FDL-

The last financial crisis can be blamed in large part on runaway securitization. Wall Street giants sliced and diced mortgage loans into bonds that they sold around the world. They claimed that they diversified the mortgage pools so that even a few defaults would not undermine the value of the securities, and they offered tranches of the bonds at a decent yield. As global demand increased for the securities, Wall Street pressured originators to close more and more loans, regardless of creditworthiness. This caused a bubble in prices. Moreover, financial innovators took the lower-tranche loans and cut them up into once-removed securities, making bets on bets on the housing market that were allegedly “safe”. We all know how this ended, and how the securitization bubble took a crash in housing prices and made it exponentially worse.

So now we’re poised to do that all over again.

As I’ve been chronicling, the housing market has been boosted by two events over the past several months, both of which have brought down supply and subsequently nudged up prices. First, banks and REO (real estate owned) holders have deliberately kept their properties off the market, restricting supply. Second and more important for the purposes of this post, institutional investors, including private equity firms and hedge funds, have begun to buy up foreclosed properties in large quantities at a discount. Over 40% of the foreclosed properties in Oakland have been purchased by investors of this type. In the near term, they plan to rent them out, creating what they believe is a fool-proof profit stream of rental payments. Eventually, I believe the plan is to flip the houses once prices rise more.

[FIRE DOG LAKE]

image: slate.com

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