Buy to Rent

Next Up in Housing – A Huge Home Equity Payment Reset

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Of all the screwed up, misallocated parts of the U.S. economy, the housing market continues to be one of the biggest potential train wrecks. While the extent of the insanity in residential real estate should be clear following the article I published yesterday, there are other potential problems just on the horizon.

One of these was written about over the weekend in the LA Times. In a nutshell, the next several years will start to see principal payments added to interest only payments on a large amount of second mortgages taken out during the boom years. The estimate is that $30 billion in home equity lines will reset next year, $53 billion in 2015, and then ultimately soaring to $111 billion in 2018.

I’m not a real estate expert by any means, so comments are encouraged and appreciated.

From the LA Times:

Some mortgage and credit experts worry that billions of dollars of home equity credit lines that were extended a decade ago during the housing boom could be heading for big trouble soon, creating a new wave of defaults for banks and homeowners.

That’s because these credit lines, which are second mortgages with floating rates and flexible withdrawal terms, carry mandatory “resets” requiring borrowers to begin paying both principal and interest on their balances after 10 years. During the initial 10-year draw period, only interest payments are required.

But the difference between the interest-only and reset payments on these credit lines can be substantial — $500 to $600 or more per month in some cases.

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Peak Insanity: Retail Investors are Making Direct Subprime Loans in a Reach for Yield

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It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children. 

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks. 

– From an excellent MarketWatch article:  Want 18% returns? Become a subprime lender

Being a somewhat conscious human being in a world in which our “leaders” have completely lost their minds can be challenging at times. One side effect of this condition is a certain emotional numbness when it comes to reacting to new events occurring in the world around you. It’s simply hard to shock me these days, but every now and then it does happen. The following article published by MarketWatch had me literally shaking my head the entire time. If this isn’t peak insanity, I do not want to know what is. We now have chiropractors and orchestral conductors competing with Blackstone in a crowded, insane trade.

Read it and weep:

Barry Jekowsky wanted to build “legacy wealth” to pass down to his children. But the 58-year-old orchestral conductor, who waved the baton for 24 years at the California Symphony, didn’t trust the stock market’s choppy returns to achieve his goals. And the tiny interest earned by his savings accounts were of no help. Instead, Jekowsky opted for an unlikely course: He became a subprime lender, providing his own cash to home buyers with poor credit and charging interest rates of 10% to 18%. It may sound risky, but “it helps me sleep better at night,” he says. “Where else can you find [these] returns?”

Go ahead and read that twice. Ok, now let’s move on, it gets worse.

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children. There is no official data, though it’s estimated that at least 100,000 such lenders exist — and the trend is on the rise, says Larry Muck, chairman of the American Association of Private Lenders, which represents a range of lenders including private-equity firms and individuals who are lending their own cash. “We know the number of people who are doing this is increasing dramatically — over the last year it’s grown exponentially,” he says.

The baby boomers will not rest until they destroy the entire world.

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks. 

The move toward mom-and-pop lending comes in the wake of what experts say is the creation of a perfect storm: Banks are still skittish about lending to home buyers with poor credit. Meanwhile, investors who have endured years of low returns from plain-vanilla investment portfolios are itching for something more.

The operations often function like a game of telephone. Subprime home buyers, who know they have no shot at getting a mortgage from a bank, start spreading the word to friends and acquaintances that they are on the lookout for anyone who will lend to them. Eventually, the word reaches someone who is willing to lend his or her cash. Other times, a group of individuals pool their cash together to fund the loan.

A game of telephone…

What all these lenders have in common, however, is their willingness to lend to borrowers with low credit scores. In some cases, they do not even check their scores. They point to examples of otherwise reliable borrowers who fell on hard times during the recession and were unable to keep up with loans. Many say they work with borrowers who intentionally stopped paying mortgages (even though they could afford the payments) when they ended up owing more on the loans than the home was worth.

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A Closer Look at the Decrepit World of Wall Street Rental Homes

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This new incursion by hedge funds and private equity groups into the American single-family home rental market is unprecedented, and is proving disastrous for many of the tens of thousands of families who are moving into these newly converted rental homes. In recent weeks, HuffPost spoke with more than a dozen current tenants, along with former employees who recently left the real estate companies. Though it’s not uncommon for tenants to complain about their landlords, many who had rented before described their current experience as the worst they’ve ever had.

