This article appears in the Fall 2015 issue of The American Prospect magazine. Subscribe here.
Each month, Esperanza Rosales sends $1,785 to the Blackstone Group, one of the world's largest private equity firms. Steve Schwarzman, the CEO, has a net worth of $11.8 billion and last year earned $690 million. He owns a Park Avenue apartment, a villa in Jamaica, and large estates in Palm Beach, the Hamptons, and St. Tropez. Rosales, a 45-year-old seamstress, pays her rent to Invitation Homes, a Blackstone subsidiary established in 2012, which owns the modest 1,200-square-foot house in South Los Angeles where she lives with her husband (who is unemployed), her four children (one of whom is autistic), and her daughter Yuri's three children. Rosales explains that her nine-member household lives "day to day, month to month" in order to pay the rent and the additional $400 to $500 a month in water and electricity bills. Invitation Homes has already told them that their rent will go up another $100 a month next year.
Yuri, 29, who had to drop out of community college to help her family make ends meet, works in the shoe department at Nordstrom. She explained that the rent and utilities take up more than half of their household income.
"It's extremely hard to pay the bills," she said. "The kids go without new toys. They like ice cream but that's now a luxury. We have to sacrifice a lot of their basic necessities so we can pay the rent."
Some of their neighbors also live in houses owned by Invitation Homes, which has been accumulating foreclosed and about-to-be-foreclosed homes and then turning them into rental properties. With more than 40,000 houses in its inventory, Blackstone is now the nation's largest owner of single-family rental homes. The company charges as much as 180 percent of fair market rent in a given city-but invests little in maintenance and repairs.
Nearly eight years after the start of the global financial crisis, some of the same corporate actors that precipitated the housing crash are buying up distressed housing assets in bulk, including delinquent mortgages and vacant houses that are a product of the crash.
Their business strategy works like this: Hold some rental properties in recovering markets via subsidiaries. Syndicate ownership of some of these properties via a new kind of security that allows investments in pools of rental properties, not unlike the syndication of subprime securities-allowing Blackstone to cash out for a quick profit. Either way, there are three seriously negative effects. First, the supply of affordable owner-occupied housing is depleted. Second, in the case of rentals, there is a greater distance between the tenant and the ultimate absentee owners. Finally, the strategy of Blackstone and other hedge funds competes with and undermines efforts by local governments and well-established community-housing and lending organizations to reverse some of the damage of the subprime collapse by reclaiming foreclosed homes for the benefit of residents.
Community development financial institutions (CDFIs), often working with local government and neighborhood groups, have the capacity to purchase large inventories of underwater mortgages and distressed properties-including vacant houses that owners lost through foreclosure and occupied homes where underwater borrowers are on the brink of foreclosure-and stabilize them as affordable housing. Certified by the Department of the Treasury, CDFIs raise funds from private and public sources to offer a range of financial products and services to low-income communities that are often underserved by conventional lenders. Through these mission-driven investments, CDFIs have developed long-term, local expertise that is essential to meeting the financial needs of low-income communities and distressed neighborhoods. Yet they are being crowded out by hedge funds that are working hand in hand with HUD, Fannie Mae, and Freddie Mac.
"This whole process shows just how tilted the playing field is for the big banks and hedge funds," said Senator Elizabeth Warren, the Massachusetts Democrat who has been the Senate's most vocal critic of Wall Street abuses. "Many of these banks and funds were responsible for fueling the housing bubble in the first place-leading to the crash that hit these families like a punch to the gut. Now these same banks and funds are turning around and scooping up these loans at bargain-basement rates so they can profit from them a second time."
On September 30, Warren will join with 250 community activists from cities across the country, including a group of mayors and city councilmembers, to urge HUD and FHFA to stop selling homes and mortgages to Wall Street speculators and to instead prioritize sales to community non-profit organizations that will modify "underwater" mortgages to help homeowners avoid foreclosure. Warren will participate in a speak-out at Washington, D.C.'s Lutheran Church of the Reformation along with Congressman Mike Capuano (D-MA) and more than a dozen other state and local elected officials. Later in the day, activists will march to the FHFA headquarters for a rally, followed by a meeting with FHFA Director Mel Watt.
