BILL ANALYSIS Ó
AB 2282
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Date of Hearing: April 21, 2016
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 2282
(Calderon) - As Amended April 12, 2016
SUBJECT: Rental housing: large-scale buy-to-rent investors:
data collection
SUMMARY: Restricts the activities, and requires registration of
large-scale buy-to-rent investors, as defined. Specifically,
this bill:
1)Requires the Department of Business Oversight (DBO) in
conjunction with assistance that may be offered by county
recorders to design and implement a registration program for
the purpose of registering and monitoring large-scale
buy-to-rent investors.
2)Prohibits a large-scale buy-to-rent investor from placing a
bid on a normal sale of a single-family home for a period of
not less than 90 days.
3)Requires DBO to consider methods to require buy-to-rent
investors to renew registration of their rental property on an
annual basis, including new and current single-family home
rentals that they own or in which they have invested.
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4)Mandates that DBO, on or before January 1, 2018 submit to the
Governor and the Legislature a report that includes the
following:
a) Information regarding how many large-scale buy-to-rent
investors own property in the state for the purpose of
renting the property and which regions of the state their
investment activity is occurring;
b) The number of single-family homes each large-scale
buy-to-rent investor owns;
c) An analysis of the potential impacts their investments
are having on the local real estate market, including the
price of homes, the ability of individual home buyers,
specifically those who need financing, to compete against
the large-scale buy-to-rent investors;
d) The length of time large-scale buy-to-rent investors are
holding their property as a rental; and,
e) How many homes large-scale buy-to-rent investors are
selling each year.
5)Codifies that it is the intent of the Legislature in enacting
this provision to monitor the investment activities of
large-scale buy-to-rent investors in the State of California
that have, since October 2013, designed a mortgage-based
security supported by the revenue from single-family rental
properties.
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6)Makes the following legislative findings:
a) The emergence of this type of security is likely to grow
and scale institutionally owned single-family rental homes
to a level that is, at this time, unknown. However, with
home prices currently approaching record highs, yet with
homeownership at historic lows, it is important to
understand the size and scope of investor activity of
single-family homes and the impacts it has on the real
estate market in California.
b) It is in the best interest of the State of California to
limit the amount of single-family homes that large-scale
buy-to-rent investors can own in our neighborhoods and
communities. Furthermore, we must protect against the
potential displacement of persons residing in single-family
home rentals that is harmful not only to the persons
displaced by these practices but also to the entire
community in which those persons reside. Large-scale
buy-to-rent investors own more single-family homes than any
other population in the United States, a market once
dominated by local, private owners.
c) Limiting the activity of large-scale buy-to-rent
investors can have a positive impact on the housing market
by providing a greater supply of homes to individual
buyers, protect the real estate market from large
fluctuations in home prices, create a stronger sense of
community in our neighborhoods, and defend the American
dream of becoming a homeowner
EXISTING LAW: States legislative findings and declarations that
the preservation and enhancement of opportunities for
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homeownership are beneficial to the well-being and prosperity of
the people of the state (Health & Safety Code, Section 50001).
FISCAL EFFECT: Unknown
COMMENTS:
Need for the bill.
According to the author's office:
In the aftermath of the financial crisis and Great Recession,
the supply of vacant homes far exceeded the demand for
owner-occupied homes. This severe imbalance created a unique
opportunity for a small number of well-funded investors to
purchase large number of single-family homes. For example, in
2013, a subsidiary of the private equity firm Blackstone took
$479 million loan from Deutsche Bank that was secured by a
pool of more than 3,000 homes. By creating a bond securitized
by revenue from rental properties suggests these investors
plan on keeping their properties as permanent rental units, or
at the very least, long-term rentals. In fact, according to a
recent Federal Reserve Board report, only 7 percent of
properties purchased by these investors in 2012 were resold
within 24 months. This is what sets the buy-to-rent investors
business model apart from the traditional investor, is their
stated intention to hold the property as a rental unit for a
number of years, possibly even permanently, rather than
re-sell in the owner-occupied market.
