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Are U.S. Taxpayers Now on the Hook for Risky Wall Street Real Estate Backed Bonds?

by Michael Krieger, Liberty Blitzkrieg:

I’m fairly certain very few of you have heard of broker price opinions, or BPOs, but it’s something I think we should all become aware of given the influence of BPOs in the market for valuing residential real estate securitized bonds.

Before we get to that, let’s revisit a little contemporary American robber baron history. In the immediate aftermath of the U.S. financial crisis, financial oligarchs immediately got to work helping Main Street climb out of the Wall Street created ditch by buying foreclosed homes from hordes of newly destitute Americans and then renting them back to those same people.

I wrote many articles about this trend over the years, starting with the January 2013 piece, America Meet Your New Slumlord: Wall Street. Here’s an excerpt:

Well they aren’t really your “new” slumlord in the sense you have been debt slaves to the financials system for decades. What I really mean is that it is now becoming overt and literal. Literal because financiers are now the main players in the real estate market and are buying all the homes ordinary citizens were kicked out of over the past few years. Yep, we bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.

Fast forward a few years, and private equity is frantically packaging these real estate rental properties into bonds. In order to value the real estate collateral you need some sort of appraisal, but the normal process of actually looking at properties is seen as too costly and time consuming, so market players are cutting corners by using “broker price opinions,” or BPOs.

As Bloomberg reports, this practice is coming under increased scrutiny and for good reason:

U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.

Radian Group Inc.’s Green River Capital unit is one of the market participants that received a request for information from the Securities and Exchange Commission in March about broker price opinions, or BPOs, the company said in a regulatory filinglate Friday. Green River provides BPOs that are used to value real estate in securitizations.

The agency has been looking at whether BPOs were wrongly inflated, and similar letters were sent to other companies, potentially serving as a starting point for an industrywide probe, according to a person with knowledge of the matter. The person asked not to be identified because the matter is private.

Green River is one of several firms that provide BPOs to the units of private-equity firms and other investors who bought up hundreds of thousands of properties in cities across the U.S. after the housing bubble burst. Many of them focused on distressed homes whose owners were evicted during the Great Recession.

Never forget, what’s good for Wall Street is good for Main Street! Also, they hate us for our freedoms.

Broker price opinions are a cheaper and less-stringent way to evaluate what a property is worth than an appraisal. Property valuations are a sensitive subject in the housing industry because regulators said inflated appraisals contributed to the housing bubble a decade ago.

The biggest private-equity landlords, led by Blackstone Group LP’s Invitation Homes, have sold more than $15 billion in bonds since 2013 backed by some 120,000 rental homes, according to data from Morningstar, and many of those deals were valued using BPOs. One recent bond deal tied to Invitation Homes was backed by guarantees from U.S. taxpayers.

Please tell me this is a joke.

The BPOs are key elements in securitizations, determining basic figures such as how much rent to charge tenants, how much leverage and risk is embedded in the deal and how much investors could recover if the bonds go sour. Many of the securities were assigned AAA grades and sold off to investors such as pension funds.

Read More @ LibertyBlitzkrieg.com

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