VitalSigns posted:

This is genius. I mean, barring some impossible black-swan world-destroying event like people being unable to continue to afford sky-high housing costs if there's an ever-so-slight economic slowdown...the law of averages proves that the senior tranche can never default, it's a safer bet than the US government!

These C tranches though, ugh. But hey, we do have a lot of them left over, and if you think about it, the law of averages...

VitalSigns posted:

Well rents are high now, so it's not like during the bubble when you could drop back from your McMansion mortgage to a cheap rental.

If a family can't afford the rent, you evict them and hope they don't trash the place over however long that takes. If a lot of people can't afford the rent, you could see the same issue as with foreclosures: too many defaults, not enough resources to process all the evictions and get sherriffs out to all these homes, and suddenly you can't collect from huge swaths of properties.

Is the hedge fund free to lower rents to attract tenants if the market starts falling, or are they locked into it by the terms of the however they securitized it? That was a big problem in the mortgage crisis right, that banks often couldn't modify mortgages even when it was in their best interests because it was so hard to untangle the actual ownership of the note?

on the left posted:

Also, the coupons being paid are pitiful.

etalian posted:

Yeah the OP covered it, after the bubble piles of big money places like Blackrock bought foreclosures and short sales in places like california to flip into high priced rental properties.

Pretty much they hope to rent for a couple of years and hopefully selloff the houses during the next bubble cycle.

Also since the whole securization of mortages wasn't enough places like Blackrock and Deutschbank also created a new rental focused security to help feed their clever plan

on the left posted:

You don't understand how asset backed securities work. On a large enough scale, you can expect a certain return on rental income, due to law of averages. For attracting capital, you can divide up these cash inflows into senior (always get paid first) and junior (might get paid, but high returns) and have the underlying capital be the value of the house.

They aren't expecting much in terms of rental income, but using the rental income this way will allow the financial sector to hold on to the properties until they can be flipped at the peak of the market. Depending on what they expect the houses todo capital appreciation-wise, they can design the tranches and collateralization and cash flows to appeal to the different investors they have.

axeil posted:

That said, a security made up of monthly rent seems really iffy from a risk perspective. How the hell do you tranche that?

axeil posted:

To clarify, what I'm saying is, a traditional MBS is able to tranche because the stuff most likely to pre-pay is in the upper tranches while the stuff most likely to default is in the lower tranches. With loans you can determine this by FICO, LTV, etc. How the gently caress do you determine that for a rental?

on the left posted:

Cashflows from mortgages are processed monthly the same way rent would be. Also, it's not at all out of the capability of a competent real estate company to predict and model rental cashflows taking into account in vacancy.

on the left posted:

In an MBS, the senior tranches have to be protected from prepayment by the junior tranches.

Charles Davi posted:

What Is A Tranche?

Tranche is a French word that means slice. Every investment will convey certain rights in the cash flows produced by the investment to the investors. A tranche is a slice of those rights. Quite literally, each tranche represents a unique piece of the investment pie. So the term tranche connotes a fairly accurate indication of how the term is used in finance. And after all, it’s easier to tell investors that they’re buying tranches as opposed to “pits” or “buckets.”

Payment Waterfalls

A payment waterfall determines who gets paid what and when. That is, each dollar produced by an investment will be “pushed through” a payment waterfall and allocated according to the rules in the payment waterfall. For example, assume that there are 3 investors, A, B and C. They collectively invest in venture X. The payment waterfall for X is defined as follows: on the first of each month, A will be paid the lesser of (i) $100 and (ii) all of the cash flows produced by X in the previous month; B will be paid the lesser of (i) $100 and (ii) all of the cash flows produced by X in the previous month less any amounts paid to A; and C will be paid the lesser of (i) $100 and (ii) all of the cash flows produced by X in the previous month less any amounts paid to A and B.

Assume that in month 1, X produced $300 in cash. On the first day of month 2, the $300 will be pushed through the waterfall. So A will get $100; B will get $100; and C will get $100. Note that in the case of C, the two choices will produce equal amounts, so the term “lessor of” isn’t technically accurate. But assume that when the choice is between equal amounts, we simply pay that amount. Now assume that X produced $150 in month 1. On the first day of month 2, the $150 will be pushed through the waterfall. So A will get $100; B will get $50; and C will get $0. Because A is “first” to get paid, so long as X produces $100 per month, A is fully paid. B is fully paid so long as X produces $200 per month and C at $300 per month. So in this case, A’s tranche is said to be the least risky of the 3 tranches, with B and C being more risky in that order. Note that I am not using my technical definition of risk.

So why would C agree to be last in the pecking order? Well, one simple explanation is that C paid the least for his tranche. In another example we could have given C the right to any amounts left over each month after all other tranches are paid. This type of right is called a residual right. It is basically an equity stake. So in that case C would bear the risk that X’s cash flows will fall short in exchange for the right to acquire any excess cash flows produced by X. As is evident, the terms of the waterfall can be anything that the parties agree to. As such, we can cater the payment priorities to meet the specific desires of investors and distribute risks accordingly.

