REO-to-Rent Articles

Investors Cooling on REO-to-Rent By Diana Olick Realty Check CNBC Pub. Friday June 7, 2013, at:

Also interesting, May 30, 2013 Joint Report on Federally Owned or Overseen Real Estate Owned Properties By U.S. Department of Housing and Urban Development Office of Inspector General and the Federal Housing Finance Agency Office of Inspector General, at:

The report says (at present) there are over 1.9 million mortgage borrowers over 90 days delinquent on their mortgage payments to Fannie and Freddie. I imagine there are also a very high number of defaulted mortgage notes held by banks and non GSE investors. I believe this substantial supply [Shadow Inventory] will depress, and keep a lid-on, home prices for quite awhile.

Over the past couple of years the REO-to-Rent institutional managers and their private equity money sources have created their own mini-bubble* which, it seems, has now priced the REO-to-Rent strategy out of the market. Now they will have to stop buying, try to digest their inventory, and try to figure out a way to earn the returns they promised their investors.

Watch out for the institutional REO-to-Rent IPO (hot potato) exit strategy.

* The Institutional Home Buying Bubble at: 

Do you wonder who’s picking-up the tab? Read on . . .

An Overview of the Federal Housing Administration Testimony Before the United States Senate Committee on Appropriations, Subcommittee on Transportation, Housing and Urban Development and Related Agencies. Testimony of The Honorable By David A. Montoya Inspector General Office of Inspector General U.S. Department of Housing and Urban Development - June 4, 2013, at: 

Housing Prices: Up Or Down? Recovery … Or Artificial Housing Bubble Which Is About to Pop? By Washington's Blog Global Research, June 05, 2013, at:

REFILE - Blackstone Eyes First ever REO to Rent Securitization By Adam Temkin - Reuters - March 13, 2013, at:

Landlord Blackstone Rushes To Capitalize On Housing Bubble By Launching First Ever REO-To-Rent Securitization Submitted by Tyler Durden on - 03/14/2013, at:

Also known as, The "Hot Potato". Flip that portfolio to the greater fool (but, as manager, maintain your property management fees).

IPO Preview: Colony American Homes - - Jun 4, 2013, see chart at:

June 5, 2013 Reuters "Colony American Homes (a division of Colony Capital) has postponed its IPO of 20 million shares due to 'market conditions'

From the article: "Rising interest rates and the poor performance of its competitors have made investors wary of stocks which pay high dividends," said John Fitzgibbon, founder of IPO rating website

An Early Investor Says Buy-to-Rent Housing Is Over By John Gittelsohn – pub. Bloomberg - June 06, 2013, at:

REO To Rental Fed Plan Would Do Little For Housing, Says Goldman Sachs By Loren Berlin - pub. Huffington Post - January 6, 2012, at:

REO-to-Rent (No Exit Strategy) The I.P.O. “Hot Potato”

What Could Possibly Go Wrong?

June 5, 2013 Reuters "Colony American Homes (a division of Colony Capital) has postponed its IPO of 20 million shares due to 'market conditions' "

From the article: "Rising interest rates and the poor performance of its competitors have made investors wary of stocks which pay high dividends," said John Fitzgibbon, founder of IPO rating website

Deutsche Bank Loan Signals Rental Home Bond Dreams*

By Heather Perlberg, Jody Shenn and John Gittelsohn – Bloomberg - Apr 19, 2013

Deutsche Bank AG is moving closer to turning U.S. rental home payments into bonds, which would be one of the first new types of securitization since the 2008 credit crisis, and pave the way for an infusion of capital.

A $100 million credit facility the bank arranged for investment firm Five Ten Capital LLC is backed by mortgages on rental houses, according to Chief Executive Officer Rob Bloemker. The structure includes separate loans on each property, helping address one concern raised by Moody’s Investors Service and Fitch Ratings, whose blessings could help sell the debt.

