Renters

For those who came in late, the deal was that housing prices collapsed when it became clear that many mortgages were not worth the paper the contract was written on. Sometimes that was because the paper was divided among multiple investors in a way that meant nobody was actually the owner of the loan obligation. Usually, though, it was because mortgages were being approved for people who didn't have the ability to pay them, with the expectation that the eventual increase in the price of the mortgaged property would eventually make the person a better risk. Which in retrospect is a very shaky base upon which to build a significant part of the economy.

Fortunately, other shakier aspects were invented and implemented that made this the least troublesome part of the situation. For example, imagine taking that risky loan, bundling it with other risky loans, selling part of the proceeds from mortgage payment as a low-risk/low-yield bond, and part as a high-risk/high-yield bond. And then imagine having bond underwriters rubber-stamp the entire bond issue without any effective way to stand behind their claim, so that when the risks came due and none of the bond-holders were paid, the possible responses were variations on "Sucks to be you."

And from such humble beginnings came a vast whirlpool of loss that took away a huge amount of equity, earnings, and available money.

And then people started thinking "Hey, there are some really cheap houses out there - we should get us one!" And those people who had money started doing just that, purchasing houses not to live in nor flip, but to manage as rental properties. And then to sell bonds backed by the proceeds from the rentals....What could possibly go wrong with that?

Well, now we know. And if we didn't know, we might have guessed. The article mentions

• For this to work, the rental properties actually have to be managed. Which isn't a core competency of these investors.
• It's not easy to predict vacancy rates for these properties well enough to know what the appropriate repayments on the bonds should be. Which means someone is going to lose money, which decreases the value of the bonds, which spirals downward from there.
• Finding creditworthy renters, who would be the ones actually generating the cash being passed along,  can be difficult (see "core competency," above).

And one might also consider the following

• Individuals with excess cash purchasing houses to rent them means fewer people who want to live in the houses can afford to buy, which distorts pricing.
• The scheme is not dissimilar to the mortgage - based process that caused the original meltdown, which turned out well.

An additional problem is that this probably has supported housing prices, and now they probably will start falling again. Where things will go from there...we'll find out.