Bonds Draw Scrutiny Where Subprime Spread

California lawmaker draws correlations between rental bonds, which are funding investment firms' purchase of tens of thousands of rental homes, and securitization of subprime mortgages.

Mark Takano saw how subprime mortgages devastated his hometown of Riverside, California, after Wall Street helped inflate a housing bubble that burst and left a trail of foreclosures among the worst in the U.S.

Now a first-term Democratic Congressman representing a district east of Los Angeles, Takano said he worries about a repeat as banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. prepare to create securities based on the latest real estate boom: rental homes.

Wall Street started packaging the home loans and then sliced them into pools based on the predicted default potential, paying higher interest rates to investors in the riskier levels of debt. Investment banking fees soared as they securitized ever-riskier home loans. Lenders originated $625 billion of subprime loans in the peak year of 2005 to borrowers who often couldn’t pay the debt, according to Inside Mortgage Finance.

Securities were then repackaged into bonds known as collateralized debt obligations, or CDOs, which were assigned top credit ratings that proved unfounded when defaults soared and the housing market crashed. Rental bonds are one of the first new types of securitization since the 2008 credit crisis.

“You’ve got this lemon sitting in the middle of the neighborhood that’s not well cared for,” Husing said in a telephone interview. “I’m looking at a dead lawn because there’s nobody in it right now.”

The rise in foreclosures sparked a wave of crimes, such as squatters occupying vacant homes and people posing as landlords and collecting rent on homes they didn’t own, according to Vicki Hightower, chief deputy district attorney who oversees prosecution of fraud in Riverside County.

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