“This has huge implications for the securitization of these assets,” said Steve Blevit, a Sidley Austin LLP attorney in Los Angeles, who worked on the credit line on behalf of Deutsche Bank. “This is the first deal that anyone’s done in this space that has mortgages on each of the properties.”

Single-family rental properties have attracted more than $10 billion from investors including Blackstone Group LP, the world’s largest private-equity firm, which more than tripled its loan led by Deutsche Bank last month. The sale of asset-backed bonds to extract cash and boost returns with borrowed money may aid the transformation of a business once dominated by small investors, which according to Goldman Sachs Group Inc. may total $2.8 trillion, into a new asset class.

Additional Capital

Investors have rushed to acquire single-family properties to rent after home prices fell as much as 35 percent from the peak in 2006. Even with an expanding pool of buyers competing for properties, prices are still down 29 percent. Private equity firms and companies have sought to raise additional funds through borrowing from banks and initial public offerings.

Blackstone, which has invested more than $4 billion to buy 24,000 homes, expanded its Deutsche Bank-led loan in March to $2.1 billion from $600 million. Citigroup Inc. extended a $245 million line of credit in October to Waypoint Homes, an Oakland, California-based firm that owns more than 3,000 rental homes and said this month it planned to sell shares to the public.

“As people see that the single-family for-rent business is a long-term operation you’ll see more financing come into the sector,” Jonathan Gray, global head of real estate for Blackstone, said during an interview in Los Angeles. “I don’t know how it’ll end up with us in terms of the best way to finance it, but I do think securitization will start to be a source of financing.”

Renee Calabro, a Deutsche Bank spokeswoman, declined to comment.

Key Enablers

Securitizations, which involve pooling debt ranging from subprime mortgages to car loans and student debt, were blamed for fueling the housing bubble and subsequent financial crisis by making credit too easily available.

Standard & Poor’s, Moody’s and Fitch were “key enablers of the financial meltdown,” the Financial Crisis Inquiry Commission, created by Congress with a 10-member bipartisan board, said in its January 2011 report. “This crisis could not have happened without the rating agencies.”

The commission’s report also blamed the crisis on lenders’ irresponsible and sometimes fraudulent practices; regulators’ inattention and overconfidence; and the recklessness of borrowers and investors.

Still, reviving the market was a key part of the Federal Reserve’s response to the crisis as it sought to restart lending and boost asset prices.

Rating Comments

Ratings companies began commenting last year on how they would approach an assessment of securities backed by rental homes as private-equity firms accelerated their purchases.

Moody’s said in a report in January that the bonds would be safest if backed by mortgages on each property, rather than secured by a trust that owns a pool of houses. The credit grader said it wouldn’t offer its highest ratings to deals backed by equity structures and that adding mortgages on individual homes carries costs to create and register the loans.

Structures without mortgages would also limit Kroll Bond Rating Agency’s grades, according to analyst Glenn Costello.

If securities were backed by a pool of properties, a bankruptcy could lead to new debt on the homes that would disadvantage bondholders, the ratings companies have said.

That’s not the only concern that Fitch would have about potential deals that could limit its ratings, Dan Chambers, an analyst, said in a telephone interview. There’s also too little history on the skills of operators and data on the performance of the asset, he said.

With institutional investors buying large numbers of homes to rent out in some markets, “if they all go on at the same time, what’s that going to do with occupancies and rents?” he said. “I don’t think we’re going to be at AA for a long time.”

Systematic Basis

Deutsche Bank’s loan to Piedmont, California-based Five Ten “shows mortgages can be documented for each property on a low-cost basis,” Blevit said. “We figured out how to do it on a systematic basis so that it’s not expensive to do.”

Five Ten, which owns about 1,000 homes in seven states, including Florida and Arizona, plans to use its additional funding to buy, renovate and rent more houses, CEO Bloemker said.

“We felt having mortgages on all the properties would give us more flexibility in long term financing going forward,” Bloemker said in a telephone interview from Texas, where the firm is expanding along with Missouri. “It will give us access to better terms and lower rates as this market matures.”