SEVERAL YEARS AGO, community groups began noticing the growing presence of Wall Street speculators in their neighborhoods, one of the aftershocks of the epidemic of foreclosures. Several local groups examined records, interviewed tenants, and issued reports-including "Blackstone: Atlanta's Newest Landlord," by Occupy Our Homes; "The New Single-Family Home Renters of California," by Tenants Together; "The Rise of the Corporate Landlord," by the Right to the City Alliance; "Renting from Wall Street: Blackstone's Invitation Homes in Los Angeles and Riverside," by Strategic Actions for a Just Economy; "REO to Rental in California: Wall Street Investments, Big Bank Financing, and Neighborhood Displacement," by the California Reinvestment Coalition; and "When Wall Street Buys Main Street," by the Center for American Progress.
These reports have documented that in areas where Wall Street investors own a significant number of these single-family homes-including Atlanta, Las Vegas, Phoenix, Miami, Tampa, Orlando, Charlotte, Dallas, Chicago, Detroit, Denver, and Los Angeles and nearby Riverside-their practices have harmed tenants and undermined long-term neighborhood stability.
In April of this year, for example, one-quarter of all home sales were to cash-carrying investors. Since 2010, institutional investors backed by Wall Street have purchased a total of 528,369 single-family homes nationwide, led by Florida (78,155), California (52,802), Georgia (46,914), Arizona (35,979), and North Carolina (34,769), according to RealtyTrac. These represent about 4 percent of all single-family homes sold during that period, and a higher percentage in distressed markets. Together, these Wall Street entities have raised close to $70 billion to buy these homes. Rents are expected to increase by 3 percent a year on average through the next decade, and to rise even higher in parts of the country that the Wall Street firms are targeting.
Blackstone is the largest institutional investor in single-family homes, followed by American Homes 4 Rent, Colony American Homes, Fundamental REO, Progress Residential, Starwood Waypoint Residential, American Residential Properties, and Silver Bay Realty Trust. These and other hedge funds and private equity firms accumulate most of their single-family homes by buying them through foreclosure sales and at auctions of properties by financial institutions.
The most discouraging part of the story is that the U.S. government now views hedge funds as useful partners, to clean up the inventory of distressed housing wholesale rather than helping distressed residents. The Obama administration sponsored several iterations of programs intended to help homeowners at risk of foreclosure keep their homes. But the programs benefited mainly bankers. (See David Dayen's "A Needless Default" from The American Prospect's Winter 2015 issue.) According to the special inspector general for the Troubled Asset Relief Program, by June 2015 fewer than 1.3 million homeowners out of 5.7 million eligible applicants actually received permanent loan modifications through the largest of these programs, and only about 900,000 are still in the program.
With support from housing activists, President Barack Obama appointed former Representative Mel Watt, a North Carolina Democrat, to head the Federal Housing Finance Agency (the FHFA oversees Fannie Mae and Freddie Mac), but Watt has been a major disappointment. He has refused to allow principal reduction on mortgages held by these two agencies. As a result, millions of owners remain underwater and are likely to lose their homes. When that happens, Blackstone and other Wall Street speculators will be there to scoop up the properties and expand their growing rental empires.
The Department of Housing and Urban Development (HUD) and FHFA own or guarantee the distressed mortgages on many single-family homes. HUD, Fannie Mae, and Freddie Mac are auctioning off tens of thousands of non-performing loans that they want to get off their books. The vast majority has gone to hedge funds and private equity firms. Working hand-in-glove with Wall Street, they've sold off many of these houses-called delinquent assets in real estate lingo-to Blackstone, Lone Star, and other investors.
And there is a double standard. Although Fannie Mae and Freddie Mac have been unwilling to offer principal reduction to struggling homeowners, they often offer steep discounts when they sell these mortgages to Wall Street speculators, who typically foreclose on the homeowners, adding to their inventory of homes scooped up in private foreclosure sales. Fannie and Freddie impose few conditions on the bulk buyers. They neither require them to consider principal reduction in the modification process nor to consider the affordability needs of communities when putting homes on the rental market.
