After gorging on subprime mortgages 10 years ago, Wall Street is investing in the U.S. housing market again — this time by snatching up homes.

Investment banks, private-equity firms and hedge funds are turning to a variety of financial vehicles and building the technology to become the largest buyers of most Americans’ biggest asset.

The trend could improve housing affordability, make it easier to buy and sell a home, and increase mobility, but it will hand unprecedented control of the U.S. housing stock to giant corporations and allow them to grab transaction fees from real estate agents.

As landlords or co-investors presiding over millions of units, they will exert considerable influence over the living conditions of American tenants, handling upkeep, management and eviction. And as “iBuyers,” they could set the prices and terms under which homebuyers and sellers transact, including commission rates.

The rental shift has been playing out since the end of the housing meltdown, as Wall Street giants like Blackstone acquired single-family rental homes while institutional apartment owners expanded their holdings.

The iBuyer trend has only just begun, driven by platforms such as Opendoor, Zillow Instant Offers and OfferPad. Drawing on institutional capital, iBuyers use technology to make quick offers on homes, close in days and flip them.

In addition, shared-equity services let homeowners sell fractional ownership of their properties to Wall Street investors. They receive down payment assistance or spending cash for giving up equity in their homes.

Barry Zigas

“Every step increases the commodification of these transactions in a way that potentially pits investors with the ability to operate and manage sophisticated trading strategies against everyday homebuyers and homeowners,” said Barry Zigas, director of housing for the Consumer Federation of America, about these new investment strategies.

Here’s how it might work.

A family rents a single-family home from a hedge fund and then uses down payment assistance from a private-equity firm to buy their first home from an iBuyer. When the private-equity firm asks for their money back, the family sells their home to an iBuyer and buys a new one owned by the same iBuyer. At each turn, investors extract fees.

Welcome to the Wall Street housing market.

A combination of technology and low interest rates is fueling a surge in this activity. Desperate for higher yields, investors are using computing and data analytics to squeeze returns out of the nest eggs of the middle class.

Single-family rentals prove a winning bet

Since the mortgage meltdown swept millions of Americans out of their homes, institutional investors such as Blackstone’s Invitation Homes, America Homes 4 Rent and Colony Starwood Homes have scooped up tens of thousands of these homes and converted them into rentals.

Gary Beasley

Cloud and mobile computing “fundamentally changed the way distributed assets could be managed,” allowing large buyers of single-family rentals to build “killer platforms in the cloud that allowed us to run margins that rivaled apartments,” said Gary Beasley, the former co-CEO of Starwood Waypoint Residential Trust (now part of Colony Starwood Homes).

These investors provide options for families who can’t afford the cost of homeownership but want to live with more breathing room and in quiet neighborhoods. But units become assets, not homes.

Plus, they are boxing out first-time homebuyers in some markets by purchasing with cash and removing inventory from the market.

Institutional investors only own between 1 and 2 percent of single-family rentals, but they are expected to gain more in the years ahead. Fannie Mae — a government-controlled mortgage guarantor — recently endorsed their market presence by guaranteeing debt backed by single-family rentals owned by Invitation Homes.

The trajectory of Wall Street apartment rental ownership offers a glimpse into what could happen to single-family rentals.

Institutional investors own more than half of U.S. apartment units, according to Amherst InsightLabs. They began gobbling up apartments in the 1980s after a market crash bankrupted banks and developers. Large single-family rental investors built their chops by buying up foreclosed properties from banks.

The rise of iBuyers

Now, they are taking aim at the consumer market by building an even bolder real estate machine: the “iBuyer.”

IBuyers use technology to offer homeowners a fast and certain sale for a service fee ranging from 6 to 13 percent. And unlike traditional home flippers, iBuyers purport to pay market value.

This business model has the potential to commoditize the housing market and, like every Wall Street move, capture generous fees. These financial rewards often come at the expense of commissions earned by local real estate agents who charge less.

Opendoor and Offerpad, the two leading iBuyers, operate in a handful of markets, but they plan to expand rapidly in the next year.

In Phoenix, the two closed more than 600 transactions in the first quarter of 2017, accounting for nearly 3 percent of total sales, according to Attom Data Solutions. Big banks provided equity funding to Opendoor and finance its property purchases.

Investment bank Evercore recently cast iBuyers as an attractive alternative to listing brokerage and said they could boost mobility and home sales.

If this happens, iBuyers will become market makers.

Market makers for stock exchanges have a legal responsibility to maintain an “orderly” market. They must keep buying even when demand dries up, and they’re restricted in how much they can mark up what they buy.

If iBuyers become market makers, what will they do when the market tanks? Pull back, step up, hike fees?

Shared equity

Other Wall Street-backed startups aren’t buying homes outright. They’re co-investing with homebuyers and owners instead.

Shared-equity services let people sell stakes of their homes for down payment assistance or cash payments from investors.

Unison Home Ownership, for example, allows homebuyers to get half of a 20 percent down payment covered by institutional investors. In return, the investors receive a 35 percent share of the loss or gain in a property’s value. Unison has raised over $300 million in capital commitments from investors.

Marking a regulatory coup, the company recently persuaded Freddie Mac to guarantee mortgages that include down payment assistance from Wall Street.

The policy changes means that borrowers can put up a 10 percent down payment and qualify for the same mortgage as a buyer who covers the full 20 percent. This could set the stage for shared-equity plans to proliferate, putting homeownership within reach of more Americans and boosting the buying power of others.

But some might not grasp the savings or control they might forego. Others could be tempted to buy bigger than they should.

Shared-equity providers want to build an exchange that would allow investors to cash out at anytime. Such financial innovation evokes the secondary mortgage market.

Wall Street is remaking the housing market in its image. Will the industry push back?

Email Teke Wiggin.

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