Signs of the Times

Recently, Mortgage News Daily reported on the current status of home equity in this article: 15% of Low End Homes Remain Under Water.

Summarizing, 8 years after the bursting of the sub-prime bubble, 30% of mortgaged homes still have less than 20% equity and 10% have negative equity. This is not home-ownership. These people are just mortgage slaves in worse condition than if they were just renting.

 

From Housing Wire : “Housing advocates: REO-to-rental boom is bad for California renters, buyers”. That was the short version. Housing Wire also included the long version. This survey is the shot across the bow. Wall Street may celebrate rent increases as a form of housing recovery, but renters may not share these sentiments. I wonder how many renters appreciate being told it is “cheaper to buy” when they are struggling to come up with first and last months’ rent, plus a deposit.

 

tenants_rights

Image via tenant-rights.webnode.com

 

The Villains Identified

Single family homes, as an investment, have always been under the radar. They were owned and operated by small investors, usually in insignificant quantities. Now the villains are clearly identified in the report:

 

Blackstone, Colony, Waypoint and American Residential were the REO to Rental companies named by respondents most frequently as being problematic, though small investors were also cited often as having a negative impact on communities.

 

Rent Controls May be on Their Way, or Maybe Something Worse

Here are the recommendations made in the survey:

In light of the current crisis of displacement facing communities, CRC recommends:

 

  • Keeping Homeowners in their homes through enforcement of foreclosure prevention rules, and prohibiting corporations that seek to convert homes to REO to Rental from buying distressed loan pools or engaging in loan servicing.
  • Investigating whether REO to Rental and related practices have a discriminatory impact on homeowners, tenants and communities, in violation of fair housing and fair lending laws.
  • Creating and enforcing stronger tenant protections to prevent unnecessary displacement.
  • Promoting home-ownership by requiring public and private REO sales to prioritize first time home buyers, and requiring REO properties to be maintained to an FHA financeable standard.
  • Implementing the Community Reinvestment Act to downgrade problematic bank practices such as REO to Rental securitization and loans to purchase rent controlled buildings that result in displacement of existing residents as a necessary or foreseeable outcome.
  • FHA, the GSEs and banks prioritizing distressed loan sales to nonprofits and mission driven entities over investors.
  • Exploring the taxation of REO to Rental Securitizations and Tax Real Estate Investment Trusts (REITs) in order to help finance the affordable housing needed as a result of REO to Rental and real estate investment practices.
  • Providing greater transparency of REO to Rental deals and LLC entities to allow local governments and the pubic the ability to track the performance of investors to see if they are harming communities.

 

rent_control_distortionsAs with every form of price control, the negative effects of rent controls are well known – however, that won’t keep politicians from implementing them if it seems advantageous to their career prospects.

 

Beware of “Creative” Little People

Rent control may have nothing to do with limiting the amount of rent. Equally detrimental to rental operators may be ordinances, regulations, procedures, licensing or fees. The CRC (California Reinvestment Coalition) conducted this survey but it is a powerless organization with respect to actually enacting any laws. Small town politicians, on the other hand, can easily draft up something that can be a nightmare to comply with.

After the sub-prime boom ended, government invention prolonged the foreclosure process, dragging it out from months to years. It was not that long ago that a few municipalities in California almost approved the use of eminent domain to acquire underwater mortgages. It would be very easy for local politicians to use anti-Wall Street landlords as a platform for an election campaign.

 

What Would Trigger Rent Control?

Debt-to-income ratios, when applying for a mortgage, set a ceiling on how far a household can extend itself financially. Theoretically, a landlord also looks at rent-to-income ratios when reviewing a rental application. These ratios are sky high today. When one spends 40% or 50% of one’s gross income on housing, there is little room for anything else. I believe any localized economic setbacks, such as closing or relocation of a big employer would suffice to have the government step in, to help renters the same way it “helped” sub-prime borrowers.

 

governmentThe danger of getting help from the government …

Cartoon by Luis Afonso

 

California, Nevada, Arizona, or … ?

Rent controls are nothing new. They exist primarily in cities where housing costs are high and supply is limited. While there hasn’t been much of an increase in direct rent control municipalities, rental control has been steadily increasing. In California, unlawful detainer actions or simple notices to vacate a premise can easily take months, creating the nightmare scenario of no rental income and no possession for the landlord. I think the point of origin of a rent control wildfire would likely be some unknown town in California which then spreads to high renter/owner communities.

If Blackstone were to hire me as an consultant, I would advise identifying potential hot spots and liquidate immediately, while the market is still accommodating.

 

 

 

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