Could This Lawsuit at The Blackstone Group L.P. Snowball Into an Avalanche?

Is this single-family rental lawsuit an isolated case, or the tip of an industry iceberg?

May 13, 2014 at 8:00AM

Source: Flickr / Peter Dutton.

"Do they have the capacity to properly maintain tens of thousands of units across the country?" -- Kevin Stein, associate director of the California Reinvestment Coalition, from the Los Angeles Times

Should huge corporate single-family home landlords be regulated? That question may seem silly at first glance. However, a recent Los Angeles Times article shines the spotlight on a lawsuit alleging unresponsive and insensitive behavior by the largest U.S. single-family rental landlord, Invitation Homes. This unit of private equity giant Blackstone Group (NYSE:BX) owns 44,000 homes in 14 different housing markets. The lawsuit involves just one family who leased a home in Sun Valley, California.

However, it could easily become a catalyst for legislators and regulators to begin a debate about the need for additional consumer protection.

Uncharted territory
Prior to the Great Recession there was no such thing as an institutional single-family home rental asset-class. This is a brand new business model. The steep nosedive in prices for single-family homes that occurred five years ago created an opportunity for buyers with cash, snapping up homes by the thousands at bargain basement prices with the intention of creating a large portfolio of rental homes.

The first publicly traded single-family REITs came into existence in 2012. In just two years, sector has quickly blossomed to include five fast-growing players.

Partially regulated already
Altisource Residential Corp. (NYSE:RESI) has successfully pioneered a different twist on acquiring single-family homes to rent. The Altisource business model is based upon acquiring portfolios of non-performing residential mortgages. This sometimes results in Altisource foreclosing and acquiring a home that can either be rented out or sold. The negotiations between Altisource and a delinquent homeowner are regulated. This is partially a result of the egregious behaviors of mortgage lenders and the companies that serviced these mortgages in the recent past.

Ocwen Financial Corp. (NYSE:OCN) is the largest servicer of delinquent loans in the U.S. -- with about $473 billion in unpaid principle balances. This related entity is the source of the vast majority of non-performing residential mortgages in the Altisource Residential portfolio. The Consumer Financial Protection Bureau, or CFPB, recently reached an agreement with Ocwen to:

1.     Reimburse $125 million to homeowners who have been unfairly foreclosed.

2.     Grant $2 billion in loan modifications to struggling borrowers.

Additionally, the New York Department of Financial Services has put an indefinite hold on the transfer of the mortgage servicing rights to 184,000 homes from Wells Fargo, primarily due to concerns regarding customer service.

That Sun Valley home is also pledged as collateral
Blackstone's Invitation Homes recently pioneered using single-family rental homes as collateral for issuing mortgage backed bonds. This three-bedroom home is part of a pool of ~3,000 homes which serve as collateral for a $480 million bond offering. This is represents a new hybrid form of commercial mortgage-backed security. Pretty heady stuff.

Historically, renting out single-family homes was done on a small scale by mom and pop landlords. If one home is vacant, it is a major financial burden for a small rental operation. There is a strong incentive to provide quality customer service. The business model employed by landlords with access to Wall Street capital has the potential for mistreatment of an individual tenant baked right into the cake. The plight of one family is frankly not that big of a deal.

A need for oversight?
On the other hand it becomes a huge -- potentially life changing -- ordeal if you are that family. That is the point here.

All states have some sort of landlord/tenant law on the books. I doubt that any of these statutes contemplated a single-family home rental being part of a billion dollar enterprise. Often the rental of one to four dwelling units is less stringently regulated by local ordinances than larger multi-family apartment buildings. Are local government fines or small claims court verdicts really sufficient to prevent a pattern of bad conduct? What if that pattern only becomes apparent when you are able to look at multiple states or jurisdictions?

There is no excuse for any landlord to lease a home to a family that is not habitable or reasonably maintained. In order to protect consumers, should there be national standards of conduct for single-family landlords who raise capital on Wall Street?  The CFPB has already set that precedent for institutional lenders and mortgage servicers. 

Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Bill Stoller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information