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>Blackstone has bundled the rental payments from more than 3,200 single-family houses, offering investors its mortgages on the underlying properties as collater

>Blackstone has bundled the rental payments from more than 3,200 single-family houses, offering investors its mortgages on the underlying properties as collateral. This reminds me of the stuff that caused the crisis of 2008 ... however, I am not that well-versed in these kinds of financial products. Could anyone explain a bit more to me how this works? They pool the collected rent and then they create a bond with that? How? >Invitation Homes has described its strategy as "a bet on America." Murrica1!

maxerickson 11y ago
A bond is a contract to make payments. So they list the properties in the contract (this might not be exactly correct, but I guess it is a good enough model of what is going on). The problems in 2008 weren't directly a result of such securitization, the problem was that the risk of the underlying mortgages was not at all correctly estimated, and the way the bonds were traded depended on the pretense that the risk had been estimated nearly perfectly. These bonds can do things like list historical occupancy and on time payment rates of the properties, so they don't need to be anywhere as murky as bonds backed by mortgages that were handed out to whoever walked in the door.
- crdoconnor 11y ago
  >The problems in 2008 weren't directly a result of such securitization, the problem was that the risk of the underlying mortgages was not at all correctly estimated, and the way the bonds were traded depended on the pretense that the risk had been estimated nearly perfectly. The problems in 2008 weren't caused by accidental risk mis-pricing. It was entirely intentional. The securitizers paid the rating agencies for their opinion and the ratings agencies duly delivered an opinion that the securitizers wanted: AAA. That meant all of the shit could get stuffed into things like retirement portfolios owned by suckers like you and me. Was anybody punished for this? No. Will it happen again? Most likely. >These bonds can do things like list historical occupancy and on time payment rates of the properties, so they don't need to be anywhere as murky as bonds backed by mortgages that were handed out to whoever walked in the door. The money question is what score did the ratings agencies give these bonds.
  - yummyfajitas 11y ago
    The AAA rating for the senior tranches was perfectly correct assuming the risk of the underlying mortgages was properly estimated. The bulk of the buyers of the AAA tranches were other banks, and the reason was satisfying requirements for capital reserves. If bank A and B both have portfolios of mortgages worth $1B, they are treated as having $1B of risky assets and do not satisfy capitalization requirements. If they securitize the portfolios and sell each other a $700M senior tranch (while holding the equity tranches themselves), bank A and B are both considered to have $700M in cash-like reserves. This does reduce the risk caused by regional house price decreases which is why regulators wanted banks to do it. (No one, including regulators, expected a national/global drop in real estate values.) Also, the idea that the mispricing was intentional is silly. The issuing banks mostly held onto the equity tranches and suffered as a result - not the actions one would take if you knew things would tank.
    - wheaties 11y ago
      No, they sold those too. Look up CDO and CDO squared to see where those things went. That said, super senior subprime mortgage binds did exceptionally well as investments. It was the BBB stuff which had near 100% loss.
      - yummyfajitas 11y ago
        CDO^2 was a minor part of the market, and again is also a valid thing to do provided the assumptions are right. According to the "evil actor/information assymmetry" theory, the people closest to the mortgage issuance should have been the ones who survived the crisis best (since their information was the most accurate). In contrast, the dumb investment banks back in NY should have been hurt the worst. That's the exact opposite of what happened.
        crdoconnor 11y ago
        >According to the "evil actor/information assymmetry" theory, the people closest to the mortgage issuance Several thousand appraisers actually wrote a letter to Congress complaining that they were being pressured to inflate their home appraisals or face blacklisting. This went back to 1999.
crdoconnor 11y ago
>This reminds me of the stuff that caused the crisis of 2008 It's exactly like that, yes. This is another form of CDO. In this case it sounds rather like Blackstone are trying to offload their risk (renters not paying on time, etc.) on to hapless investors but still getting a cut of the check.
pas 11y ago
This is the stuff that caused the 2008 crisis: http://econlog.econlib.org/archives/2013/05/conditional_ins.html http://econlog.econlib.org/archives/2013/05/conditional_ins.... that's how systemic risk looks like. Innocent.

maxerickson 11y ago

A bond is a contract to make payments. So they list the properties in the contract (this might not be exactly correct, but I guess it is a good enough model of what is going on). The problems in 2008 weren't directly a result of such securitization, the problem was that the risk of the underlying mortgages was not at all correctly estimated, and the way the bonds were traded depended on the pretense that the risk had been estimated nearly perfectly. These bonds can do things like list historical occupancy and on time payment rates of the properties, so they don't need to be anywhere as murky as bonds backed by mortgages that were handed out to whoever walked in the door.

crdoconnor 11y ago
>The problems in 2008 weren't directly a result of such securitization, the problem was that the risk of the underlying mortgages was not at all correctly estimated, and the way the bonds were traded depended on the pretense that the risk had been estimated nearly perfectly. The problems in 2008 weren't caused by accidental risk mis-pricing. It was entirely intentional. The securitizers paid the rating agencies for their opinion and the ratings agencies duly delivered an opinion that the securitizers wanted: AAA. That meant all of the shit could get stuffed into things like retirement portfolios owned by suckers like you and me. Was anybody punished for this? No. Will it happen again? Most likely. >These bonds can do things like list historical occupancy and on time payment rates of the properties, so they don't need to be anywhere as murky as bonds backed by mortgages that were handed out to whoever walked in the door. The money question is what score did the ratings agencies give these bonds.
- yummyfajitas 11y ago
  The AAA rating for the senior tranches was perfectly correct assuming the risk of the underlying mortgages was properly estimated. The bulk of the buyers of the AAA tranches were other banks, and the reason was satisfying requirements for capital reserves. If bank A and B both have portfolios of mortgages worth $1B, they are treated as having $1B of risky assets and do not satisfy capitalization requirements. If they securitize the portfolios and sell each other a $700M senior tranch (while holding the equity tranches themselves), bank A and B are both considered to have $700M in cash-like reserves. This does reduce the risk caused by regional house price decreases which is why regulators wanted banks to do it. (No one, including regulators, expected a national/global drop in real estate values.) Also, the idea that the mispricing was intentional is silly. The issuing banks mostly held onto the equity tranches and suffered as a result - not the actions one would take if you knew things would tank.
  - wheaties 11y ago
    No, they sold those too. Look up CDO and CDO squared to see where those things went. That said, super senior subprime mortgage binds did exceptionally well as investments. It was the BBB stuff which had near 100% loss.
    - yummyfajitas 11y ago
      CDO^2 was a minor part of the market, and again is also a valid thing to do provided the assumptions are right. According to the "evil actor/information assymmetry" theory, the people closest to the mortgage issuance should have been the ones who survived the crisis best (since their information was the most accurate). In contrast, the dumb investment banks back in NY should have been hurt the worst. That's the exact opposite of what happened.
      - crdoconnor 11y ago
        >According to the "evil actor/information assymmetry" theory, the people closest to the mortgage issuance Several thousand appraisers actually wrote a letter to Congress complaining that they were being pressured to inflate their home appraisals or face blacklisting. This went back to 1999.

crdoconnor 11y ago

>This reminds me of the stuff that caused the crisis of 2008 It's exactly like that, yes. This is another form of CDO. In this case it sounds rather like Blackstone are trying to offload their risk (renters not paying on time, etc.) on to hapless investors but still getting a cut of the check.

pas 11y ago

This is the stuff that caused the 2008 crisis: http://econlog.econlib.org/archives/2013/05/conditional_ins.html http://econlog.econlib.org/archives/2013/05/conditional_ins.... that's how systemic risk looks like. Innocent.