"We spent years trying to persuade policymakers that principal reduction was better for homeowners, their communities, and even lenders in the long run," said Wade Henderson, president and CEO of the Leadership Conference on Civil and Human Rights. "We were hopeful that things would change after Mel Watt took over [FHFA] last year. Unfortunately, we have only seen progress around the edges. And with this shift we're seeing toward a rental economy, and a lack of sustainable investments in communities, I'm worried that a lot of the 'recovery' we hear about in housing will prove to be illusory."
It is hard to imagine a more vivid example of the incestuous link between Wall Street and Washington. The same banks and investors that caused the mortgage meltdown now stand ready to profit once again by exploiting the mess they made. Over the past few years, HUD and FHFA agencies have auctioned off about 150,000 distressed single-family properties and mortgage loans.
Of these loans, fewer than 2 percent have gone to nonprofit buyers. The rest (98 percent) have gone to Wall Street companies. Five Wall Street entities-Lone Star (with 19 percent); Blackstone (with 19 percent); Angelo, Gordon & Co. (with 11 percent); and Selene Residential Partners and the Royal Bank of Scotland (both with 6 percent)-account for 64 percent of all public loan sales. Between them, the five companies have bought more than 70,000 loans from government entities. (In the latest round of sales, Goldman Sachs popped up on the purchaser list for the first time, buying 677 loans from Freddie Mac).
BETWEEN 2006 AND 2011, Americans lost about $7 trillion in home equity-the largest overall loss of wealth than at any time since the Depression. During the crisis, 5.8 million families lost their homes to foreclosure. Even today, more than one in ten homeowners, or about 5.1 million, are "underwater"-their homes worth less than their mortgage payments. Much of the supposed progress in the reduced numbers of underwater homes is the result of seven years of foreclosures and distress sales.
Since 2005, the nation's homeownership rate has plunged from a peak of 69.1 percent to 63.4 percent in the second quarter of 2015, the lowest since 1967. At the same time, the number of single-family homes occupied by renters has grown. Fourteen million households now live in single-family rentals. The number of single-family homes for rent has increased by more than two million since 2007, up by about 17 percent.
Banks targeted communities of color for subprime and other risky mortgages. Not surprisingly, those communities have suffered the greatest hardship. Between 2005 and 2009, the median net worth for African Americans fell by 53 percent; for Latinos, it was a 66 percent decrease. In contrast, median net worth for whites fell by only 16 percent. While white families have experienced a rebound in wealth since the crisis, African American and Latino families have continued to lose wealth since 2010.
The Rosales family is characteristic of what occurred. They had owned their own home for over two decades, but lost it to foreclosure after the housing bubble burst and their lender refused to modify their mortgage. After the bank evicted them from their home, the family looked for a place to live in the same South Los Angeles neighborhood so the younger children could attend the same school. Two years ago, their daughter Yuri saw a "for rent" sign in front of a house that Invitation Homes had purchased after another homeowner had lost it as a result of a foreclosure.
Favian Gonzalez, a community organizer with Strategic Actions for a Just Economy (SAJE), encountered the Rosales family when he was door-knocking in South Los Angeles. He quickly discovered that a growing number of residents who had once owned their homes were now renting from absentee Wall Street landlords like Invitation Homes and were not protected by the city's rent-control law, which exempts single-family homes.
SAJE conducted a survey of Invitation Homes' renters in Los Angeles and Riverside. Nearly half of all residents interviewed (46 percent) reported problems with plumbing, 39 percent had issues with roaches or insects, and 22 percent had had problems with rodents or termites. More than 20 percent reported heating or air-conditioning malfunctions, another 20 percent reported problems with mold, and 18 percent reported having roof leaks.
"The mom-and-pop landlords are disappearing," said Gonzalez. "Houses that were owned by long-term residents are now for rent. These tenants are paying a lot of money, but they have no security. That's the sucking sound of Wall Street wiping out our community's wealth."
THE BLACKSTONE GROUP is one of the world's largest private equity firms, with $333 billion in assets under management. The firm specializes in leveraged buyouts, but since the financial crisis, it has also spent nearly $7.5 billion to purchase the 40,000 single-family homes it manages as rentals across the United States. In Atlanta, Blackstone purchased 1,400 homes on a single day in April of 2013. That year, Blackstone collected $4.7 billion in performance fees-70 percent of which came from its real-estate segment. Blackstone's net income in 2013 came to $2.9 billion. The next year, it paid Schwarzman more than $690 million-the largest-ever annual payment for a CEO of a public company.
