Letter to Jeb Hensarling, Chairman, Committee on Financial Services, and Maxine Waters, Ranking Member, Commitee on Financial Services - Congressional Hearings into Rental Backed Securities

Letter

January 23, 2014

The Honorable Jeb Hensarling
Chairman
Committee on Financial Services
U.S. House of Representatives
2228 Rayburn House Office Building
Washington, DC 20515

The Honorable Maxine Waters
Ranking Member
Committee on Financial Services
U.S. House of Representatives
2221 Rayburn House Office Building
Washington, DC 20515

Dear Chairman Hensarling and Ranking Member Waters:

I am writing to request that the House Financial Services Committee hold hearings to examine the recent rise of investor owned properties and the development of single family rental backed securities.

California's Inland Empire, which I represent, was hit particularly hard by the wave of foreclosures that occurred as a result of the financial crisis. Between 2008 and 2011, Riverside County saw 134,910 household foreclosures -- a rate of one in every ten homes. During the height of the crisis, nearly one in five Inland Empire borrowers was behind on a home loan. Much of the debt from these mortgages was bundled, securitized, and put up for sale to investors. When the housing bubble finally burst there was a severe shock to the entire financial system. It is my belief that another disaster like this must be avoided at all costs.

After the flood of foreclosures, the Inland Empire housing market has seen record low prices and interest rates. Despite these strong incentives to buy, families and first-time homebuyers are finding it hard to purchase a home. It is increasingly the case that these homes are being purchased by investment companies looking to rent out the property, leaving the family purchaser of modest means shut out of the market. While Southern California provides a clear example of this new trend, it is not the only region that has seen a rise in investment owned properties. Similar stories are coming out of Florida, Arizona, Nevada, and Georgia.

Now, these same investors have developed a new financial product linked to rental properties, a single family rental backed security. Last October, Blackstone announced that it would sell $479 million in bonds backed by the rental income from some 3,207 properties. If the Blackstone bond is successful, other companies are expected to follow suit. These new products deserve thorough review before they become common place. Ratings agencies are at odds over how to assess the risk of these new bonds. Moody's Analytics gave the bonds in the highest traunch a Triple-A rating, but Fitch has refused to rate the bonds citing their limited track record and vulnerability due to the intricacy of maintenance expenses, capital expenditures, property tax fluctuation, and the potential for local municipality involvement. The Financial Services Committee can help resolve unanswered questions about these new bonds and the impact they may have on the housing market. Proper oversight of new financial innovations is key to ensuring we don't go down the same road of the unchecked sub-prime mortgage backed security, and create an unsustainable bubble that will wreak havoc when it bursts.

Again, I respectfully ask that the House Financial Services Committee hold hearings to examine the rise in investor owned rentals and the brand new securitization that has been borne out of it.

Sincerely,
Mark Takano

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