Meet Your New Landlord, America: Wall Street

 What mortgage crisis? (NYT via RealtyTrac)

What mortgage crisis? (NYT via RealtyTrac)

The New York Times has been running a series about the quietly dominant role private equity firms have started to play in many aspects of our lives - from responding to 911 calls to writing local laws - but this week it finally addressed what I think these firms are having the biggest impact on: buying and renting homes.  I've written a number of blogs about how the mortgage crisis never really ended and that is partly because private equity firms swarmed the housing market as banks retreated after the 2008 crash. Despite putting billions of dollars into housing, these firms have only masked the crisis and have not solved it by any means.

Over the past 6 years alone, a small handful of private equity firms have bought up over 500,000 homes across the country while avoiding regulations that banks were subject to which were intended to prevent foreclosures.  As a result, instead of fundamentally addressing the structural causes of the foreclosure crisis, we have in many ways maintained the same problem with fewer policy tools at hand to address them.

I won't rehash all of the details of the 2008 crash here, but want to point out that an estimated 10 million Americans lost their homes during the crisis, representing the single largest collective migration of Americans in history.  

The basic formula for the crisis, as I've seen it, had three pillars:

1. Unfounded societal preference for homeownership.  

2. Excessive governmental support for homeownership.  

3. Reckless financial exploitation of homeownership. 

You simply can't create such a devastating, slow-moving event like the 2008 crash without indicting everyone.  We've crafted the American Dream to include a house and a green backyard as opposed to an apartment and a public park. We've created 80 years of laws to subsidize homeownership for some while excluding most minorities. And we've actively or passively encouraged financial practices that range from unethical to illegal. So the next time you hear someone say "Well, that person should have known they couldn't afford a $600,000 house," remember that everyone was telling that person that they could and should. The deck was thoroughly stacked against them.

When the crash occurred, millions of homeowners were defaulting on mortgage payments and the institutions backing those mortgages came under considerable financial pressure, particularly Freddie Mac and Fannie Mae, the federally-sponsored private companies that back most private home mortgages in the country.  As I've previously discussed, there is an ongoing debate about how much trouble Freddie and Fannie were actually in, but the Bush Administration and then the Obama Administration balked at pressure from financial leaders to deem the companies at-risk and took them over, infusing them with nearly $500 billion in tax dollars. 

At this point, the US Government had several options to solve the crisis. They could 'bail out' the financial institutions providing liquidity for the mortgage market and hope that the market self-corrects; they could 'bail out' homeowners and reduce principal payments on individual mortgages relieving millions of Americans of the risk of losing their homes; and they could prosecute rouge actors in the market and further regulate how banks provide mortgages to homeowners. They could also begin to address the underlying economic and cultural conditions that led to the crisis in the first place.

Technically, the US Government has done the first three, but realistically the main trust of the government's intervention, the Troubled Asset Relief Program (TARP), bailed out financial institutions and ignored homeowners and bad actors. Of that $500b I mentioned earlier, only a small portion went to actual homeowners, resulting in only about 1.2 million who received even modest principal reduction on their mortgages.  As for sending people to jail, only some of the smaller, egregious actors in the market were prosecuted while major banks such as Wells Fargo and Bank of America escaped with slap-wrist fines.  And finally, there wasn't much discussion about root causes of the crisis or what broader policies could be created to address them.

Ironically, it was some of the regulations introduced during this period, and further flushed out in Dodd-Frank, that caused banks to turn away from mortgages, leaving a vacuum for private equity firms. Whereas banks were required to seek out low-income homeowners and to resist foreclosures at all-costs, private equity firms do not face any such restrictions or mandates.  Why? Because banks borrow money from (and are accountable to) the government and private equity firms don't, relying instead on private investors. 

What is more troubling is the government's eagerness to work with private equity firms in the housing market despite not obtaining the same policy compromises from banks. Federal housing agencies have sold off over 100,000 homes with trouble mortgages to these firms in the last few years, often at steep discounts of 30%. If the US government valued low-income homeownership and averting foreclosures so much, you would think it would require similar concessions from private equity firms in order to get such good deals.

In theory, private equity firms buying these troubled mortgages have some positive effects.  By one count, 10% of mortgages sold to these firms were abandoned homes that were put back on the market.  This obviously is good news for some buyers and surrounding homeowners.  The billions of dollars put into the housing market have also stabilized housing prices nationally, certainly helping millions of other homeowners. This has dulled the overt signs of distress from the mortgage crisis.

In practice however, it appears that private equity firms are not having a completely positive impact on the communities they are operating in.  By most accounts, they are more likely to foreclose on residents than banks.  The NY Times found that one company, Lone Star, has foreclosed on 20% of the properties it has bought from the federal government and only restructured about 9%. This has proven especially true in certain markets that have rebounded faster than the country as a whole.  Parts of Florida and Ohio where these firms own homes have seen higher foreclosure rates than other states.  These firms are clearly clawing back and flipping houses that are recouping value quickly and sitting on ones that aren't until they do. They don't appear particularly concerned about the impact those decisions have on the residents and communities affected by them and, in their defense, they don't have to be.

Far from restoring the housing market, this type of massive speculation further warps it by encouraging more foreclosures that harm families and communities (often by massive conflicts of interests within these companies), removing housing stock in attractive markets from local buyers (or putting more pressure on prices), and by trapping people in false foreclosure proceedings through clerical errors due to amassing millions of mortgages in a short span of time. 

As many housing advocates, housing lawyers, and, increasingly, government officials are starting to notice, private equity firms are no better at handling the crisis than banks or government agencies and might be worse. They have not kept enough people in their homes. They only focus on markets that probably would have recovered anyway while ignoring potentially needier markets.  They are also only beholden to investors - and the returns on the bonds created by these assets have been keeping them happy.  (A further irony is that some of these investors are public pension funds that likely have members that are being affected by the crisis.) This is the best outcome we can hope for?

This is why I maintain that the mortgage crisis has never ended.  Those three basic housing pillars that led to it are still in place.  Unless we question and reassess all three of these pillars, we're just going to recreate the crisis over and over again.  We can't keep relying on exotic financial products to 'cure' the housing market whether they come from private equity firms or banks. We must create policies that create affordable housing in a variety of forms in a variety of places. We can't keep allowing the government to warp housing policy which gives away too much tax money while preventing too many Americans from actually finding a secure home.  We must steer federal policy towards housing as a right and not a wealth-vehicle. Finally, we can't keep clinging to the false notion that homeownership is the key to the American Dream. Perhaps it is for some Americans, but surly having a safe, affordable place to live whether you own it or rent it should be obtainable for all Americans.

Right now our public and private sectors are failing us all in housing.  We can keep punting on addressing the economic conditions that make it so difficult for Americans to afford a decent home on the one hand but make it so attractive for powerful financial institutions to exploit it on the other. We can keep papering over the dire conditions that many homeowners and renters are currently in hoping that the economy bails us out. Largely because of private equity firms stepping in as our nation's landlord, many of us have stopped worrying about it altogether. Recent history should make us wary of stopping there.