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Monday, June 20, 2022

How Wall Street is about to implode the housing market

The single family home market is flying off a cliff.  Again.

This is part 2 of a 2 part article.  Be sure to read part 1, published in 2017!

Five years ago I wrote an article predicting new nonsense in the housing market.  It had taken less than a decade after the 2008 mortgage disaster for the gang on Wall Street to regroup and get drunk enough to go back after it with a vengeance.  The result is a coming perfect storm no one could have written.


Thelma is the mortgage industry.  Louise is the market for homes.


What I had not anticipated in the 2017 writing, was that the industry made up of corporate buyers of detached single family residences would find ways to keep their antics from being outed by the standard indicators, such as filed evictions and foreclosures, and would create new financing vehicles to allow individual, proxy "investors" to be their fronts in buying more and more rental properties.  Let's review the game in a nutshell.

MONEY IS LOOSER THAN EVER


After the 2008 crash, single family residences were pushed by Wall Street geniuses into asset class status on Wall Street.  This made unprecedented institutional money available to purchase homes directly, not just packages of mortgages on them, almost overnight.

Next, new institutions bought up entire defunct neighborhoods, not to sell them, but to rent them out, as I described in 2017.

Using the asset class holdings, these companies then packaged up the predicted future rental income of those properties, and sold that future income on Wall Street for big, up-front cash.  Brokerages began making a fortune in fees.

The companies then bought more homes with the cash, and repeated the process until they ran out of defunct neighborhoods to buy.  

The companies then began buying up individual homes to satisfy their appetite and need to invest massive amounts of cash that the profitable Wall Street transactions created.  These homes were also rented.

Homes got scarce, so the companies started 'We'll buy your home, don't bother to list it' marketing campaigns directly to potential sellers, looking to purchase standard tract home models in areas with predictable employment and residents unable or unlikely to buy homes.  Prices started escalating.  Even fewer homes were available to fill the Wall Street appetite. 

Rents began to be dummied-up to create more income anticipation to inflate the securities generated.  Rental contracts have no underwriting regulations or oversight, so it is easy to have a renter sign a contract that appears to generate more rent than it actually does, simply by allowing return favors to that renter.  Renter blogs feature these topics often.

WALL STREET IS MORE CROOKED THAN EVER


The rating companies started rating the single family residence rent-backet securities, based on everything except the rents.  This brought in more institutional investors. The huge appetite for houses, which are effectively removed from the market, never to be re-sold, had to be satisfied.

The companies started using the asset class status of houses to create a new type of mortgage product, designed only for individuals buying rental properties.  Where such rules used to be based on FHNMA guidelines limiting the number of rentals one person could finance (it was generally four rental houses before 2008), those standards were scrapped.  

The result was a mortgage product, often called a Debt Service Coverage Ratio (DSCR) loan, based entirely on the expected rent from a house, with almost nothing to do with the borrower's other qualifications - they often don't even pull a credit report, and allow you to borrow with no other income, even in a company name.  

A product description from the website of JMAC Lending as of 6/2022. 
No job required, scant credit, no income.  They basically finance the house despite borrower


Once again we see borrowers who are fodder for Wall Street, getting loans at twice the standard interest if they could fog a mirror and find house and a renter.  Suddenly your barista from 3 years ago showed up with 30, 40, even over 100 loans, buying up more and more homes to rent. They became Instagram millionaires and YouTube gurus as they bragged about the rents they collected and offered seminars.

Rents increased, to try to cover the underlying Wall Street debts.  This sent the standards of rent underwriting through the roof.  Where once a loan underwriter would consider rent acceptable at the equivalent of one week's pay, now it was just fine at half your salary.  

Naturally, evictions started to escalate.  With each one came a need to generate more from the standing assets. The companies have thus mastered making "cash for keys" deals to exit the tenants without eviction, as not to draw attention or negative statistics.  


"CASH BUYERS" ARE NOT CASH BUYERS


The new breed of "landlord" could be anticipated to default on large portfolios of home loans, so a new methodology was instituted.  Rather than the lender foreclosing on the home, they would have the borrower hold or transfer the title of the home to a Single Purpose Vehicle (typically a trust or LLC) to hold title to the houses. Sometimes they even buy the home for the "investor," titling it in the SPV in lieu of financing, which looks like a cash offer.  It isn't, it's just that the financing is hidden on Wall Street.  

This is done not only with landlords but with owner-occupied home owners looking for a way to sell out and take profits, while being able to afford a new place.  New Wall Street-backed facilitators do it all for them under a company or trust.  These individuals look like cash buyers.  They don't actually have to have a dime.

An actual explanation page from a facilitator as of 6/22


HOW TO HIDE THE BUYERS, EVICTIONS, AND FORECLOSURES


Instead of filing foreclosure on the houses, which is a very public and closely measured statistic, the companies now just privately foreclose on the SPV's themselves, quietly taking over the asset positions and not filing any foreclosures in the neighborhoods or courthouses.  No posted notices, no auctions, nice and quiet.  