Bayview Acquisitions LLC, of which Blackstone holds a significant share, has bought nearly 24,000 non-performing loans through HUD's Distressed Asset Stabilization Program (DASP). This makes Blackstone the second-largest buyer in the program. Another Blackstone subsidiary, Invitation Homes, has a troublesome record on tenants' rights. For example, in Chicago, the company has required tenants to rent property "as is" and has used leases that indemnify the company from damages caused by its own negligence.
Such "as is" rentals-terms that are not standard in residential leases-and indemnification clauses are likely violations of local housing laws, including Illinois's Landlord and Tenant Act, as they shift the risk and expense of ownership to tenants. Tenants have also reported that the company has failed to carry out the renovations promised to them when they signed the initial lease. Last year, Blackstone, which owns properties in at least 14 cities, announced that it was narrowing future single-family home purchases to a handful of markets: Seattle, Atlanta, Miami, Orlando, and Tampa.
Another major player is Lone Star Funds, a private equity firm that manages more than $45 billion in assets. To date, it is the single largest buyer of non-performing loans from HUD and Freddie Mac, having purchased the notes for over 22,500 homes across the country. Its CEO, John Grayken, has a net worth of $5.2 billion.
Lone Star's subsidiary, Caliber Home Loans, pursues a strategy of buying and selling distressed properties, and has continued some of the predatory practices that led to the mortgage meltdown a decade ago. Despite obtaining these homes at a discount, Caliber steers homeowners into loan modifications with balloon payments that have to be paid if the home is sold, if the loan is refinanced, or when the loan matures. This traps owners into a situation that makes it difficult for them to refinance or sell their homes if necessary. Additionally, Caliber often offers homeowners temporary modification terms with "five-year interest-only" loans. That means homeowners are not paying down principal at all and will owe as much after five years of payments as they did when they began the process. In the sixth year of these loans, a homeowner could find herself with a much higher interest rate, which could result in losing the home.
A Pennsylvania couple sent monthly checks to Caliber, but the company rejected their payments and misstated the amount of payments they had already made. Caliber's actions led the couple to default on their loan, but a Lackawanna County court judge ruled in their favor, saying that their unsuccessful attempts to continue to pay was a reasonable defense.
In Detroit, a man whose home had been foreclosed tried to buy back his home from Caliber. Caliber had taken control of the mortgage on the home after it merged with Vericrest, which had bought the mortgage from the original lender. During eviction proceedings in front of a district court judge, Caliber had agreed to sell back the house to the resident at double the market value. Caliber kept sending eviction notices but wouldn't return the man's calls, even though he was trying to repurchase the house with the help of a loan from a nonprofit organization.
A number of consumer complaints against Caliber and Vericrest suggest that such incidents are a distinct part of Lone Star's business model, and are not isolated. Complaints often allege that the Lone Star affiliates took payments from homeowners without updating the homeowners' statuses or applying the payments to their accounts-a practice that appears intentional and not because of incompetence. Other complaints include allegations that the companies tried to foreclose without notice or after just one late payment.
Other major Wall Street players in the single-family rental business have had their own troublesome track records with risky, reckless, and illegal banking practices, facing lawsuits, fines, and settlements. But HUD and FHFA continue to sell them properties and mortgages with few safeguards in place for homeowners or neighborhoods. For example, a Royal Bank of Scotland subsidiary, RBS Financial Products, Inc., has purchased more than 5,000 distressed single-family mortgages from HUD, despite a history of financial abuses and legal problems.
In addition to the hedge funds that purchase distressed loans and foreclosed homes, a number of major banks have provided financing to companies that have become large absentee landlords. For example, Wells Fargo extended $1 billion in credit to American Homes 4 Rent. Bank of America and JPMorgan Chase have made loans to Silver Bay Realty Trust, another major player in the single-family rental business. Blackstone is backed by Morgan Stanley, Citibank, and Bank of America.
