The man often referred to as the godfather of the mortgage-backed security said a new breed of bonds backed by investor-owned rental properties carry no risk. The statement came just after Lewis Ranieri expressed regret that the mortgage-backed securities market imploded the way it did, bringing the U.S. economy along with it.
According to Ranieri, the rental bonds are different “because it’s almost done like the European covered bonds, because there’s enough cash flow and they can replace cash flow to pay the bonds,” he said in an interview.
The chairman and founding partner of New York-based Ranieri Partners was an early advocate of the so-called REO-to-Rent (Real Estate Owned-to-Rent) play. Over the last three years, institutional investors have poured as much as $20 billion into purchasing foreclosed properties, which they have turned around as single-family rental homes.
Blackstone, the largest player in the group, is about to offer a new security backed by these homes. Through its Invitation Homes program, Blackstone owns nearly 40,000 properties, according to recent statements from its chairman, Steve Schwarzman. Securitizing the rental stream of these homes is the next step for the new asset class.
(Read more: From ashes of a housing crisis, a new type of bond)
“It obviously works. It’s one more version of taking the cash flows off of a series of hard assets and securitizing them. It works, and so I think they’re good securities and you’ll see more of them,” said Ranieri, who believes there will be plenty of demand for the bonds.
He did admit that the private label mortgage-backed securities market needs resuscitation. One of his firms, Shellpoint Partners, was set to offer a major jumbo mortgage securitization deal last month. It first delayed the deal, cutting its size, and then cancelled it altogether. Ranieri said investor demand just isn’t there.
“The RMBS (residential mortgage-backed security) market is still very fragile,” he said. “The damage that was done to it [has] not anywhere near been repaired. In fact, there’s only a handful of buyers for the Triple-A tranches, where there used to be literally hundreds and hundreds. It’s not dead, but it’s certainly on oxygen.”
(Read more: US extends backing for higher-priced mortgages)
Mortgage credit remains extremely tight, as bankers are facing new mortgage regulations and lingering litigation left over from the mortgage crash. Federal regulators continue to implement new restrictions designed to protect borrowers, but bankers say the pendulum has swung too far.
“Enough is enough,” said David Stevens, CEO of the Mortgage Bankers Association, to an audience of more than 1,000 at the MBA’s 100th annual convention in Washington, DC. “The overcorrection and conflicting policies that continue to come out of Washington are threatening not just this market, but they are threatening the recovery.”