Institutional investors have played an important role in many
markets that were struggling at the time. They helped raise
home price, albeit artificially, and reduce the number of
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vacant properties in the neighborhoods hit hardest by the
Great Recession. At the same time, the sheer scope of investor
activity in the single-family home market relative to
owner-occupant purchases is unprecedented, as is the size of
these large, single-family rental portfolios.
Holding thousands of single-family homes in their portfolio
puts California communities at risk. If the market predictions
from these hedge fund managers are wrong, and fail to pay back
their investors of the bonds they're creating, then we could
see another housing crisis with a huge flood of single-family
home hitting the real estate market?again. However, this time,
not only will housing prices drop dramatically, thousands of
families could be disenfranchised to no fault of their own.
Further, and more importantly, homeownership rates are near
historic lows. Nationally, homeownership is the lowest it's
been since 1967 at 63.4 percent, however, California's
homeownership rate is almost 10 percent lower, at 54.1% in the
fourth quarter of 2015, according to recent census data.
What's troublesome about the lack of homeownership, are large
institutional investors are no longer just buying short-sales
or foreclosures, which are typically harder for low and
moderate income families to buy, but are now buying natural
sales of homes. The CEO of Colony American Homes Inc. recently
stated, "The first phase was distressed homes. The second
phase is acquiring homes in a more regular way." By having
this new type of investor in the single-family home market,
families must now not only compete against their more
financially secure community members, but multiple, large
hedge fund companies who have millions of dollars of cash on
hand to outbid them. Furthermore, as state before, these
institutional investors have computer algorithms that can
calculate whether or not they should bid on a property within
eight minutes. So, not only do large-scale buy-to-rent
investors have a monetary advantage, but they now have a
technological advantage, as well.
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The foreclosure crisis created massive inventories of
foreclosure properties across the nation. Many of these
foreclosed homes are just now finding their way onto the housing
market. With the private label mortgage backed securities
(MBSs) market on life support, institutional investors needed
other investment outlets in the housing market. These investors
bought large portfolios of foreclosed homes and securitized the
rental income. The structure of various single-family rental
(SFR) securitizations are very similar as callable and/or
non-callable bonds are issued from a single loan, backed by
portfolios of SFRS. The bonds typically have terms of two to
three years with options for one-year extensions capped at five
years total.
On September 19th, 2014, American Homes 4 Rent issued the first
bond of this kind bearing a 10-year fixed interest rate, with
coupon payment tranches amounting to a weighted average coupon
rate of 4.418%. The majority of the portfolio is located in
Texas, Illinois, Indiana, Ohio, and North Carolina; markets that
have experienced less volatility than other markets. When
rent-backed securities premiered on the market in October 2013,
the $479 million offering from the private equity giant
Blackstone Group generated more demand from investors than the
private equity firm could accommodate. Since then, Blackstone
and several other firms specializing in the rental of
single-family homes have sold more than $3 billion of these
bonds. REO-to-rental securitization has been hailed as an
exciting new asset class, with financial analysts at Keefe,
Bruyette & Woods estimating that it could swell into a nearly $1
trillion industry over the next six years. SFR industry has
expanded tremendously in the past two years. According to
Commercial Mortgage Alert, the US CMBS issuance was about $94
billion and the US SFR issuance was about $6.8 billion in 2014.
As of July 2015, year-to-date US SFR issuance is $5.42 billion
up 53% from $2.85 billion for the same period in 2014 whereas
year-to-date US CMBS issuance is $55.74 billion up 22% compared
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to the same period in 2014. The SFR bond market is currently
estimated to be a $12.65 billion market with Blackstone's
Invitation Homes unit having a leading market share of 42.1%
through its seven offerings totaling $5.32 billion. American
Homes 4 Rent stands second at $2.08 billion followed by Colony
American Homes at $1.75 billion. The business is so profitable
that the founder of Blackstone is worth more than $10 billion
and for his 60th birthday party was entertained by Rod Stewart
which begs the question of what is more egregious, the
securitization of rental properties or that Rod Stewart is
available for birthday parties?
Impacts?
What is the impact of large scale rental investment strategies
on the housing market? According to Department of Finance data,
California has a little over nine million single family homes.