Wannabe landlords or fantasy buyers can thus be put out, without ownership change in the property.  There is no transfer tax on the property, no realtor costs, no appraisals, no escrow, no property foreclosure.  Even the renters don't know title to their residence has changed hands.  The companies  obtain entire portfolios from former Tiktok gurus, for less then buying them through traditional means in public, without any notices in the papers or running up foreclosure stats.  Then they sell the masked interest in the properties again, to more newly minted "investors" from "secret foreclosure lists" and the like, and keep the Ponzi scheme going.

Fronting the process with 'barista-turned-investor' Instagram experts and individual 'look-at-us-we-movin-on-up' buyers, masks the institutional investors who actually have control of the properties.  This keeps the official institutional investor numbers in the single family home market down around 2%. It's certainly higher.

But have you noticed that the public has begun losing confidence in the value of homes?  This always happens when the payment on an average home, with a mortgage at 80% of purchase price and an 'A' paper, 30-year fixed rate, is more than the legitimate rent that can be collected on that home.  The values have to be propped up, so the companies have begun buying homes from the public more aggressively, and triggering landlords to do the same, sight unseen, often far above the asking price, and often far above all other bids.  

Homebuyers are often shocked that winning bids can be tens of thousands of dollars over the next highest bid. The companies buying don't care if they overpay substantially for a given house. In fact, its an opportunity, because that one transaction buoys up the sales prices of many other homes they own in that subdivision.  They do it to use the overpriced sale as a comparable, feeding it to the the willfully-blind rating companies to determine the value of these ridiculously inflated portfolios of homes and mortgages.  

In short, they took the mortgage scams of the early 2000's, and removed the limitations. 

Now, it's all about to go 'Thelma and Louise.'

A MASSIVE INVENTORY BUBBLE


The companies instigating this have been burying rental losses in more house purchases and Ponzi hypothecations of fantasy future rents.  It all crashes when the renters stop paying or stop renting, in numbers sufficient to trigger a run on the underlying securities, choking off the ongoing Ponzi purchases, then forcing sales on the houses held.

The question of "a real estate bubble" is only a question of false demand.  If there is artificial demand, as there was in the early 2000's with straw buyers, then it's a bubble. 

With hundreds of thousands of homes owned by these companies, what we have now is unprecedented artificial demand driven, ultimately, by Wall Street appetite for single family residences as fodder for fee-generating hypothecation deals.  There is no shortage of supply for families looking for a home.  There is only a shortage of supply for the credit bro's creating this Wizard of Oz behemoth scam, for fat fees.  Your neighbors are corporations, even when they look like families.   

Next it crashes, and those who perpetrated it blame everyone else, from the President, to realtors, to regulators and regulations, to the renters.  Again.


What's your reaction?


A)  I don't care, just get me more rentals financing

B)  Tell me more


I welcome your comments and related experiences.





 

1 comment:

  1. A concern to consider is the nearly 20% and growing amount of ARM (3 and 5 year) loans for homes that will come due in the next 2 to 3 years if rates remain high, this could expand foreclosures greatly like in 2008, that is my major concern. A shortage of housing for existing homes when rates remain high and people do not want to sell and loose their 3 % fixed mortgage and new home builds dropping due to cost and supply chain issues. There will for a while continue to be a shortage. As long as a shortage continues, supply lower than demand, prices will go up, though possibly slower. Institutional buyers account for less than 2% of the single family residential market, less concern about institutions dumping homes for any significant decrease. Rents will continue to rise and those rental properties will be held for asset value and income. People are limited to either buy a home, rent a home/apartment, or live in a tent. Many will struggle and do everything they can to remain housed instead of homeless. However, and sadly, the homeless problem will only get larger. The increase in interested rates has had a far greatly cost increase t the average home buyer than the price increase in the last few years, based on mortgage payments. A feedback loop of increasing interest rates for all consumer loans which will add more cost to people needing a home, vehicles, and paying off debt will be harder. Corporations will pass on the added costs of higher interest rates to prices of products and services to consumers and businesses. Economists never seems to talk about the feedback loop of higher interest rates will contribute, at least for a while, to higher inflation. The only way to substantially stop inflation is either fix the current supply chain and labor bottlenecks quickly, which will be difficult, or raise interest rates beyond inflation and spin us into a terrible recession and slow down which will also revert many small businesses and individuals to lower economic levels which is detrimental as well for many. The fear of the USD being like Zimbabwe or Venezuela in regard to inflation is fear mongering or ignorance. As long as we (USA) are the reserve currency, and 53 countries link their currency to the USA, and commodities such as Oil, Gold, Silver are priced in USD, it not likely. The question is, what are our options. 1. Do nothing and lt the markets sort it out. 2. The Fed alter interest rates to curb inflation, which their track record is not so great. 3. Go all out and raise rates quickly and painfully like in 1979-1981. 4. Is there another option?

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How Wall Street is about to implode the housing market

The single family home market is flying off a cliff.  Again. This is part 2 of a 2 part article.  Be sure to read part 1 , published in 2017...