foreclosureIt feels like this country went from a housing glut to a housing boom almost overnight. One day, all you're hearing about is how much extra housing capacity there is, and the next you're reading headlines about record home starts.

But before the housing-market resurgence, the other thing you heard about was how no one knew what to do with all that extra housing.

Well, Wall Street is trying to figure out what to do with it, and their idea doesn't bode well for either individual neighborhoods or the economy as a whole.

It's Deja Vu All Over Again

Though you're currently seeing new home developments springing up left and right, the fact is there are still plenty of empty houses out there, especially in certain areas of the country. These are homes people bought during the boom but in short order discovered they couldn't afford.

As these homeowners defaulted on their loans, the mortgage-backed securities the loans had been bundled into also began to fail -- triggering the financial crisis. But someone owns these foreclosed homes, and they want to do something profitable with them, which has turned out to be renting them.

Sounds good so far.

However, now Wall Street is considering packaging up these rental properties into securities that can then be sold off to investors. (Sound familiar?) But apparently, even the ratings agencies are nervous about this untested bit of financial innovation. That's right: Those same ratings agencies that gave AAA ratings to so many of the mortgage-backed securities that ended up going bust and dropping the U.S. economy off a cliff? Even they don't feel comfortable with Wall Street's latest clever idea.

Your Friendly Neighborhood Renter

So, Wall Street may be brewing some new macro-level concoction that could come back to bite us all. Again. But what might this idea for rental-backed securities mean on a more micro level?

Nobody likes empty, foreclosed homes in their neighborhood. In the best-case scenario, a bank or some similar entity is keeping the grass cut, the driveway weeded, and the squatters out.
In the not-so-best-case scenario, none of the above is happening, plus the windows are broken or boarded up; "entrepreneurs" are stripping the home of interior furnishings, wiring and plumbing; and your kids have decided these ripped-up homes are a great place to play in.

So are renters worse than the worst-case scenario described above? Hardly. A responsible renter can be as good a neighbor as a home owner. And it's far from gospel that all home owners are responsible neighbors, diligently keeping up their property, and therefore the neighborhood's property values. In fact, the right kind of renter could turn out to be a far better neighbor than the homeowners you're living next to right now.

The Truly Worst-Case Scenario

But if the idea of rental-backed securities takes hold with investors, and the Wall Street securitization machine consequently gets humming, the same thing that happened with mortgage-backed securities might happen again: The demand for investments would drive the demand for rental homes, and thereby lower the caliber of the renters.

Not only would this be bad for neighborhoods, but if enough poorly qualified people are renting properties that have been bundled up into securities, and those people stop paying their rent, the securities could also then fail. This could put the financial industry -- along with the rest of us -- right back where we were four-and-a-half years ago.

Before the boom in mortgage-backed securities, no one knew how they would perform on a large scale, nor how they would change the real estate market, and today, no one can be sure how these rental-backed securities will perform on a large scale either. But here's a hint: If the previously AAA-happy credit agencies are nervous about this new type of investment, maybe the rest of us should be wary as well.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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February 21 2013 at 2:11 PM Report abuse rate up rate down Reply

I own many, many expensive rentals for many, many years. The banks (Fannie) and Wall Street do not understand RE at all. Years ago, before the fall out, I have seen them loan on risky rental properties and reject very safe rental properties. Knowing what to buy and not to buy is the easy part of being a Landlord. If they can not even get that basic part down (which they have proven they can't), they have no chance of success at running rentals correctly, for them, the investors or the nieghborhood.

February 21 2013 at 12:50 PM Report abuse rate up rate down Reply

The only way you get a good renter for the landlord and the neighborhood is for the LL to be very active in checking on the place, managing it, taking care of the property (including investing time and money) and making sure all is the way it should be. A typical management company does not do this at all. And wall street surley will not do this. They will not care about anything except the short term profits and nothing else.

February 21 2013 at 12:42 PM Report abuse rate up rate down Reply

what if the renters do not pay ? then what happens?

February 21 2013 at 12:34 PM Report abuse rate up rate down Reply

This time the government needs to stay out of it and let those banks involved fail if thats where it leads to, if jobs go south again because of a second ask for a bailout so be it, there is no reason our tax dollars should be used to bailout a business that makes risky and unnecessary poor choices let them learn from their own decisions even if they choose to layoff and close because of the outcome, chances are those working in that sector will get a decent severage if they lose there job anyway. Move on without government assistance and make less risky choices next time wall street.

February 21 2013 at 4:53 AM Report abuse +1 rate up rate down Reply

Wall street would wrap feces in gold colored foil and try to sell it as gold.

February 21 2013 at 12:14 AM Report abuse +1 rate up rate down Reply

I trust these Wall Street wise guys and their inventiveness as far as I can throw them. Wall Street banksters and wise guys have never learned their lesson from the housing fiasco. Instead of putting a few of these unconscionably greedy bastards in jail and throwing away the key, we'll let them concoct some other "brainiac" triple AAA scheme and run the economy off another cliff. This country has too short a memory and no common sense. Unless our imbeciles in Gov't puts the breaks on these guys and comes up with some regulations with teeth, the Banksters will ultimately destroy the economy of the entire planet. They almost succeeded last time, and we're not out of the woods yet. It's simply business as usual with these guys. It's one scheme after the other.

February 20 2013 at 7:13 PM Report abuse +1 rate up rate down Reply

This is just the same scam with a different name. Housing prices are about 100 to 150 over the real affordable value. Affordability left the market,,,,hence sub-prime loans that ended-up being paid for by the U.S. Tax payer. The banks got their money, now they want to sell the property again? Take the inflation out of the housing market. When it is affordable, people will but. I hope "we" have learned not to use our houses as a big ATM.!

February 20 2013 at 6:02 PM Report abuse rate up rate down Reply
Leonard Solie

I disagree with you, it's not a horrible idea. By keeping the homes in the rental pool, you begin to create a "supply in demand" scenario which will stabilize the prices and then we will begin to see an up-tick in valuation which will further slow down additional forclosures. This is what we need, this is the only solution or prices will further decline.

February 20 2013 at 4:30 PM Report abuse -1 rate up rate down Reply

I have a great idea how about used condom backed sercurities!!!!!let wallstreeters jerk off during their day jobs...they send the used condoms to a site overseas...then they empty the contents...and then they sell the offspring of course most of the offspring will have at least 4 brains...look like aliens..or they can bottle it and sell it off as themost toxic liquid ever to be on this earth.....

February 20 2013 at 4:20 PM Report abuse +1 rate up rate down Reply