Just as many banks pooled large numbers of risky subprime loans into private securities and sold them off to unsuspecting investors, Blackstone and other private equity firms and hedge funds have created a new kind of security to allow them to cash out some of their new inventory of homes for rent. In 2013, Blackstone partnered with Deutsche Bank to offer the first "single-family rental-backed security" to Wall Street investors, priced at $480 million. Since then, Wall Street firms have sold more than $9.8 billion of these bonds backed by rents for single-family homes. Financial analysts at Keefe, Bruyette & Woods estimate that in the next five years, this could expand into a nearly $1 trillion industry. But others are worried that these bonds-backed by rent checks rather than monthly mortgage payments-could suffer the same fate as mortgage-backed securities, which exploded as part of the housing crash. The success of these bonds depends on keeping the homes filled and the rents high, which could pose problems if the wages of American workers remain stagnant or suffer another decline. Blackstone reaps the gains and passes along the risks-to tenants on one side and investors on the other.
A 2013 report by economists for the Federal Reserve warned, "Investor activity may pose risks to local housing markets if investors have difficulties managing such large stocks of rental properties or fail to adequately maintain their homes. Such behavior could lower the quality of the neighborhoods in which investors own rental properties."
They added: "A future appreciable increase [in] the extent of investor holdings and leverage, or unforeseen difficulties in managing such large single-family-rental inventories, could raise financial stability risks by increasing the odds of financial distress amongst a large number of investors, the institutions providing their funding, and homeowners in affected markets. In particular, it will be important to monitor the development of markets for bonds backed by rental-income streams for the development of potentially destabilizing structures or concentrated exposures."
Last year, California Representative Mark Takano-whose Riverside district has been hit hard by foreclosures and has recently seen a large influx of Wall Street landlords-sent a letter to Mary Jo White, chair of the federal Securities and Exchange Commission, asking the SEC to investigate the risk posed by rental-backed securities. Earlier this year, Takano also asked the House Financial Services Committee to hold hearings on the topic. "Proper oversight of new financial innovations is key to ensuring we don't go down the same road of the unchecked sub-prime mortgage-backed security," he wrote, "and create an unsustainable bubble that will wreak havoc when it bursts."
There is an alternative to the Wall Street–Washington real-estate nexus. In stark contrast to Wall Street speculators, several well-established nonprofit organizations promote affordable housing and legitimate mortgage loans. Community development finance institutions have a good track record of helping homeowners avoid foreclosure and of creating much-needed affordable rental housing. These CDFIs are lenders and developers with a social mission. They've developed programs to buy seriously delinquent mortgages and offer a "restart" for struggling homeowners, by reducing principal down to current market value and otherwise modifying the loan. When these nonprofits are not able to return homeowners back to good standing or they acquire vacant properties, they have a housing disposition plan based on the affordable-housing needs of the communities. A recent study found that CDFIs are more than twice as likely to focus their home-purchase and home-improvement loans in high-poverty areas than are conventional lenders.
Some of the best CDFIs, such as Chicago's pioneering Shorebank, were the collateral damage of the subprime collapse. Shorebank made no subprime loans, but the impact of other subprime losses in the neighborhoods where it operated undermined housing values and pushed many of its mortgage loans into the red as property values plummeted and unemployment rose. But there are still hundreds of healthy CDFIs that, unlike the mainstream financial sector, actually increased lending during the recession.
Hogar Hispano Inc. (HHI) is a CDFI founded by the National Council of La Raza in 2004. Headquartered in Washington, D.C., it works in 31 states, focusing on areas hit hard by the economic crisis and bypassed by the nation's so-called housing recovery. HHI acquires and renovates distressed properties for resale or lease to working-class families. It also purchases delinquent mortgages and works with the families to modify their loans so they can afford to remain in their home as homeowners. It has already helped homeowners reduce more than $4 million in principal.
National Community Capital (NCC) was formed in 2012 to reduce foreclosures and stabilize neighborhoods across the country. NCC currently operates in Florida, New Jersey, and North Carolina, and has capacity to expand to other states. It has purchased 673 homes in New Jersey (mostly in Newark) and 329 in Florida, and has helped nearly 2,000 other families in financial trouble.
NCC invests in local communities by purchasing non-performing-loan pools. If the properties are occupied, NCC helps homeowners stay in their homes by modifying their mortgages through principal reduction. If the homes are vacant, NCC rehabs the properties and sells them to local owner-occupants on affordable terms, based on the current value of the house.