Available financing has “really gone up” with most of the largest banks already offering loans, according to Silver Bay Realty Trust Corp. CEO David N. Miller, whose Minnetonka, Minnesota-based rental-home firm raised $245 million in an IPO in December. The shares rose 2 percent to $20 at 4:15 p.m. in New York extending the gain since the offering to 8.1 percent.

Near Future

Securitization is “certainly a possibility and a strong possibility over time, but I just don’t see it very much in the near future,” he said on a conference call last month.

Laurie S. Goodman, the Amherst Securities Group LP researcher who’s in the Fixed Income Analysts Society’s Hall of Fame, is also skeptical that the bond market will be a significant source of funding for firms renting out homes bought in foreclosures, known as real-estate owned, or REO.

“I don’t think securitization will be the best outlet for the REO-to-rental operators, at least in the near term,” she said in an e-mail. “The rating agencies will be very conservative, and don’t have a rental history they are comfortable with to forecast cash flows.”

Perfect Environment

Part of the reason securitizations may be slow to develop is that the companies involved aren’t sure whether they would want long- or short-term financing, which would affect the nature of their deals, Fitch’s Chambers said. Chris Hentemann, chief investment officer at hedge fund 400 Capital Management LLC, which oversees about $700 million, said it would be a natural progression for the securitized markets to replace bank lending.

Right now would be “the perfect environment for securitizations like this to come to market,” said Hentemann, a former head of global structured products at Bank of America Corp.’s securities unit through 2007. “There’s a lot of capital out there chasing higher yields, so the pricing has become much more normalized and it’s much more efficient for people to bring securitizations to market at good economic levels.”


'Shadow' home inventory could burden U.S. housing agencies, watchdogs say*

May 30, 2013 (Reuters) - Millions of U.S. homeowners are months behind on payments on government-backed mortgages, raising the risk federal housing agencies will end up facing the cost of managing a fresh flood of foreclosed homes, two government watchdogs said on Thursday.

Some 2.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report.

These loan delinquencies represent a "shadow inventory" of homes that could hit the market if foreclosed on, which would need be managed by government-run Fannie Mae or Freddie Mac, or some other federal housing agency. Once seized, these so-called real estate owned properties, or REOs, present significant financial challenges to these government agencies, the report said.

"Not only are current REO inventory levels elevated ... they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on," the report stated.

Since the housing market boom and bust, the government has employed billions of dollars to help borrowers manage high-cost loans and stabilize neighborhoods hit by foreclosures. Fannie Mae, Freddie Mac and HUD, which oversees the nation's mortgage insurer, the Federal Housing Administration, have been burdened with a glut of repossessed properties as a result of the housing market collapse.

Not only does the government need to cover maintenance costs, it also needs to hire real estate agents and contractors to rehabilitate and sell the homes. Finding cost-effective ways to deal with the supply poses a challenge, the report said.

"These networks require significant oversight to ensure that they perform effectively and that they mitigate both REO-related expenses and foreclosure's negative effects," the report stated.

The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own.

"Even a fraction of the shadow inventory falling into foreclosure could considerably swell ... inventories of REO properties," the report warned.

Fannie Mae, Freddie Mac and the Federal Housing Administration are backing about nine out of every ten new home loans. Fannie Mae and Freddie Mac owned about 158,000 REO properties at the end of September 2012, while HUD had about 37,000.

HUD, Fannie Mae and Freddie Mac have all taken steps to shrink their REO inventories, the report noted. Fannie Mae has already launched a pilot program to mitigate the costs of foreclosures, auctioning off some of its properties in bulk to investors with the intention to convert them into rentals



Directors Disappoint by What They Don't Do


" Directors Disappoint by What They Don’t Do" By Gretchen Morgenson – Pub. New York Times - May 11, 2013*

Ms. Morgenson:

I'm surprised you didn't include the classic example of ‘Directors Disappointing’ provided by the Board of Directors at Countrywide Financial.