Mortgage Backed Securities And Prepayment Risk

Securitization is a fairly simple process to grasp in the abstract. In reality, turning thousands of mortgages into interest bearing notes is not a simple process. However, we can at least begin to understand the process by considering how a payment waterfall can be used to streamline the payments to investors. Viewed as a bond, a mortgage is a bond where the borrower, in this case the mortgagor, has a right to call the bond at any point in time. That is, at any point in time, a mortgagor can simply repay the full amount owed and terminate the lending agreement. Additionally, even if the mortgagor doesn’t pay the full amount owed, it is free to pay more than the amount obligated under the mortgage and allocate any additional amounts to the outstanding principal on the mortgage. For example, if A has a mortgage where A is obligated to make monthly payments of $100, A could pay $150 in a particular month, and request that the lender allocate the additional $50 to reduce the outstanding principal on the mortgage.

The typical practice for a mortgage is to require the mortgagor to make fixed payments over the life of the mortgage. So each payment will consist of an interest portion and a principal portion. The amount allocated to principal is predetermined and said to amortize over the life of the mortgage. And as mentioned above, any amount over the fixed amount can be allocated to principal at the option of the mortgagor. The risk that any given loan will pay an amount above the required fixed payment is called prepayment risk.

While getting your money back is usually a good thing, investors prefer to defer repayment to some future date in exchange for receiving more money than they invested. So getting all of their principal back today is not the most preferred outcome. They prefer to get their principal at maturity plus interest over the life of the agreement. For example, if all of the mortgages in a pool of mortgages that have been securitized prepay the full amount before the anticipated maturity date of the notes, then the investors will presumably be repaid, but will not receive the remaining interest payments over the anticipated life of the notes. If this prepayment en masse occurs on the second day of the life of the notes, it would defeat the purpose of the investment.

Prepayment Risk And Payment Waterfalls

We can use payment waterfalls to distribute prepayment risk into different tranches. In reality, this can become a mind numbingly complex endeavor. We propose one simple example to demonstrate how tranches can be used to redistribute complex risks.

Assume that our mortgage pool consists of N mortgages; the remaining principal on each mortgage is p_i; and the total remaining principal on the pool is P = p_1 + \cdots + p_N. Because each mortgage payment consists of some interest and some principal, each month, there will be a scheduled reduction in the outstanding total principal on the pool. Let S denote the scheduled reduction of P. That is, S is the sum of all of the principal portions of the fixed payments to be made in the pool. If there are any prepayments in the underlying mortgages, the actual reduction in P will exceed the scheduled reduction. Let A denote the actual reduction in P. The question now becomes, what do we do with A - S? That is, how do we distribute the amount by which the actual reduction in total principal exceeds the scheduled reduction? The simple answer, and the one considered here, is to push the entire prepayment amount onto one tranche, and reduce the outstanding principal on that tranche by that same amount.

For example, assume that a mortgage pool contains mortgages with a total $100 million principal outstanding and that $100 million worth of notes were issued against that pool. Further, assume that there are two tranches of notes: the A series and B series, with $50 million face value of each outstanding. For simplicity’s sake, assume the notes pay interest monthly. On any interest payment date, we could pay the B series the entire prepayment amount A - S and reduce the face value on the B series notes by A - S. For example, if on the first interest payment date, A - S = $10 million, then we would pay the $10 million to the B series note holders and reduce the face value on the B series to $40 million. Thus, any prepayment amount less than or equal to $50 million will be completely absorbed by the B series note holders. So the net effect is to cushion the A series against a certain amount of prepayment risk. The B series note holders will likely demand something in return for bearing this risk.

axeil posted:

I believe you have it the other way around. Senior tranches are exposed to prepayment risk in exchange for being protected from default risk. Junior tranches are exposed to default risk in exchange for being protected from prepayment risk.

on the left posted:

It depends on how the security is structured actually. The example that stood out in my mind used a z-tranche to protect senior tranches from prepayment.

axeil posted:

I take some issue with people saying that all MBS is bad no matter what. If you package an MBS right, that is you aren't fraudulently packing it full of poo poo, it's a perfectly legitimate investment vehicle.

That said, a security made up of monthly rent seems really iffy from a risk perspective. How the hell do you tranche that?

shrike82 posted:

I'm skeptical about the notion that small time landlords are better at landlording. It's like small retail shops versus big box retail - in a lot of cases, individual business owners can be just as sleazy.

Shifty Pony posted:

Cross-post from the politics thread:

HIPSTERS!!!!!!!!!!!

Essentially the people who made up the first wave of gentrification are being driven out of the cities by high prices.

axeil posted:

I take some issue with people saying that all MBS is bad no matter what. If you package an MBS right, that is you aren't fraudulently packing it full of poo poo, it's a perfectly legitimate investment vehicle.