Thanks to NCC, Kendith and Ebalease Broxton and their three kids can remain in their home in Tampa. Kendith is a self-employed construction worker who earns about $20,000 a year. The family was severely underwater on their mortgage, with a loan nearly two and a half times larger than the value of their house, which plummeted in value after the nation's housing market collapsed. After the modification program, their debt went from nearly $285,000 to a little over $72,000. Their $1,455 in monthly mortgage payments has been cut to $600 a month.
The approach of NCC and other community-oriented lenders offers a dramatic contrast with the business model of Blackstone and other hedge-fund landlords-and argues for a very different approach. A growing number of community activists, mayors, and other local officials, as well as members of Congress, led by Senator Warren, are pushing HUD and FHFA to adopt new rules that will require the agencies to sell their portfolios of distressed mortgages to purchasers that put the interests of occupants and neighborhoods first, instead of selling them to speculators.
"Our government agencies are supposed to work for American families-not for the biggest financial institutions-and they should be doing more to work with nonprofits to help families stay in their homes," says Warren.
HUD and FHFA have used an auction process for the majority of loans they've sold to date, selling to the highest bidder without regard to the quality of the bidder's program when it comes to saving homes from foreclosure and creating affordable housing. Housing advocates have proposed several ways to address this: One way is the creation of a "first look program" that allows nonprofits first chance to bid on the pools before opening the auction up to all bidders. Alternatively, the government could establish a point system that gives more points to bidders with strong neighborhood-stabilization programs-a system common in government bidding. Additionally, a growing number of cities and states are asking HUD and FHFA to make "direct sales" of mortgage pools in a given geography to qualified nonprofits.
Earlier this year, a coalition of consumer, civil-rights, and community groups-Right to the City, Americans for Financial Reform, the Center for American Progress, the Center for Popular Democracy, the National Consumer Law Center, the National Community Reinvestment Coalition, National Council of La Raza, the National Association for Latino Community Asset Builders, the National Fair Housing Alliance, the Leadership Conference on Civil and Human Rights, the California Reinvestment Coalition, and the Greenlining Institute-sent a letter to HUD, asking the agency to stop auctioning off the loans until it puts in place rules to limit sales of HUD and FHFA loans and properties to Wall Street speculators; to give priority to nonprofit groups in the disposition of troubled properties; and to require buyers of these loan pools to help homeowners avoid foreclosure. The activists also want FHFA director Mel Watt to immediately begin offering principal reduction to homeowners whose mortgages are held by Fannie Mae and Freddie Mac and who are drowning in debt.
"Predatory lending and the housing crash took a big toll on San Francisco and particularly our working class African American and Latino neighborhoods," said John Avalos, an elected member of the city's Board of Supervisors. "The last thing we need is HUD and Fannie Mae selling troubled mortgages to hedge funds."
The Center for Popular Democracy and Local Progress (a network of progressive local elected officials) enlisted the mayors of 17 cities, including New York, Los Angeles, Oakland, Newark, Pittsburgh, and Minneapolis, to co-sponsor a resolution they took to the annual U.S. Conference of Mayors meeting in June. The resolution, urging HUD and FHFA, as well as banks, to sell delinquent mortgages to nonprofits for foreclosure prevention and affordable housing, not to speculators, passed unanimously. These local elected officials are joining with community groups and taking their demands directly to the directors of HUD and FHFA in Washington, D.C.
"We can't let Wall Street colonize our neighborhoods. Wall Street got us into this mess and now they've found one more way to make money while harming our neighborhoods," said Amy Schur, campaign director of the Alliance of Californians for Community Empowerment. "Our communities need HUD, Fannie Mae, and Freddie Mac to stop facilitating this housing grab by speculators and instead advance the goal of neighborhood stabilization. They need to make it a priority to sell their delinquent mortgages to responsible nonprofits committed to saving homes from foreclosures and creating affordable housing."
Correction: A previous version of this article stated that the Blackstone Group has spent nearly $7.5 million since the financial crisis to purchase 40,000 single-family homes. In fact, they have spent nearly $7.5 billion.
