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Please send more post-dated cheques. Thx. Bill

By Fred Bethune on Friday December 10, 2010 12:27 PM

Marcel Proust

This is Pete Campbell Bill Ackman. Like many hedge fund managers, Bill recently went through a bit of a rough patch. His attempted takeover of Target was voted down last year, and he reacted in a fashion quite unbecoming of Wall Street's most impeccably coiffed manager. While announcing the failure of his takeover bid, Ackman burst into tears. Channelling Marcel Proust, he then stayed up all night writing a 5,000 word essay explaining that his tears were not for his own loss, but were rather an involuntary reaction to a flood of memories, images, and recollections of possible futures lost, all triggered by a particularly poignant JFK quote that he used in the speech. True stories.

Today Ackman has dried his eyes, set aside his hauntological theories, and is back with a new asset class to get rich on: SFHRPs. What's that, you ask? Is it like Treasury coupon STRIPS, or is it more like an MBS CDO?

Well, it's actually more like this: picture the home you live in now, but owned by a twat in a bespoke suit.

It's the Single Family Home Rental Property!

Now I'll take any excuse to post up pictures of a mane like that, but I think that this story is actually related to a couple of themes that surface here from time to time.

Brian M. recently commented that suburban living, despite its drawbacks, still represented an improvement over the days of slumlords and filthy tenements. Does that still hold though, when that piece of the American pie is no longer free and clear, or even mortgaged, but must instead be rented from a ruling class that has given up on productive investment and returned to the most basic rentier behaviour?

Conversely, Father Smith is, to his credit, a great proponent of renting. But for everyone to rent, someone must own, and a population of renters-for-life makes for easy prey.

I'm a bit more agnostic about buying vs. renting, houses vs. apartments, etc. I prefer whichever puts a roof over the people's heads at the lowest percentage of income. The good thing about having both rental and purchasing markets is that it puts a limit on price gouging. One can always sell the home and start renting, or vice-versa.

This dynamic should ensure that landlords can't extract excessive rent from tenants who could always buy for themselves. But if there is no excess return to be had, no alpha to be generated, then why is Bill Ackman sniffing around?

I think that I have this game figured out. It's all about credit score arbitrage. Say you take a family who, through no fault of their own, bought in too high on a bad mortgage and got foreclosed upon. Their credit score has been destroyed, and now they are shut out of owning property. But here's the thing: they still have the same cash flow. If you have a better credit score, you can buy a property, rent it to them, and extract a premium over what it would cost for them to buy the home because they cannot switch to buying.

Bill probably has the right idea. Extorting the credit score refugees could very well be a cash cow. This tool of class oppression isn't new, but I get the sense that it will be increasingly important. My own pet solution: the credit score jubilee. Think about it. Is it at all fair that regular working Joes are being punished for failing to foresee the previously unobserved positive correlations between local housing markets, or failing to research the effect of securitized lending on home price appreciation? Surely, if "no one could see this coming" then it hardly makes sense to punish the people who had the very least responsibility to foresee the subprime crisis.

I know, I know: the empire doesn't do ponies, "tough luck, bub" is how it is and how it always will be for the underclass -- but this man-made credit famine really ought to be exposed and opposed before these Goriots corner the market.

Comments (11)

I think that I have this game figured out. It's all about credit score arbitrage. Say you take a family who, through no fault of their own, bought in too high on a bad mortgage and got foreclosed upon. Their credit score has been destroyed, and now they are shut out of owning property. But here's the thing: they still have the same cash flow. If you have a better credit score, you can buy a property, rent it to them, and extract a premium over what it would cost for them to buy the home because they cannot switch to buying.

If they were foreclosed on, but still have the same cash flow, it means they intentionally stopped paying their mortgage. If their cash flow didn't change, why would their house have been foreclosed on, except that they just chose to stop paying? While that may be a clever or defensible move, I don't see why lenders wouldn't knock their credit score down for it. After all, the credit score is to say "How much money can we lend these people and expect to get back?"

What's more likely is that a two-income family bought a house, and one of the income earners lost their job, leading to a foreclosure. (That also leads to a lower credit score, obviously.)

As to what this guy is up to, I figure he's looking to buy a bunch of empty, foreclosed, or half-completed houses in very distressed markets, at fire sale prices, and make a profit renting them.

Al Schumann:

The hypothetical foreclosed-on family might be groaning under an ARM or added expenses, e.g. medical, which made keeping pace with the payments too much to handle. The cash flow would stay the same, but the drain on it would increase

The credit score arbitrage reflects greater investment security than vulture capitalism.

senecal:

So, this is a plan to lure the unlucky but still credit-worthy former home owners back to their former homes, only now as renters, minus any equity they may have accumulated formerly as owners. Sounds Dickensian, ok, but realize, Ackman also has to reach some kind of deal with the mortgage holders (which could be tricky, even locating the real ones) convincing them that his slice is only a small percentage of the paper loss he's relieving them of.

FB:

Yeah, someone who took out an ARM is what I had in mind there. And historically, which came first, the mortgage resets or the unemployment?

You can still relax those assumptions. Forget the ARM for a minute and consider say a 'prudent homebuyer' standard. Take a person who bought a home that was within their means, financed by a traditional mortgage and based on the assumption that home prices would at least retain their value. The person figured that if one income was lost, he would be able to sell the home and buy another one. When home prices crashed he got stuck with the house and defaulted. I'd say that also fits the description of "no fault of their own"

The bottom line is that if you have a single family home that someone can rent for the excessive price necessary to generate hedge fund returns, they should also be able to buy a comparable home for less. The only reason that they can't is credit rationing, and that's a function of the credit score hangover.

op:

great post fb

MJS:

What OP said, FB. Juicy stuff. All the right questions asked, implicitly at least. So many considerations crowd to mind that I'll have to save 'em for a post -- too much thinking needed for a comment.

Count on it: The suburbs are going to be the new Inner City, complete with the increasing transfer of our racial-slavery warehousees from latter to former.

It's already a live process, and the coming steepening of fuel costs will greatly amplify it.

Al Schumann:

I particularly like the post's emphasis on credit rationing and credit arbitrage. I don't think the vicious "nudge" they serve up gets enough exposure.

It's not just his hair that is magnificent. That man has got a pretty mouth too.

Just sayin'...

Al Schumann:

A real pretty mouth, bless his heart.

gluelicker:

Just to complete the picture. After Bill's been sodomized in the backwoods, his avengers can strike their final blow. They can go to their local polling place and express their contempt for these predatory Wall Street elitists by casting a vote for their favorite Tea Party blowhard, who groks the secret connections between these unpatriotic sons-of-Rothschild and undeserving minorities (while on the side, tag-teams with Obama to eliminate the estate tax). Then, Chip Berlet can sound the alarm about incipient fascism, and hand-wringingly endorse "critical support" for finance capital-backed DP'ers. Loyal but conflicted readers of Alex Cockburn and Josh Frank will then ponderously agonize about tactical alliances between left populists and paleo-cons. And round and round we go.

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