A former inspector for American Homes 4 Rent who worked in the Dallas office said he routinely examined homes just prior to rental that were not habitable. Though it wasn’t his job to answer complaints, he said he fielded “hundreds of calls” from irate tenants.

– From the Huffington Post’s excellent article: Here’s What Happens When Wall Street Builds A Rental Empire

This is a topic that I have been writing extensively on since the beginning of the year. In fact, I don’t think there’s another topic I have focused so intently on in the whole of 2013, with the exception of the NSA revelations. It all started back in January with my post titled, America Meet Your New Slumlord: Wall Street, which received a huge amount of attention in the alternative media world.

I knew from the start that this whole “buy-to-rent” thing would be a disaster. Over the last decade or so, everything that Wall Street touched has turned into a scheme primarily focused on parasitically funneling wealth and resources away from society at large to itself. This is no different. They call it a “new asset class.” I call it Wall Street serfdom.

What makes this article even more interesting is that it’s not simply greed, it is also obvious that these Wall Street firms have no idea what the fuck they are doing. For example:

Former employees of the companies, who spoke on condition of anonymity because they worry about jeopardizing their careers, said their former colleagues can’t keep up with the volume of complaints. The rush to buy up as many homes as possible has stretched resources to the point of breaking, these people said. 

My advice to people out there in the rental market, is they should try to avoid Wall Street rentals. The three main companies highlighted in this article are: Invitation Homes (owned by Blackstone), Colony American and American Homes 4 Rent. Unfortunately, it appears these companies may try to hide their presence in certain markets so you may have to do additional digging. For example, WRI Property Management is the local agent of Colony American in Georgia.

More from the Huffington Post:

There’s no escaping the stench of raw sewage in Mindy Culpepper’s Atlanta-area rental home. The odor greets her before she turns into her driveway each evening as she returns from work. It’s there when she prepares dinner, and only diminishes when she and her husband hunker down in their bedroom, where they now eat their meals.

For the $1,225 a month she pays for the three-bedroom house in the quiet suburb of Lilburn, Culpepper thinks it isn’t too much to expect that her landlord, Colony American Homes, make the necessary plumbing repairs to eliminate the smell. But her complaints have gone unanswered, she said. Short of buying a plane ticket to visit the company’s office in Scottsdale, Ariz., she is out of ideas.

“You can not get in touch with them, you can’t get them on the phone, you can’t get them to respond to an email,” said Culpepper, whose family has lived with the problem since the day they moved in five months ago. “My certified letters, they don’t get answered.”

Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.

Most who spoke with HuffPost said they moved into their rental homes only to find that renovations they were assured were comprehensive amounted to little more than a fresh coat of paint and new carpeting. Tenants said they immediately discovered major mechanical and plumbing problems: broken water heaters and air conditioners, broken toilets and in some cases even vermin infestations, including fleas, silverfish and rodents.

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The Carlyle Group’s Latest Investment…Trailer Parks

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Earlier this month, I highlighted the fact that the Carlyle Group was the latest in a series of “smart money” private equity firms to decide it was time to exit the suddenly extremely crowded “buy-to rent” residential real estate trade. At the time I noted that:

As it sells apartments, Carlyle is focusing investments in areas such as senior housing, self-storage units and manufactured homes, where demand tends to be driven by life changes such as retirement or marriages, and isn’t so closely tied to changes in employment and gross domestic product, Stuckey said.

Well it appears Carlyle has already started to make its move. As the Wall Street Journal reported on Tuesday: Carlyle Jumps Into Niche Space – Private-Equity Firm Adds Trailer Parks to Its Diverse Portfolio. In case you can’t figure out what appears to be the key logic behind the shift in focus, try this line on for size: 

Because the cost of relocating a home is expensive, residents are less likely to move away. “Our customers have no alternative shot at homeownership, nor do they [normally] even have the credit scores and quality to seek anything better,” Mr. Rolfe said. “They never leave the park they are in, and the revenues are unbelievably stable as a result.”

