Monday, December 2, 2013

Who Got the Money?

In 1987, the savings and loan scandal was about to hit full stride when the stock market crashed one fine October day. Something like $500 billion in wealth was lost, which my father didn't buy for a second. "If they lost $500 billion," he reasoned, "who got the money?"

I did a lot of mental gymnastics over this. Clearly, no one person, place, thing or entity got the money that was lost. Still, shareholders watched their investment values evaporate. If they lost all that money and no one got it, was it ever really there in the first place?

She had a pile of dough before the crash
Fast forward to 2007. The housing market tanked with the stock market following shortly thereafter as the world financial system failed big time. American homes lost, on average, 30% of their value. Lower-end homes lost even more. "Underwater," a term only real estate industry nerds once knew, entered the common vernacular.

How much money was lost by mostly middle-class homeowners? This Wall Street Journal post says $7.38 billion. Worse--because of leveraging--people lost 55% of their homes' value.

If they lost it, where did it go? Who got the money? If no one got it, is it fair to say that the money wasn't really lost, since it never really existed? After all, saying a house is worth $X, even if an appraiser is saying it, doesn't mean it really is, right?

Well, it turns out that someone did get the money.

For some time, I've been perplexed by the enormous number of cash sales in the real estate market. Yes, investors are buying up deals, and yes, Baby Boomers selling homes are using the equity to by downsized ones. But that didn't explain everything. I wrote about it a couple of times on The Rookie's Guide to the Real Estate Galaxy.

But my WTF moment really struck when I read an Inman News article noting that lenders were avoiding short sales and taking the foreclosure route instead. A short sale used to cause a 10%-20% hit, but foreclosures resulted in an average 35% writedown, so short sales were preferred. Moreover, state law changes and the MERS scandal added time and uncertainty. Why the switch in preference?

Turns out I far underestimated investor cash sales. The Blackstone Group, under the moniker Invitation Homes, has spent $7.5 billion buying up foreclosed homes across the U.S. through November. It bought 1,400 such homes in Atlanta in a single day! It's now the single largest owner of single-family homes in America, more fully explained in this Tomgram story by Lauras Gottediener.

Who is the Blackstone Group? It's among the largest private equity and investment banking groups in the world, owning names like Hilton Worldwide, the Michael's craft store chain and Biomet, to name a few. Who owns Blackstone? It's institutional owners are a who's who, not just of major mortgage lenders, but a Dalton Gang of names caught up in a rash of still-ongoing civil actions resulting from the housing and mortgage crisis: Bank of America, Citigroup, JP Morgan Chase, and Morgan Stanley, among others.

While Blackstone just released its first bond offering whose proceeds are paid by the renters of homes it has purchased--not securitized mortgages, mind you, but securitized rentals--its intent is to hold the properties until values return to their former levels. And Blackstone is just one of several such firms buying up foreclosed homes.

Someone did get the $500 billion lost in the 1987 crash. It was the investors who just waited around for stock prices to recover, which they did.

In 2013, it's not the investors, i.e. homeowners, who wait things out until prices recover. They're wiped out. Instead, it's the lenders who loaned the money in the first place and who, through the filter of Blackstone and others, are paying themselves back via the foreclosure process and then taking title to the homes, collecting rent from the people they foreclosed on, and ultimately recovering the entire lost wealth when prices recover.

That's who got the money. Theirs, and yours, too.

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