No, not yet. Thank you for the link to it!