In neo-feudalistic America, always, always go long serfdom.

More from the WSJ:

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Blackstone’s Head of Private Equity: “We Are in the Middle of an Epic Credit Bubble”

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We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity.

– Joseph Baratta, Global Head of Private Equity at the Blackstone Group

According to CNBC, the above statement was made this past Thursday at the Dow Jones Private Equity Analyst Conference in New York City. While I certainly can’t disagree with his sentiments, I do find it a bit bizarre coming from someone so high up at Blackstone. More than any other firm, Blackstone has been aggresively buying up real estate all over the U.S. in all cash bids, playing a huge role in inflating another housing bubble. A bubble in which the average citizenry is being outbid by Blackstone and other private equity firms, and then in turn is forced to rent housing from Wall Street. Not only that, remember I highlighted back in July that Blackstone “is preparing to expand its bet on the housing recovery by lending to other landlords.” 

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You’re Fired! American Homes 4 Rent Dismisses 15% of its Workforce

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Earlier today, I published a piece discussing the ridiculousness of the latest centrally planned housing bubble, and I also described some of the things I have gotten wrong with regard to real estate in the past several years. Well here’s one thing I got right. In early May I wrote an article titled: Las Vegas Housing: … Read more

The Las Vegas Housing Market has Gone Full Chinese

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Let’s face it, the Las Vegas real estate market has gone full Chinese.  By full Chinese I mean a centrally planned bubble has been created that is just asking to blow up.  I’ve covered the renewed insanity of the Las Vegas market before, but this article from yesterday’s Wall Street Journal provides even more detail.  In a nutshell, as a result of Assembly Bill 284, which essentially made foreclosures impossible in Nevada, extremely delinquent homes are not coming for sale, and this phony market signal is leading to rampant overbuilding and price speculation.

Here are some numbers. Utility data showed nearly 64,000 vacant homes in Las Vegas at the end of last September, only 8,000 of which are on the market. Meanwhile, new home sales are up 87% and new building permits are up 52% this year. What’s the end result? Another bubble, but this time one where Blackstone and other private equity firms are pricing out average citizens with elevated all cash bids.  USA! USA!  From the WSJ:

LAS VEGAS—In a city dotted with tens of thousands of vacant houses, Jericho Guarin figured it would be easy to buy his first home. But nearly a year after beginning a search late last summer, he has come up dry.

“It has been a nightmare,” says the 37-year-old U.S. Air Force officer. “There are plenty of empty houses, but they’re just not for sale.”

Thank you for your service Mr. Guarin, now go rent from Blackstone.

Many real-estate agents, home builders and consumer advocates argue that the law, intended to remedy foreclosure-processing abuses, has backfired. Some owners who are behind on payments aren’t maintaining their homes as banks refrain from eviction proceedings. The perverse outcome: Inventory shortages have spurred new developments despite a glut of properties stuck in foreclosure limbo.

“The people hurt most by this law are the middle class,” says Steve Hawks, a real-estate agent in Henderson, Nev. He refers to the phenomenon wrought by the foreclosure measure, Assembly Bill 284, as the “A.B. 284 bubble.”

The middle class…what’s that?

Mr. Guarin, the Air Force Captain, is preapproved for a mortgage backed by the Veterans Administration for up to $185,000. But like many buyers who need financing, he is at a severe disadvantage because sellers often prefer all-cash deals that won’t be tied up by a low appraisal or other red tape. “There’s no way I can match the cash offers,” says Mr. Guarin.

With investors in the game, more properties are commanding prices above asking—a phenomenon real-estate agent Bryan Lebo knows all too well. Recently, he listed a bank-owned property for $86,000. The home, which he said needed around $20,000 in repairs, drew 41 offers—39 of them all-cash—and sold to an investor for $135,000. “If you’re an honest working person, you pretty much don’t have a chance,” says Mr. Lebo of current market conditions.

