How Does Income Inequality Happen? Here's One Way.

(I learned of this from friends safely tucked away in Geneva, Switzerland. Thanks.)

Let's buy a bunch of these and turn them into bonds! Brilliant!

I'd heard reports that banks were buying up foreclosed homes but hadn't heard, until now, that hedge funds were deep into residential real estate:

Over the last year and a half, Wall Street hedge funds and private equity firms have quietly amassed an unprecedented rental empire, snapping up Queen Anne Victorians in Atlanta, brick-faced bungalows in Chicago, Spanish revivals in Phoenix. In total, these deep-pocketed investors have bought more than 200,000 cheap, mostly foreclosed houses in cities hardest hit by the economic meltdown.

Wall Street's foreclosure crisis, which began in late 2007 and forced more than 10 million people from their homes, has created a paradoxical problem. Millions of evicted Americans need a safe place to live, even as millions of vacant, bank-owned houses are blighting neighborhoods and spurring a rise in crime. Lucky for us, Wall Street has devised a solution: It's going to rent these foreclosed houses back to us. In the process, it's devised a new form of securitization that could cause this whole plan to blow up—again.

Since the buying frenzy began, no company has picked up more houses than the Blackstone Group, the largest private equity firm in the world. Using a subsidiary company, Invitation Homes, Blackstone has grabbed houses at foreclosure auctions, through local brokers, and in bulk purchases directly from banks the same way a regular person might stock up on toilet paper from Costco.

In one move, it bought 1,400 houses in Atlanta in a single day. As of November, Blackstone had spent $7.5 billion to buy 40,000 mostly foreclosed houses across the country. That's a spending rate of $100 million a week since October 2012. It recently announced plans to take the business international, beginning in foreclosure-ravaged Spain.

If this was it, it would be bad enough, but it's not. There's more:

But buying homes cheap and then waiting for them to appreciate in value isn't the only way Blackstone is making money on this deal. It wants your rental payment, too.

Wall Street's rental empire is entirely new. The single-family rental industry used to be the bailiwick of small-time mom-and-pop operations. But what makes this moment unprecedented is the financial alchemy that Blackstone added. In November, after many months of hype, Blackstone released history's first rated bond backed by securitized rental payments. And once investors tripped over themselves in a rush to get it, Blackstone's competitors announced that they, too, would develop similar securities as soon as possible.

Depending on whom you ask, the idea of bundling rental payments and selling them off to investors is either a natural evolution of the finance industry or a fire-breathing chimera.

"This is a new frontier," comments Ted Weinstein, a consultant in the real-estate-owned homes industry for 30 years. "It's something I never really would have dreamt of."
However, to anyone who went through the 2008 mortgage-backed-security crisis, this new territory will sound strangely familiar.

 For fun, read Michael Lewis' The Big Short to learn about how mortgage-backed securities and their evil twin, synthetic consolidated debt obligations, trashed our economy in 2008. Now they're into rental-backed securities? Holy crap. No need to regulate this industry!