That said, a security made up of monthly rent seems really iffy from a risk perspective. How the hell do you tranche that?

Buffer posted:

Then poo poo like mommy and daddy buying kiddo a condo for their stay at Harvard.

computer parts posted:

It's apparently quite common here to buy a house for your kid to live in for four years and then you sell it later. You only need ~30k for the down payment (which is about the price of a new car) and you can just get the rent off of the roommates the kid has. And at the end of it you can sell it for a reasonable profit (house prices here never really boomed or busted so the market's fairly stable).

Rah! posted:

VitalSigns posted:

Well, now I don't feel as terrible about the price I just agreed to pay for a first home in Austin. Like, today.

VitalSigns posted:

Well, now I don't feel as terrible about the price I just agreed to pay for a first home in Austin. Like, today.

I'm not too worried about it; I mean, if it all goes to hell there's always one way out

mike- posted:

San Francisco is a place you expect housing to work differently though. There are land constraints so land pricing is going to work differently than a place where you can just build outwards. I'm sure the house the hoarder lived in was basically worthless while the land accounted for most of the price. Modifying the restrictions on building height would help, but who knows how much.

mike- posted:

San Francisco is a place you expect housing to work differently though. There are land constraints so land pricing is going to work differently than a place where you can just build outwards. I'm sure the house the hoarder lived in was basically worthless while the land accounted for most of the price. Modifying the restrictions on building height would help, but who knows how much.

shrike82 posted:

What the gently caress is an alpha city

Berke Negri posted:

High rises rule anyways. Who is like "god, I hate this city of the world and just wish I lived in a town of short buildings."

Oh right, NIMBY assholes where their 'scenic views' are more important than affordable housing.

Rah! posted:

The reason it's so expensive is because there aren't nearly enough housing units for all the people who want to live here. Land constraints play a part, but the biggest contributor has been decades of lovely NIMBY policy restricting development. despite SF's small geographic size, there's more than enough space to provide enough housing for everyone. If SF had been allowed to densify and build upwards at a natural pace over the decades, prices wouldn't be quit as insane. Of course much of the city would have a different feel than it does now, as it would be a lot denser and have a lot more highrises. The land constraints on 3 sides and the fact that we will never be able to annex the towns to the south, means that the only way to build enough housing is to build upwards, and we haven't done nearly enough of that.

Runaktla posted:

I said this earlier in the thread buuuuuut... all this talk about anti-NIMBY and we could build more affordable housing by going upwards begs the question...

... you want this country to be overcrowded? I'm kind of glad that this stuff exists. Populate areas nearby but not IN it. Also quit having so many babies.

Runaktla posted:

I said this earlier in the thread buuuuuut... all this talk about anti-NIMBY and we could build more affordable housing by going upwards begs the question...

... you want this country to be overcrowded? I'm kind of glad that this stuff exists. Populate areas nearby but not IN it. Also quit having so many babies.

Runaktla posted:

I said this earlier in the thread buuuuuut... all this talk about anti-NIMBY and we could build more affordable housing by going upwards begs the question...

... you want this country to be overcrowded? I'm kind of glad that this stuff exists. Populate areas nearby but not IN it. Also quit having so many babies.

Runaktla posted:

I said this earlier in the thread buuuuuut... all this talk about anti-NIMBY and we could build more affordable housing by going upwards begs the question...

... you want this country to be overcrowded? I'm kind of glad that this stuff exists. Populate areas nearby but not IN it. Also quit having so many babies.

Cicero posted:

This makes zero sense. How does forcing families to live somewhere else help with overcrowding at a national scale?

Plus, living in higher density areas actually helps with overpopulation because people consume fewer resources (for example, relying more on walking/biking/public transport instead of cars).

Berke Negri posted:

This country isn't overpopulated at all. Maybe you do not realize how big the United States are.

computer parts posted:

Population in the US is more or less stable as is (whatever growth there is is primarily driven by immigration).

All that restrictions on high density housing do is drive up the price.

axeil posted:

Except this leads to massive suburban sprawl and you get poo poo like DC where buildings can't be higher than 6 stories so everything is getting pushed further and further out, increasing commute times and making people rely even more on the generally terrible metro system.

I'll take 40 story monstrosities all over the city than what DC currently has. Actually, this is the main reason I live in not-DC, they actually can build high rises here and my 4 years in high rises have been much, much better than the 1 year I lived in an actual house. The high rises don't try and steal your $8,000 security deposit that only exists so the landlord can't rent to "undesirables." They also generally don't have fraudulent electric meters that the power company tries to shut off, have functioning a/c and heating systems, and don't put reminders on your door to pay the rent like you're a loving 4 year-old.

Thought about naming and shaming the actual landlord here but that might be doxxing so I won't.

Runaktla posted:

Well I'm not read up on urban sprawl but isn't the cause of crap commutes forced centralization of business? Maybe the answer is businesses actively setting up shop outside of the city center all the drat time.