It didn’t take long. We now know by an interview with Maria Bartiromo today that these Wall Street innovators want to package up rental income and sell it as securities to unsuspecting investors. I didn’t have a clear view regarding the purpose of the 1 per cent buying real estate to rent when I wrote that the 1 per cent were buying up all the low end real estate.
But leave it to the 1 per cent to figure out a way to pawn off risk to everyone else so that they can try to manufacture a housing bubble on the backs of renters! The same risks that occurred when we had securitization of mortgage backed securities will likely accompany these securities, including lack of transparency, ratings companies rating these securities, and the SEC and more inept government agencies policing these securities.
But the danger goes beyond the actual risk of the securities themselves. That was not covered by the best looking CNBC shill for the banks, Mrs Bartiromo. The danger is that the money generated by these securities will be plugged into even more purchasing of homes. And the fervent heat by which these buyers in the 1 per cent will buy could cause another housing bubble if the scale is big enough.
Think about it, you have hedge funds with 1 per cent money, buying rentals. They take the rental income and bundle them up into securities. The profits they get from the selling of the securities goes to buying more houses. Rinse and repeat.
This juggernaut could go on indefinitely until the house prices are driven up to levels that do not reflect the rents, and it will crash, or maybe it could be manipulated to raise rents. That would weaken the ability for the renter to pay back the rent and thus weaken the underlying rental securities. It could ruin main street as well!
The market will be dominated by the 1 per cent buying houses everywhere, and when that hot money decides to get out, and prices start declining again, what will be the end result? Or will this bubble last longer than the last bubble because the 1 per cent has the same interest in profiting from higher and higher rent?
This sounds like a really bad idea for main street, and the economists need to get their hands around the potential outcomes if this rent securitization comes to pass. This is the beginning of a big attack upon main street, who apparently does not know what a mortgage backed security even is. Talk about a bunch of sitting ducks.
Tell your friends that this boneheaded idea is bad. Spread the word. The investment banks tried to securitize the timing of death in insurance policies, and it never went anywhere. The investment banks, namely ING, tried to get perpetual loans to take hold in Australia until the press went against ING.
So this securitization of rents can be stopped, but only if people speak out loudly. Otherwise, the housing market will be subject to potentially massive manipulation beyond what we are now seeing. This could be a trap for main street beyond any greedy idea Wall Street has ever contemplated!
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