Shouldn't that board have been suspicious of, and more reluctant to approve, Angelo Mozilo's serial changes to his optioned stock liquidation program? Should that board of directors have been less willing to approve and extend the significant corporate 'stock buyback' program, contemporaneous to Mozilo's option sales? And, should that board have recognized it was a buyback program which gave artificial price support to Mozilo's significant sales of his optioned stock? Should the board of directors at Countrywide have been more curious about Countrywide’s mortgage sales (origination) procedures, the risks of mortgage application falsification, and the non-verification of assets and income of mortgage applicants? Should the Countrywide Board of Directors have questioned, and perhaps even requested, the independent audit details for the quality classifications of Countrywide's mortgage investment portfolio. Should the Countrywide Board of Directors have wondered why Stanford Kurland, Angelo Mozilo's heir apparent, abruptly resigned from Countrywide in 2006? (1) An interesting point, Stanford Kurland is a long time friend (and confidant?) of BackRock CEO, Laurence Fink.

It seems Countrywide board members like Kathleen Brown(2) and Henry Cisneros(3) should have had the financial sophistication to be more concerned about what was happening, in general, in the mortgage market, and, in specific, more concerned about what was happening at Countrywide Financial.(4)

Maybe, that board of directors subscribed to former Citibank CEO, Chuck Prince’s business theory. You may recall what Chuck Prince said about the mortgage bubble, ". . . as long as the music is playing, you've got to get up and dance".(5)

But, I think it’s appropriate to ask, should a board of directors be dancing, or should it be calling the tune?


1. “Kurland left his job as president and chief operating officer of Countrywide in September 2006, just as the housing market began its descent. The previous year, in 2005, he was paid $19.2 million and made an additional $13.7 million by exercising stock options, according to Reuters. See, “Former Countrywide No. 2 Sees Opportunities in Troubled Mortgages” By Matthew Padilla - pub. Orange County Register - June 10, 2008 - at:

Also see: “Inside the Trillionaires’ Club at BlackRock” By Shawn Tully – CNNMoney - August 17, 2009 From “Lesson No 2 When Investments Get Complex, Do Your Homework” at:

In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.

And see, "Those Valley Boys" at:

2. Kathleen Brown is the sister of, then State of California Attorney General, now California Governor, Jerry Brown. See: Kathleen Brown, Wikipedia:

3. Henry Cisneros was the Director of The Department of Housing and Urban Development (HUD) during Clinton's first term as president. In that position he was very instrumental in the implementation of Clinton’s Affordable Housing Initiative which is credited with ‘putting enforcement teeth” into Jimmy Carter’s Community Reinvestment Act. see Henry Cisneros, Wikipedia:

4. “The Tragedy of Countrywide Financial and Angelo Mozilo” By Gary Jacobson pub. Muckety June 28, 2008, at:

5. Citigroup Chief Still Bullish on Buy-Outs By Michoyo Nakimoto and David Wighton - pub. Financial Times - July 9,2007. See the quote, at:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

Additional background: Shortly after being inaugurated into his second term as U.S. President, Bill Clinton discusses his Affordable Housing Initiative in a PBS NewsHour interview. “Bill Clinton: Laying the Foundation for The House of Cards”:

The True Origins of The Financial Crisis

The True Origins of This Financial Crisis: As opposed to a desperate liberal legend By Peter J. Wallison - pub. 2/06/09

This morning I discovered the above referenced article, I thought you might find it interesting.

Peter Wallison was a member of the congressionally appointed Financial Crisis Inquiry Commission (FCIC). The Commission was charged with the responsibility of studying and reporting on the causes of the current financial crisis, which began in late 2006 with the significant deterioration of home prices and mortgage investments.

The Financial Crisis Inquiry Commission issued it’s "Majority Opinion on the Causes of the Financial Crisis" on January 27, 2011.* The FCIC’s opinion included a dissenting opinion written by Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas . And, Peter Wallison wrote a separate dissenting opinion which was also included in the FCIC report. On May 16, 2011, Mr. Wallison published a more detailed “Dissent from The Majority Opinion of the Financial Crisis Inquiry Commission” see, at: .

