For People Who Care About Important Things

[Jake Kucheck]

We just started a new secondary market for rentals... for lack of a better term- SFRABS.

Details here.

[Jake Kucheck]

@Brandon Turner , I'm happy to provide some color commentary.

In essence, this is the start of a more sophisticated and nuanced version of the mortgage boom. In the early-mid 2000s, a lot of people received a lot of loans they should never have, and no one really bothered to ask why. We already knew that and it has been very well documented.

One of the big reasons why this was allowed to happen is that the companies providing these loans not only had no incentive to make good loans, they had plenty of incentive to make terrible loans (or, just as many loans as they could) because the entity they would sell their loans to (Bear Stearns, Lehman, etc) wanted not the yield from individual mortgages, but the ability to package lots of mortgages into some three letter abbreviation (MBS, CMO, CDO, etc) and trade that product as an asset backed security. The reason they could do this so easily is that AAA ratings were given to mortgage pools that were comprised of a significant amount of individual mortgages that would not have been rated anywhere near investment grade. If you think flipping houses is a lucrative business, think about how much you could make from flipping a CDO. I probably don't have to explain how much money was made on Wall Street throughout this process (and that's before we even get into the CDS frenzy that nearly caused AIG to go under).

This is all relevant now because a new type of asset backed security is close to coming to market- one that is based on the cash flows from rental income. If a rating agency gives a AAA rating to this type of ABS, it means a hell of a lot more liquidity for the large SFR aggregation companies out there (think Blackstone, ARPI, Silver Bay, American Homes 4 Rent). As Blackstone has already $6 Billion on 40,000 properties across the country, imagine how much more they could do when they don't have to rely on equity and credit lines, and can monetize their cash flows as well. It also means that really small time aggregators like myself and probably a few others on BP will have a larger pool of PE companies/hedge funds/REITs waiting to buy their inventory, since securitization will likely add credibility to the business model, attracting more firms (and more capital from existing firms). I wrote about the demand for this kind of liquidity back in May, here.

I can imagine that someone that is bearish on the securitization of rental income would say that we are doing subprime all over again... but I don't think that's the case. With subprime, lenders were making stupid loans to non-credit worthy borrowers and kicking the can down the road. In this brave new world of cash flow driven ABS, there is not just more accountability, but smarter people/companies on both sides of the trade. As bad as the publicly traded SFR REITS have been beat up by Wall Street since their IPOs for poor execution of their models and failure to make it into the black at their quarterly reports, I don't think anyone is going to make the argument that they are less competent than subprime borrowers.

Absent some massive scale fraud or global collapse of the US or worldwide economy (and again, we did both of these things with subprime, so its not entirely out of the question), I think that the securitization of rental cash flows will provide more liquidity to a market that could certainly use it, and have a net positive effect on the economy.