Posted by: Dirk | April 8, 2013

REO to rental – MBS 2.0?

Real estate owned and rented out produces incomes streams. Income streams can be securitized. Real estate in the US is cheap, some people think, so they buy. REO to rental is the next thing, according to Reuters:

Specialists say that once the purchased properties are rehabilitated with a tenant, they become good candidates for inclusion in the traditional securitization process.

Since last year, credit rating agencies have been working on possible criteria that would be used to rate a REO-to-rental securitization.

I can see credit rating agencies struggling to come up with models that create prices for those assets. The last crisis has been caused by people believing in ratings, then when models failed markets froze. Here is an article from NASDAQ today:

The world is not only becoming more integrated, but a great deal of our lives and the stuff we buy (houses, etc) are becoming securitized and need the services of Moody’s to give the public a sense of value and risk.  Securitization of rental properties are an up and coming industry that will require Moody’s services.  Blackstone and Deutsche Bank are introducing the first REO to rental securities and someone has to “rate” their risk.

Let me repeat: someone has to – quote unquote – rate their risk. That is how they put it on the NASDAQ website. Good luck with that. I sure hope that regulators are watching this. If this becomes the next bubble, it will be the next bust, and I think that there will be no more financial system any more if this happens because politicians actively chose to not protect the public. Twice.


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