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Stage Two of the Housing Bubble Begins: Blackstone to Lend to Others for “Buy to Rent”

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As we all know, any good ponzi scheme needs a continued stream of new investors in order to keep it going otherwise the whole thing falls apart.  We also know that the current rebound in the U.S. housing market is a centrally planned monster, led by private equity firms with access to cheap money and laundered foreign capital flooding into depressed markets, crowding out American families looking to purchase a home. Well now that Blackstone has spent more than $5 billion in its “buy-to-rent” scheme, it wants others to be able to “participate” in this wonderful investment opportunity (after them of course).  Oh and by the way, one of the most common ads on the local radio here in Boulder as of late explains to people how they too can “get in” on the buy-to-rent trade.  Best of luck. From Bloomberg:

Blackstone Group LP, the private-equity firm that has spent $5 billion on more than 30,000 distressed houses, is preparing to expand its bet on the housing recovery by lending to other landlords.

The firm, which already owns more rental homes than any other investor, has set up B2R Finance LP to offer loans starting at $10 million, according to four people who reviewed the terms. B2R is reaching out to landlords with portfolios of properties seeking to grow in the burgeoning industry for single-family homes to rent, said the people, who asked not to be identified because the discussions are private.

At least five rental companies have received non-binding term sheets from B2R, according to the people. Jeffrey Tennyson, the former chief executive officer of mortgage originator EquiFirst Corp., is running the firm, which stands for buy-to-rent. He previously led EquiFirst to become the 12th-largest wholesale subprime lender in the U.S. by 2007, when Barclays Bank PLC bought it. The London-based bank closed the business two years later after the market collapsed.

Tennyson didn’t return phone messages seeking comment on his role at B2R. Peter Rose, a spokesman for Blackstone, declined to comment.

So basically we continue to recycle the same characters from the last housing bubble to come on in and do it again.

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Chinese Malls Waive Rents Due to Soaring Vacancies

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I was writing about the ultimate pain coming to China’s crony, liquidity fueled, ponzi economy way before it was cool.  In fact, all the way back in 2009 when I was still working on Wall Street I wrote a piece for clients titled “The Emerging China Risk.”  Last year, I highlighted some of the country’s fraudulent “wealth products” in the post: China to Boost the Global Economy? Nope it’s also a Total Ponzi.  Well now we see that the overbuilding of ghost malls in the middle of nowhere is finally coming home to roost.  We learn from Bloomberg that:

Chinese landlords are forgoing rent and paying to outfit stores for mass-market fashion brands including Zara and H&M, a bid to blunt the impact of a boom in shopping-mall construction that threatens to push up vacancies.

Chinese developers built more malls and expanded into smaller cities as consumer spending and incomes grew, elevating China’s economy to the largest in the world after the U.S.

Half of the 32 million square meters (344 million square feet) of shopping centers under construction around the world are in China, according to CBRE Group Inc. (CBG) About 21 million square meters of retail space is expected to be completed by next year, a 38 percent increase in supply, according to broker Cushman, which tracks 20 cities in China.

Vacancy rates in some less affluent cities could surge to more than 30 percent by next year from as low as 6.8 percent in the first quarter this year, Cushman forecasts.

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Meet the Military-Industrial-Wall Street Complex: Blackstone Hires General Wesley Clark

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So how’s a private equity company snatching up homes all across America, pushing average citizens out of the market and then renting these homes back to the once middle class, but now indentured servitude masses supposed to hedge itself against future backlash?  Simple, put a former General and NATO Supreme Allied Commander in Europe on your payroll.  That’s exactly what Blackstone has just done.

According to Bloomberg, Blackstone has hired General Wesley Clark to “to advise on its investments in energy companies.”  This makes perfect sense since General Clark may be privy to information regarding which countries’ oil wells and refineries may be next in line or liberation by America.  From Bloomberg:

Blackstone Group LP hired Wesley Clark, the former NATO Supreme Allied Commander in Europe and a one-time U.S. presidential candidate, to advise on its investments in energy companies.

Private-equity firms hire high-ranking executives and former officials to expand relationships with corporations and governments worldwide, as well as to benefit from their industry experiences. KKR & Co., the buyout company run by Henry Kravis and George Roberts, hired former CIA director David Petraeus last month to run a new unit for public policy and economic research at the New York-based firm.

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