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