Real Estate Gobbled Up By Investors Worries Inland Empire Congressman

A congressman who represents several Riverside County communities wants officials to look into whether the rise of investor owned properties in the area is creating an "unsustainable bubble that will wreak havoc when it bursts."

Representative Mark Takano (D-CA) released his "Rent on the Rise in Riverside" report today in which he claims one in three renters in Riverside County is shelling out more than 50 percent of their income on rent. He claims the number of people doing so in Riverside County is rising faster than any other Southern California county.

Takano, whose district includes the cities of Moreno Valley, Riverside and Perris, says his numbers were  gathered using data from the Census' American Community Survey. The numbers show Riverside County rents are rising faster than wages, according to Takano.

This has Takano worried. His report claims rents are partially rising because purchasing a home has become much more difficult for non-investors, who must finance their purchase and are subjected to tighter credit markets. Investors are more attractive to sellers because they are able to pay with cash, according to Takano.

The congressman also points to private equity firms and real estate investment trusts, including the Blackstone group, which he claims has purchased nearly 200,000 homes across the United States in communities hit hardest by the mortgage crisis, such as Riverside, Phoenix, Tampa, Sacramento, Atlanta, Los Angeles and Las Vegas.

Homes in these communities were the easiest to purchase at fire-sale prices, Takano asserts.

When asked for a response, Blackstone declined comment Thursday.

"According to a recent report by the Federal Reserve, this type of, 'investor activity may pose risks to local housing markets if investors have difficulties managing such large stocks of rental properties or fail to adequately maintain their homes. Such behavior could lower the quality of the neighborhoods in which investors own rental properties,'" Takano's report reads.

"Additionally, it's unclear how these new financial products could react to a downturn. If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole. Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall," the report continued.

Takano said he sent a letter today to the House Financial Services Committee requesting hearings on the rise of investor owned properties and the single-family rental backed securities saying, "The Financial Services Committee can help resolve unanswered questions about these new bonds and the impact they may have on the housing market. Proper oversight of new financial innovations is key to ensuring we don't go down the same road of the unchecked sub-prime mortgage backed security, and create an unsustainable bubble that will wreak havoc when it bursts."

Below is the full text of Takano's letter:

January 23, 2014

The Honorable Jeb Hensarling

Chairman

Committee on Financial Services

U.S. House of Representatives

2228 Rayburn House Office Building

Washington, DC 20515


The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

U.S. House of Representatives

2221 Rayburn House Office Building

Washington, DC 20515


Dear Chairman Hensarling and Ranking Member Waters:

I am writing to request that the House Financial Services Committee hold hearings to examine the recent rise of investor owned properties and the development of single family rental backed securities.

California's Inland Empire, which I represent, was hit particularly hard by the wave of foreclosures that occurred as a result of the financial crisis. Between 2008 and 2011, Riverside County saw 134,910 household foreclosures – a rate of one in every ten homes. During the height of the crisis, nearly one in five Inland Empire borrowers was behind on a home loan. Much of the debt from these mortgages was bundled, securitized, and put up for sale to investors. When the housing bubble finally burst there was a severe shock to the entire financial system. It is my belief that another disaster like this must be avoided at all costs.

After the flood of foreclosures, the Inland Empire housing market has seen record low prices and interest rates. Despite these strong incentives to buy, families and first-time homebuyers are finding it hard to purchase a home. It is increasingly the case that these homes are being purchased by investment companies looking to rent out the property, leaving the family purchaser of modest means shut out of the market. While Southern California provides a clear example of this new trend, it is not the only region that has seen a rise in investment owned properties. Similar stories are coming out of Florida, Arizona, Nevada, and Georgia.

Now, these same investors have developed a new financial product linked to rental properties, a single family rental backed security. Last October, Blackstone announced that it would sell $479 million in bonds backed by the rental income from some 3,207 properties. If the Blackstone bond is successful, other companies are expected to follow suit. These new products deserve thorough review before they become common place. Ratings agencies are at odds over how to assess the risk of these new bonds. Moody's Analytics gave the bonds in the highest traunch a Triple-A rating, but Fitch has refused to rate the bonds citing their limited track record and vulnerability due to the intricacy of maintenance expenses, capital expenditures, property tax fluctuation, and the potential for local municipality involvement. The Financial Services Committee can help resolve unanswered questions about these new bonds and the impact they may have on the housing market. Proper oversight of new financial innovations is key to ensuring we don't go down the same road of the unchecked sub-prime mortgage backed security, and create an unsustainable bubble that will wreak havoc when it bursts.

Again, I respectfully ask that the House Financial Services Committee hold hearings to examine the rise in investor owned rentals and the brand new securitization that has been borne out of it.

Sincerely,

Mark Takano

Reported by Patch editor Toni McAllister