I’m old enough to remember the collapse of Big Shitpile, but apparently the financial sector is not. One of the things that led to the massive bubble in housing prices was the willingness to gave any hominid, regardless of ability to repay the loan, a housing loan (which was compounded by having loans where you didn’t have to pay the principal for two or three years, at which point the monthly payments would skyrocket). What drove this was securitization of loans: housing loans would be bundled together, and then sold as a package*. Investors would receive the mortgage payments. As these became popular due to rating agencies’ chicanery, more loans were required, ultimately leading to ninja loans (“no income, no job and no assets”). Ultimately, the problem is that the person making the loan was unconcerned about the reliability of that loan: the goal become to generate loans and sell them (to suckers).

Since this worked so well for mortgages, imagine what it could do for rental properties (boldface mine):

The end result of a system that paid people to make loans, whether or not they could be repaid, was lots and lots of bad loans. When conditions turned downward in local real estate markets, people found it difficult to make their mortgage payments. When mortgages weren’t paid, investors in MBSs weren’t paid either. These investors — e.g. your pension fund—suffered major losses.

In a pre-MBS world, banks would have had a big incentive to keep people away from mortgages they couldn’t repay or once they got in trouble, to revise loan terms using common sense. But this isn’t possible in the shadowy world we live in: borrowers don’t even now who to talk to in order to get some relief. Unsurprisingly, many struggling borrowers, many of whom had been steered into bad loans, ended up being losing their homes and savings…

This time, however, they want to securitize rent rolls, by assembling a pool of rentals. The income stream from these rentals—meaning the combined rent checks of everyone in the pool– would be packaged into securities, which would be sold onto investors.

Think about what this means. Just as banks got out of the business of administering the mortgages they made, these securitized rental investors would replace conventional landlords. To make these deals profitable, lots and lots of mortgages would have to be combined. But, the investors won’t administer these rentals. Instead, a rental servicer would be responsible for collecting your rent and distributing it to all of the investors.

Now, what will happen when your toilet backs up or there is no heat? Your concerns would be addressed at a call center, perhaps in another country, provided you stay on hold long enough and are eventually switched to the right person.

Most likely, after leaving any number of messages, your rental servicer will schedule an appointment when you have to be at work. Or, will just allow you to get on with it, and sort the problem on your own.

Suppose you decide to hold back rent until the repairs are taken care of. The servicer may report you as delinquent in paying your rent. That may make it harder for you to find a new rental later—or finance the car you need to get to work—because this negative information would be reported to credit agencies.

Rent securitization is also a bad idea for the investor. There is no historical information on investment performance of securitized rent pools. What looks like a good deal on paper for your pension fund could lead to losses even after someone is evicted on your behalf. Do we really want to go down this road? Doesn’t the ongoing mortgage and foreclosure mess give us a good idea of how this movie ends?

What I don’t get is that rent securitization doesn’t solve any problems. At least, in principle, bundling loans together meant that you could be protected against some failures, and it could be used to provide some people at the edges opportunities to get loans that they otherwise wouldn’t have. But rent securitization doesn’t do anything except create problems. Leaving aside those issues listed above, it will drive up rental costs (you have to pay a landlord and a servicer). It won’t expand the numbers of rental properties–those are usually determined by factors other than loan origination (disproportionately, people who rent are confined to certain areas due to job location or low income; in those places, such as cities or zoned suburbs, rental properties are limited).

Intelligent Designer, this is stupid.

*Where the stupidity and fraud came in was at the rating agencies who would rate different parts of these pools according to supposed ability to avoid default. They then took the shittiest parts, and divided those, relabeling the least shitty part AA+. This is how one transforms junk into solid gold.