The estimated portfolio of homes turned to rentals owned by
Invitation Homes, a subsidiary of Blackstone is around
10,000-12,000 in in California. The impact of rental
securitizations on home prices is unclear. Some market
observers have found that SFR securitization deals have relied
on projected occupancy rates that real estate professionals have
called unrealistic at best. Blackstone's first offering, for
example, assumed a 94% occupancy rate and claimed that 100% of
properties were occupied when the deal was launched. Within a
few months, 8.3% of these properties were vacant or occupied by
delinquent renters, causing rental income to fall by 7.6%.
Reported vacancies also rose last year after Blackstone offered
a second, $1 billion bond in May and Colony Capital launched a
$514 million deal in March.
Two issues not addressed in this bill, but that have major
impacts on pricing are flipping and foreign cash buyers.
RealtyTrac, a real estate foreclosure marketplace, tracks the
number of house "flips" and reports they made up 5.5% of last
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year's real estate sales. Since the housing crash, investors
have consistently made up a significant portion of home buyers,
but they largely purchased homes to convert to rental property.
In the last couple of years, RealtyTrac says the trend has been
toward flips. The total number of investors who completed at
least one flip in 2015 was at the highest level since 2007, and
the number of flips per investor was at the lowest level since
2008. Homes flipped in 2015 were on average purchased at a 26%
discount below estimated market value and re-sold by the flipper
at a 5% premium above estimated market value. Some real estate
experts find that when home flipping numbers go up, it is
usually an indication that the housing market is in trouble. He
says home flipping tends to artificially inflate home prices.
That makes houses less affordable and increases the risk of a
bubble. The average flip in California grossed close to
$100,000 in profit and impacts the price of surrounding homes.
Another contributor to expensive housing in certain California
markets has been the large influx of foreign cash buyers.
According to data from the National Association of Realtors,
during 2014/15 the average price foreign clients paid for a
house was $500,000, compared to the overall U.S. average house
price of $256,000. Approximately $54.5 billion of sales was
attributed to non-resident foreigners, with resident foreigners
accounting for $49.4 billion of sales. The bulk of purchases by
international clients were all-cash, accounting for
approximately 55% of reported foreign transactions.
Amendments
This bill was previously heard in the Assembly Committee on
Housing where the author agreed to accept the following
amendments in Banking & Finance:
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1)Change the prohibition on a large scale buy-to-rent investor
from bidding on a property from 90 days to 15 days.
2)The bill applies to companies that hold 10 or more properties.
The amendments would change that threshold to 100 or more.
Issues going forward
As the author further refines the bill going forward the
following issues should be addressed.
1)The Legislative findings and declarations provide that
limiting the activity of large-scale buy-to-rent investors can
protect against large home price fluctuations. Given the
numerous housing difficulties in California and the multitude
of issues that contribute to our housing costs this provision
may need to be reworked so as not to give the indication that
this one issue will have a significant impact on home price
appreciation.
2)The registration program to be administered by DBO lacks
detail. It does not give DBO the authority to charge a
registration fee nor provide any penalties for entities that
do not register. Additionally, DBO is not given authority to
confront entities that may report inaccurate information.
3)The entities covered would be required to renew their
registration but the process is somewhat unclear and
confusing.
4)The report required of DBO mandates that they provide an
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"analysis of the potential impacts" these large-scale
buy-to-rent investors are having on the housing market. Staff
believes that DBO may not have the expertise necessary to
provide an "analysis" and may need to hire a third party to
comply with this provision. The author may want to consider
authorizing DBO to hire an independent third party to conduct
this study.
5)Prohibits the large-scale buy-to-rent investor from placing a
bid on a "normal sale." The term "normal sale" is not a
defined term in existing law. The author may wish to define
this term.
6)The bill exempts short-sales, foreclosure sales, and real
estate owned property from the purchase prohibition even
though foreclosure sales provided the initial bulk of
properties to these investors. While foreclosures have
declined significantly, the author may wish to further examine
this issue.
7)The prohibition on buying a home for 15 days also would impact
sellers of property.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file.
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Opposition
California Apartment Association
Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081