New York Magazine had a truly scathing article about the Department of Housing and Urban Development under Secretary Carson last week and it’s worth reading. He is as disinterested and unaware of housing policy as many feared, but surprisingly, to me anyway, he is also as prone to incompetence, nepotism, and cronyism as his boss. I could go on about how bad things are at HUD and why that is terrible for the affordable housing crisis, but one person who played a minor role in the story deserves more focus: Maren Kasper.
Ms. Kasper’s presence in government offers a chance to talk about the significant growth of private equity firms in the single-family housing market and why it confirms how fraudulent the federal government’s stated policy of encouraging homeownership truly is. It also shows that addressing the affordable housing crisis is not a priority of the federal government under either party.
Before I get to Ms. Kasper, let’s quickly review what happened during the foreclosure crisis in 2007–2008. The long-held bi-partisan focus on promoting homeownership in the US created a policy apparatus that over decades became a two-headed monster that was bound to devour itself and us along with it.
On the one side, through massive Government Sponsored Organizations (GSOs) like Fannie Mae and Freddie Mac, the federal government subsidized homeownership by backing mortgages and allowing them to be securitized and traded on secondary markets. Over time, mortgages were bundled and unbundled, divided and combined, sold and resold to the extent that it was hard to know where they originated. The largest, most powerful banks in the country traded in this profitable and increasingly complex system, which became a main engine of the American economy.
On the other, in the interest of raising homeownership rates, government policies created incentives for banks and other mortgage lenders to offer increasingly absurd or pernicious mortgages for traditionally unqualified buyers — the most infamous example being the sub-prime mortgage. Millions of Americans took out mortgages that they could not realistically expect to support based on willful ignorance, carelessness, and outright criminality from the industry.
You know the rest. Inevitably, the system collapsed on itself and caused the greatest economic crisis since the Great Depression. An estimated 10 million Americans lost their homes and 30% of all homeowners were underwater in their mortgages. The financial system was bailed out and Fannie and Freddie came under government receivership, where they remain today.
Some banks like Wells Fargo, Bank of America, and Goldman Sachs were forced to pay millions in fines and one or two low-level people went to jail. Some lending policies were tweaked and financial regulations were added in Dodd-Frank. Some people continued to lose their homes or remain underwater. The country and the press largely moved on.
But the crisis never really went away. That’s because the underlying roots of the crisis were never honestly accounted for or discussed at the policy level. The bigger problem is that Americans can’t afford basic goods and services anymore without taking on huge amounts of debt.
Rather than address ways to increase Americans’ incomes and purchasing power, or to control the costs of important needs like housing, education, and healthcare, we’ve encouraged increasingly exotic financial instruments to fill the gap.
That’s what our federal housing policy actually is — a series of exotic financial instruments. On the surface, it provides a means for Americans to buy homes, but look deeper and it is in fact a giant wealth transfer for financial institutions.
By allowing housing — the land, the structure, and the mortgage — to become a commodity (through the policies that I mentioned earlier, but just as importantly, through the tax code) they’ve increased the incentive to speculate on housing just like any other traded good.
In the immediate aftermath of the crisis, this naturally led to a rush of private equity firms into the housing market, buying up thousands of foreclosed homes on the cheap.
The government could have helped keep families in these homes, could have kept ownership of them, or could have sold them to non-profit housing groups. Instead it allowed speculators to dominate this vulnerable market, flying in the face of what the goals of housing policy were supposedly intended to do.
That brings us to Ms. Kasper, who worked at a west coast startup company called Roofstock before she entered the Trump Administration. The company is a platform that helps investors buy single-family homes with the intention of renting them. Roofstock offers a chance for smaller investors to compete with PE firms in the same speculative game.
The space for renting single-family homes is rapidly expanding, thanks to the government. Just this month, Blackstone merged with Starwood Waypoint Homes to form one of the largest landlord entities in the country, with over 80,000 homes under management. The NY Times had a detailed article about the new focus and it’s worth checking out.
In 2015, when Blackstone originally announced it was spinning-off its business into a publicly traded home rental company, it also quietly announced that Fannie Mae was backing $1 billion of its mortgage debt.
If it seems counter-intuitive for a single-family home to be owned by large private equity firms, you’re right. If it seems counter-intuitive for the federal government to support private equity firms — or investor platforms like Roofstock — in owning single-family homes, you’d also be right. But that’s exactly what is happening.
So let’s be clear: it has been federal policy to encourage homeownership for the average American family for 70 years to create an ownership society, to promote economic development and strengthen civic commitment (with decidedly mixed results). The government has spent trillions of dollars subsidizing the industry as a result. Now, that policy directly supports the opposite. How does that make any sense?
It doesn’t. The truth is, secure housing for Americans may have been the initial goal of federal policy (for white Americans, anyway) but by the 1970s the true goal was to enrich private interests through the commodification of housing.
The move to subsidize private equity firms as they rent out homes just shows that this reality no longer has to be hidden from the public. This contradiction doesn’t factor in to policy discussions — at all. Who in either party is willing to talk about this? Who is willing to question if this is good for the country?
It’s also clear that this trend is making it harder for Americans to afford homes, particularly at the lower-end of the market and in hotter secondary markets. First time buyers are competing with these investors for the same housing, but often don’t have nearly as much cash on hand for the deposit. In many cases, they instead get to rent those homes for increased rents. The federal government has increased the cost of shelter for Americans.
It is clear that affordable housing will not be a central goal in the Trump Administration. HUD is in serious trouble under Secretary Carson. Massive budget cuts are expected to further weaken the agency’s mission. Tax reform threatens the only (flawed) federal affordable housing policy, the Low-Income Tax Credit. And the desire to deregulate the financial industry further only speeds up a future crisis.
As a coda, Ms. Kasper, the only visible member of the administration with even a modicum of housing experience, is now working at Ginnie Mae, which like Fannie and Freddie, backs mortgages. She will likely pursue more support for private investors to enter the single-family housing rental market.
If this doesn’t show how bad federal housing policy is, I don’t know what will. We have learned little from the Great Recession and we have no new ideas at the federal level for the ongoing affordable housing crisis that doesn’t rely on the same flawed market thinking. Until either party is confronted with the flawed logic of our housing policy, the cycle of crisis will continue.