Watch a brief video-clip taken from a June 2, 2010 FCIC hearing during which Peter Wallison questions Warren Buffett about Buffett's thoughts on what caused the financial crisis.
If you would like to see other resources which provide insight into "The Role of the Government Sponsored Enterprises and Federal Housing Policy in the Financial Crisis", click:
* "The Dodd-Frank Wall Street Reform and Consumer Protection Act" was signed into law on July 21, 2010 – five months and six days before the FCIC issued its “Majority Opinion”. Please draw your own conclusions as to why The Dodd-Frank Act was ‘crafted’ before the FCIC issued its findings.

What Happens When the Biggest Buyer Leaves the Market?

Investor frenzy over housing has peaked By Nin-Hai Tseng, Fortune / - April 5, 2013 at:

Rents for Single-Family Home Flatten as Investors Saturate the Rental Market By Jed Kolko, Chief Economist at Trulia - pub. 4/04/2013, at:

Review Chapter 1, The Institutional Home Buying Bubble at:

Performance Enhancement = Juiced-up . . . Housing Prices are on a Tear

Housing on a Sugar High? In an April 8, 2013 MSN video interview with former Fannie Mae Chief Credit Officer, Ed Pinto, Mr. Pinto explains the fundamentals of the housing market and how the "wealth effect" fueled by artificially low interest rates and abundant borrowed money, rather than increasing incomes, is effecting housing prices (and other asset prices). 

Housing Market Accelerates: Home Prices Jump 9.3% in Quickest Rise Since 2006; Gains Seen Across Country By Nick Timiraos Wall Street Journal 4/30/2013, at:

Home Prices Growing At Pre-Bubble Rates On Bernanke Boost, But Big Shadow Inventory Lurks By Agustino Fontevecchia - pub. 4/30/2013, at:

Peter Schiff and The Coming Housing Collapse: The Fed, Instead Of Lehman, Owns The Mortgage Market By Agustino Fontevecchia - pub. - 3/5/2013, at:

In a February 12, 2012 video interview, Warren Buffett, “The Oracle of Omaha” comments on The Institutional Home Buying Bubble, ‘bulk’ single family home property management, record low interest rates, home price values and risks, and suggests that buying a home is a good way to “short-the-dollar”.


[Note: The small red cross, above 2012 on the horizontal axis on the graph below is approximately February of 2012, the time that Warren Buffett made his comments in the above linked interview.] 

The Institutional Home Buying Bubble at:

This Time It's Different?

April 30, 2013 - A few days ago I was watching a video-clip of former Fannie Mae Chief Credit Officer, Ed Pinto, discussing the Fed’s artificially induced low interest rates, his views on their effect on home prices, and his views on their effect on what many are calling the current housing market ‘recovery”.
At approximately two-minutes-and-thirty-seconds into the video interview, Mr. Pinto says, ‘These low interest rates are starting to make people buy houses the way they buy automobiles.’ “They don’t ask what’s the price? They ask what’s the monthly payment?*.

Mr. Pinto’s comparison of the economics of home buying, to economics to automobile buying, ignited my curiosity. I began to wonder . . . how are automobile prices, auto financing, and auto sales reacting to this artificially low interest rate environment? This morning I did a key words search on: ‘low interest rates auto sales’.

My search yielded several good and informative articles, one of the articles seemed to survey current conditions more broadly than the other articles. I’ve copied and pasted that article below:

March 2013 Car Sales: Juiced By Low-Interest Loans?*

Spring is finally here, and the jobs picture is brightening--but the biggest factor in rising car sales could be easy money.

March 2013 car sales are being reported today, and for the most part, all the brands sold in the U.S. are posting moderate gains over the same period a year ago. Subaru and BMW are up strongly at 13 percent each, while the domestics are showing single-digit gains. Only the South Korean brands so far are down, with Kia posting the least encouraging numbers of the news cycle.

