Here we go again…

In a year where Wall Street would like us to focus on stock market returns, we’d like to ask you to pause and look closely at a nifty little investment strategy that is suddenly not so little – and one that could be the seed to our next financial crisis.

For context, let’s look back at the early 2000’s when Wall Street was securitizing sub-prime mortgage loans and slicing them up into pieces and selling them to the public. At the time, not many people paid attention to CMO’s (collateralized mortgage obligations), but many remember that they offered juicy returns and took the world of finance by storm. Of course these sub-prime CMOs were stamped as AAA by credit rating agencies and subsequently bought up like hot cakes by everyone (including pension funds, retirement plans, hedge funds, and individual investors across the globe).

Of course you will remember that the chickens came home to roost in 2007 when sub-prime borrowers started defaulting en masse on their loans. CMOs turned out to be anything but AAA and wreaked havoc on the entire global financial system throughout the financial crisis.

Well… here we go again. Today, Wall Street is collateralizing a new type of asset: Think of this as CMOs version 2.0.

Since the housing bottom in 2011 the firm Blackstone has spent billions of dollars buying roughly 40,000 homes across the country! Is their intent to flip them? No. In fact, they are going to rent them out.  Blackstone is now the country’s number 1 landlord. And they are not alone…

But Wall Street owning rental homes is only half the story. The other half is that they are going to collateralize the rent payments, and sell the collateralized rent obligations off to the public! So we rather than CMOs, we are now seeing a world of CROs coming our way.

Look closely: Blackstone recently finished putting together a deal where they will securitize the rent payments of roughly 3,200 homes (70% of which are in AZ and CA) for $479 million. Think of this as Blackstone’s exit strategy from the recovery in housing…  (Here is a Bloomberg article with more of the details).

Of course, this is a new concept to most of us, as many people think of “Mom and Pop” rental properties – you know… the kind where someone buys an extra house and rents it out for the passive income. But Blackstone is different – this is institutionally owned and managed single family rental business.

What will be the end result of new asset class?  Only time will tell. But for now, it looks like Blackstone is reducing its exposure to real estate, and the general public is increasing it.

For more information on this topic, you can check out the following stories:

Here’s What Happens When Wall St Builds A Rental Empire

Rental Backed Securities Are Here To Stay

Blackstone Lures Investors to Home Rental Bonds (Video)

Categorized in: Blog

This post was written by Conscient Capital