Shutterstock

The investors who brought us mortgage-backed securities are now betting on housing again, with a twist.

You've heard, probably menacingly, about mortgage-backed securities. To quickly recap that innovation that helped undermine the American economy: Banks bundled mortgages from many homeowners, then offered slices of the resulting pool to investors in a financial product so far removed from a single homeowner that one missed mortgage payment posed meager risk.

The idea severed the traditional ties (and incentives) between a homeowner and her local bank. As a result, many people who shouldn't have become homeowners were encouraged to. And when a whole lot of them started falling behind on their monthly payments – spanning entire blocks, then whole neighborhoods – the resulting mess turned out to be chaotic to untangle.

With that history in mind, now meet the next big innovation in financial engineering: rental-backed securities.

There's a kind of ominous symmetry to their creation. As a result of the housing crisis, families who were once homeowners have shifted to renting. And properties that were once owner-occupied have, by the tens of thousands, fallen into foreclosure. The same savvy investors who brought us mortgage-backed securities looked at those two trends and saw a new opportunity: Buy up foreclosed, single-family homes, and convert them to rentals for the very people who are now averse to homeowning. Turn Wall Street, in effect, into a landlord of national proportions.

William D. Cohan wrote in the October issue of The Atlantic about the giant private-equity firm, Blackstone, that's been pioneering this model. Its Invitation Homes vowed to "professionalize" rental services (although some Invitation Homes tenants would beg to differ). The idea was intriguing. Could a national company like this be more than a slum lord? Or would this system create its own perverse incentives, forcing renters to coax repairs from an anonymous, faraway property manager?

Cohan hinted in October that Blackstone might also be weighing an additional, unsurprising move: securitizing those rent payments. Now, per The Financial Times, Blackstone is preparing this week to roll out these new securities, which constitute "the world’s first bond backed by home rental income."

From Tracy Alloway and Anjli Raval:

The sale will be closely watched by bankers, hedge funds and private equity firms, with a belief that strong demand for the bonds could give birth to a new asset class and provide a fresh source of capital to finance their purchases of foreclosed houses in the US.

That breathless anticipation is probably reason enough to give us pause. For now, it feels like rental rates are rising in many cities with no end in sight... which is, come to think of it, a lot like how the for-sale housing market felt six years ago.

Top image: Monkey Business Images/Shutterstock.com

About the Author

Most Popular

  1. a photo of a full parking lot with a double rainbow over it
    Transportation

    Parking Reform Will Save the City

    Cities that require builders to provide off-street parking trigger more traffic, sprawl, and housing unaffordability. But we can break the vicious cycle.   

  2. Life

    Mapping the Changing Colors of Fall Across the U.S.

    Much of the country won’t see those vibrant oranges and reds until mid-October, which leaves plenty of time for leaf peepers to plan their autumn road trips.

  3. A photo of President Donald Trump boarding Air Force One
    Equity

    Housing Organizations Slam White House Report on Homelessness

    As Trump targets California’s homeless crisis, a report from his Council of Economic Advisors lays out a policing-heavy blueprint for fixing the issue.

  4. A woman looks straight at camera with others people and trees in background.
    Equity

    Why Pittsburgh Is the Worst City for Black Women, in 6 Charts

    Pittsburgh is the worst place for black women to live in for just about every indicator of livability, says the city’s Gender Equity Commission.

  5. a map comparing the sizes of several cities
    Maps

    The Commuting Principle That Shaped Urban History

    From ancient Rome to modern Atlanta, the shape of cities has been defined by the technologies that allow commuters to get to work in about 30 minutes.

×