In all, the seasonally adjusted annual rate (SAAR) in March is expected to reach 15.3 million units, according to a joint survey from J.D. Power and Associates and LMC Automotive. That would be flat against February's numbers, despite the average retail price of a new car going up 3 percent, to $28,504.

The retail sales SAAR of 12.1 million units should remain unchanged as well.

What's at the root of continued healthy sales? J.D. Power and Associates senior vice president of global automotive operations John Humphrey says that the steady upward pressure of price has pushed buyers into longer-term loans, but says shoppers also are leasing more, as well as capitalizing on low interest rates.'s average for new 48-month auto loans currently sits at 2.44 percent, near historic lows.

"While longer loan terms have traditionally been a cause for concern to the industry due to the risk of purchase cycle extension, it is not necessarily as daunting as it may seem." said Humphrey. "The longer loans are being offset by more leasing and the low interest environment, which means that consumers are able to put more of their monthly payment towards their loan principal rather than interest fees."

The financial climate's led Power partners LMC Automotive to hold its forecast for total 2013 light vehicle sales in the U.S. to 15.3 million units, with the retail sales forecast holding at 12.5 million units.

"We expect the economic environment to improve throughout 2013, as the likelihood of a dark cloud slowing the recovery pace diminishes," said Jeff Schuster, senior vice president of forecasting at LMC Automotive. "Consumers do not appear phased by headwinds from Washington."

The automakers themselves are upbeat about prospects for the remainder of the year. GM predicts a SAAR of between 15 and 15.5 million units for the year; Chrysler estimates the March SAAR at 15.6 million vehicles, including retail and fleet.

Do you think lessors are actually increasing their up-front lease contract payments? At what point - in a 48 month purchase or lease contract - does the obligor / purchaser have positive equity in the auto? Are those buyers who are using these methods to finance rapidly depreciating assets (automobiles) economically sophisticated enough to make decisions without close supervision?
(1) Actually, I don’t believe this is a recent phenomenon. I think, when buying a home, most people consider how much they can afford. or are willing to spend on their mortgage payment, then they buy as much house as that payment will allow. Every real estate sales person I’ve ever met encourages this approach to home buying and home affordability.

Lighter than Air, The Great Helium Debate

Congress finds it hard to let Federal Helium Program run out of gas
If you think this is an easy decision, read the article and the first “reader comment” (by Ferguson Foont). at: 
Imagine a world without balloons (VIDEO) Georgia Congressional Representative, Hank Johnson, on the helium debate. (Copied from C-SPAN.)
If you are interested in other subjects that Congressional Representative Hank Johnson has spoken about, watch  ‘Hank Johnson Guam Capsizing’

and, Congressman Hank Johnson on 'midgets'.

Some Thoughts on the Value of Gold

Reversion to the Mean

In an April 16, 2013 Wall Street Journal video interview, Mark Hulbert mentions that a recent academic study places gold’s fundamental value at approximately $800.00 per ounce.(1)

I did some key-words-searches to verify such a study exists, and I found the study to which Mr. Hulbert is referring. The study was conducted by a former commodities trader for Trust Company of the West, Claude Erb and a Finance Professor at Duke University, Campbell Harvey.(2) The study is based upon a time series of rates of inflation as compared to the fluctuations in value of the hedge against inflation (gold). The study puts the mean value of gold, over a long historical time series, at approximately $800.00 per ounce.

It’s also interesting to note, recent industry estimates for the average costs-of-production for one ounce of gold are approximately $600.00.(3) Which raises the question, what premium should a gold buyer pay, to buy the next ounce produced, of a commodity which costs $600.00 per ounce to produce? Or, expressed another way, what is the fair-market (competitive) profit one should expect for producing an ounce of gold?

And, MarketWatch pub. The Wall Street Journal 4/16/2013, at:
2. The Golden Dilemma By Claude Erb and Campbell Harvey Social Sciences Research Network (SSRN) first posted 6/6/12 at:
3. The Production Cost of Gold May Surprise You pub. 4/23/2013, at: