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Be Ready for Renter-Backed Bonds and Meet the Beneficiaries

NEW YORK (TheStreet) -- Just when I thought that nothing could be more perilous than mortgage-backed-securities (MBS) a couple of market mavens are ready to hatch something new.

DeutscheBank (DB) may be the financial entity that will structure and sell this new breed of bond. What is this new product anyway?

This will sound familiar, but for the first time in U.S. history a well-known private equity firm is thinking about bundling monthly rental payments from upwards of 1,700 rental homes it owns and selling them to investors as "securities."

Which firm is considering this brilliant idea? BlackstoneGroup (BX), the publicly-traded money manager which I recently wrote a story about is one of the master-minds.

Besides private equity BlackstoneGroup invests in real estate, hedge funds and high-yielding credit funds. It buys when everyone else is selling with the biggest profits coming from its private equity and real estate holdings.

Over the past few years it's been accumulating thousands of houses that BlackstoneGroup then converts to rentals. Many of these houses were in foreclosure and purchased at low pricing so the rent covers the usual costs of ownership such as property taxes, maintenance and management.

Analysts who remember the recent mortgage debacle and the impact it had on MBS values are understandably gun shy. There is little information if any on how reliable rental payments are for this latest breed of debt instruments.

Questions abound about vacancy rates, turnover and whether renters have a reliable long-term record of paying the monthly rent on time. This data is critical in determining the safety of what I'm calling "renter-backed securities" (RBS).

The details of the deal with Deutsche Bank are sketchy but the first tranche may be in the $250 million range. Indications are the structure will be like the multi-layered residential and commercial-backed mortgage securities of recent years.

The first "layer" would most likely be securities that are directly collateralized by the rental houses and other equity. Then like in the bad-old days of MBS there would be securities collateralized by the first layer.

The further each RBS is from being secured by the rental properties the more risk, the lower the rating, and the higher the interest rate offered to investors.

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