Rep. Takano Calls for Congressional Hearings into Rental Backed Securities

Washington DC – Earlier today, Rep. Mark Takano sent a letter to House Financial Services Chairman Jeb Hensarling and Ranking Member Maxine Waters requesting Congressional hearings into single-family rental backed securities that are being developed by The Blackstone Group.

 

In the letter, Rep. Takano says, “The Financial Services Committee can help resolve unanswered questions about these new bonds and the impact they may have on the housing market. Proper oversight of new financial innovations is key to ensuring we don’t go down the same road of the unchecked sub-prime mortgage backed security, and create an unsustainable bubble that will wreak havoc when it bursts.”

 

In a report released today that found one in three residents of Riverside County are paying more than 50% of their income on rent, Rep. Takano determined that rents are partially rising because purchasing a home has become much more difficult for non-investors, who must finance the home and are subjected to tighter credit markets. Investors are more attractive to sellers because they are able to pay with cash.

 

The rise of large investor purchases has also seen an increase in poor upkeep and a lack in responsiveness by investor landlords to their tenants.

 

Private equity firms and real estate investment trusts, including The Blackstone Group, have purchased nearly 200,000 homes across the United States in communities hit hardest by the mortgage crisis, such as Riverside, Phoenix, Tampa, Sacramento, Atlanta, Los Angeles and Las Vegas.  Homes in these communities were the easiest to purchase at fire-sale prices.

 

The report released by Takano addresses the danger of rental backed securities saying, “According to a recent report by the Federal Reserve, this type of, ‘investor activity may pose risks to local housing markets if investors have difficulties managing such large stocks of rental properties or fail to adequately maintain their homes. Such behavior could lower the quality of the neighborhoods in which investors own rental properties.’”

 

“Additionally, it’s unclear how these new financial products could react to a downturn. If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole. Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall.”

 

After sending the letter, Takano said, “The housing market crumbled partly because of lax regulation, unscrupulous lenders and shady financial products that falsely guaranteed reward without risk.  This led to millions of foreclosures across the nation, and now Wall Street has found a new opportunity amid the destruction they caused with the mortgage crisis - cheap homes that only they can buy because they have access to capital, which are then converted to rental properties that they control the price of. Now they have decided to socialize the risk by securitizing the income from the rents and sell it to investors. This reminds me too much of the “Too Big to Fail” schemes of the past and I’m concerned that the American people would once again be stuck with the bill. Congressional hearings and meaningful regulations on these new unproven securities could alleviate some of that risk and protect millions of Americans who would potentially suffer in another economic downturn.”

 

 

 

January 23, 2014

 

 

 

The Honorable Jeb Hensarling

Chairman

Committee on Financial Services

U.S. House of Representatives

2228 Rayburn House Office Building

Washington, DC 20515

 

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

U.S. House of Representatives

2221 Rayburn House Office Building

Washington, DC 20515

 

 

Dear Chairman Hensarling and Ranking Member Waters:

 

I am writing to request that the House Financial Services Committee hold hearings to examine the recent rise of investor owned properties and the development of single family rental backed securities.

 

California’s Inland Empire, which I represent, was hit particularly hard by the wave of foreclosures that occurred as a result of the financial crisis. Between 2008 and 2011, Riverside County saw 134,910 household foreclosures – a rate of one in every ten homes. During the height of the crisis, nearly one in five Inland Empire borrowers was behind on a home loan. Much of the debt from these mortgages was bundled, securitized, and put up for sale to investors. When the housing bubble finally burst there was a severe shock to the entire financial system. It is my belief that another disaster like this must be avoided at all costs.

 

After the flood of foreclosures, the Inland Empire housing market has seen record low prices and interest rates. Despite these strong incentives to buy, families and first-time homebuyers are finding it hard to purchase a home.  It is increasingly the case that these homes are being purchased by investment companies looking to rent out the property, leaving the family purchaser of modest means shut out of the market. While Southern California provides a clear example of this new trend, it is not the only region that has seen a rise in investment owned properties. Similar stories are coming out of Florida, Arizona, Nevada, and Georgia.

 

Now, these same investors have developed a new financial product linked to rental properties, a single family rental backed security. Last October, Blackstone announced that it would sell $479 million in bonds backed by the rental income from some 3,207 properties. If the Blackstone bond is successful, other companies are expected to follow suit.  These new products deserve thorough review before they become common place. Ratings agencies are at odds over how to assess the risk of these new bonds. Moody’s Analytics gave the bonds in the highest traunch a Triple-A rating, but Fitch has refused to rate the bonds citing their limited track record and vulnerability due to the intricacy of maintenance expenses, capital expenditures, property tax fluctuation, and the potential for local municipality involvement. The Financial Services Committee can help resolve unanswered questions about these new bonds and the impact they may have on the housing market. Proper oversight of new financial innovations is key to ensuring we don’t go down the same road of the unchecked sub-prime mortgage backed security, and create an unsustainable bubble that will wreak havoc when it bursts.

 

            Again, I respectfully ask that the House Financial Services Committee hold hearings to examine the rise in investor owned rentals and the brand new securitization that has been borne out of it.

 

Sincerely,

Mark Takano

 

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