Foreclosure Crisis

PE Firms Renting Homes Proves How Fraudulent Federal Housing Policy Is

Since when is this a thing? (cnbc)

Since when is this a thing? (cnbc)

 

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.

In Debt We Trust

Going in the wrong direction (privatedebtproject)

Going in the wrong direction (privatedebtproject)

As Slate writer Henry Grabar pointed out this week, the US reached a symbolic (but, admittedly, arbitrary) milestone in March when the total amount of household debt measured by the Federal Reserve reached $12.73 trillion, surpassing the previous high in 2008.  There’s nothing inherently wrong with holding debt - capitalism can’t function without it - but the type of debt that Americans now hold has changed considerably, especially in the last ten years, and the trend is troubling.  This change is inescapably linked to the affordable housing crisis and the larger crisis of late capitalism that we are slowly waking up to. 

Home mortgages make up the vast majority of household debt ($8.63 trillion, 68%), which is to be expected, but student loans ($1.34 trillion, 11%) and car loans ($1.17 trillion, 9%) have risen as a share of total debt to a remarkable degree just in ten years (from 5% and 6%, respectively).  Credit card debt ($764 billion, 6%) and home equity credit ($456 billion, 4%) are the other large debt categories, but like mortgage debt, their relative share of total debt are about the same over 10 years.

I pointed out earlier that the milestone of $12.73t is basically arbitrary because it’s not adjusted for inflation and doesn’t contextualize the overall growth of the economy.  Relative to the size of the economy, this level of debt is 67% of GDP, down from 85% of GDP in 2008 at the height of the crash.  You could argue that this shows we are in better shape than 10 years ago, which is true, but it also shows that even “better shape” is not very good.

So what does this all mean? And how does this inform the affordable housing crisis?

Basically, all of these numbers reinforce the narrative that Americans, particularly of the younger and poorer variety, are struggling to gain security in today’s economy at an unprecedented scale – even as the economy continues to grow and corporate profits continue to increase.

Having a degree, having a car, and having a house used to be affordable ways to gain entry into the middle class.  But these assets are exponentially more expensive today than 30 years ago and we are going into greater debt to get them.  What's worse, they aren’t the guarantees of security they used to be.  That’s not a sign of a healthy economy or society.

There is one simple explanation for why this is happening: workers are not getting paid enough.  Since 1973 the average economic output per worker has grown by 72%.  That’s a steady clip of increased productivity (though it has slowed down) and is partly the result of the Information Technology revolution in the work place.

However, during that same period, average wages have only gone up by 9%.  Since 2000, this gap has gotten even bigger. Productivity has increased by 21% but wages have only increased by 2%.

As the Economic Policy Institute points out in a 2015 report, this was no accident. The explosion of compensation at the top end of the pay scale and the concentration of profit at the shareholder level (as opposed to labor) are the direct results of 30 years of federal regulatory, trade, and tax policies.  We live in a deeply unequal period as a result of a particular form of government intervention.

(As the recent American Airlines effort to raise wages shows, even corporations that try to buck this trend are punished in the market.)

It’s no surprise that by the late 1970s household debt started rising rapidly while personal savings decreased rapidly. By the early 1990s, the average Americans household had more debt than savings (as the picture at the top of this article shows). This trend has only gotten worse, despite a slight dip during the Great Recession. 

Our consumer culture didn’t adjust to a decrease in wages (or even put political pressure on increasing wages.)  It simply created new financial tools to allow us to keep spending.

There has long been the basic idea that there is “good debt” and “bad debt.”  Good debt is an investment in the future, like taking out a loan to build a bigger factory, which pays for itself in the long run. Bad debt is borrowing from the future to cover today, like a pay-day loan or covering operating costs with capital budgets. That rarely works out.

The problem today is that it’s no longer clear what debt is good and bad.  Student loans were generally seen as good debt - an investment in acquiring skills that will pay off in the long run in a higher salary - but its unclear what skills will be valued and at what salary in the near or long term economy.  The cost of undergraduate and graduate degrees have also increased dramatically as we have placed more importance on them as a society – all while their value has become more uncertain.

Nowhere is this debt doubt more apparent than homeownership. Even though homeownership rates are at the lowest they have been in 50 years, 64% of Americans still own their home. This represents the bulk of American households’ wealth and financial security.

As I’ve written before, that’s no accident or organic market outcome either.  It has been a concentrated policy effort at the federal level for 80 years.  We spend $134 billion a year subsidizing homeownership in this country – more than the entire budget of the Dept. of Justice, Education, and Energy combined.

The thinking was (and still is for the most part) that homeownership drives economic growth nationally and economic security personally.  (We really don’t know if that’s the case objectively because our society has been built around subsidizing this theory.) But, despite all of this intervention, these two basic conceits are not holding up in the modern economy. 

First, the idea that homes are guaranteed financial security is largely not true over the long run.  Robert Schiller has written often about how, despite the hype of house flipping or the recent bubble, home values on the national level haven’t increased at all.  For every hot real estate market like Las Vegas, there is a dying one in Youngstown, Ohio. 

Additionally, the foreclosure crisis never really ended.  There are still 3 million Americans underwater in their mortgages and many millions more that are dangerously close.  There has been a steady, if slow, increase in foreclosures in several markets.  Another downturn and we could see another spike.

Finally, and perhaps most troubling, there is an entire generation of suburban homeowners in certain markets (the Northeast and Midwest in particular) retiring whose wealth is tied up in homes that no one wants to buy.  The paper wealth associated with a home is only real if someone buys it at that price.  Long term demographics and economic development trends should cast serious doubt on the value of many of these homes in the near future.  

Second, the emphasis on homeownership (particularly in far-flung suburbs) is terrible for the national economy’s future.  All signs point to millennials wanting to own homes just like any other generation, but that doesn’t mean they will want to live where cheap single-family homes are available, because those areas don’t generally have a concentration of accessible, high-paying jobs.

On the flip side, high-paying jobs are increasingly concentrated in cities with highly regulated land use and, not surprisingly, housing prices have skyrocketed.  The economic benefit of high wages are largely gobbled up by big down payments and expensive mortgages, which limits the ability for a household to invest in other purchases.  

The federal government has consciously created the affordable housing crisis through debt on two fronts.  On the one hand, they have spent decades, along with billions of dollars, encouraging suburban homeownership through subsidizing mortgages among other policies, which has counter-intuitively created an asset class that has little re-adaptability as the economy changes along with demographics. Millions of Americans have wealth tied up in their homes that might simply vanish in the coming decades.

And on the other hand, they have instituted 40 years of economic policy that has frozen wages for the majority of Americans while lavishing profits on the top individuals and biggest corporations.  They have allowed increasingly exotic and pernicious financial tools to mask this scandal by allowing people to build massive amounts of personal debt.  Only after the crash did they properly regulate the mortgage market (now 60% of mortgages go to individuals with high credit scores, double from a decade ago) while other debt markets (particularly car loans) are largely under-regulated. 

Because there is no such thing as the free market without government intervention, we must re-examine what economy we want our government to create.  Do we want a debt-riddled society that is financially vulnerable at a near-permanent level? Do we want a society that politically and financially rewards a tiny percentage of the population at the expense of the rest?

Our government has created a homeownership society that is increasingly based on higher levels of debt. It has the power to create an affordable housing society that doesn’t rely on debt.  It’s up to us to make it do so.

The Silent Sandy: the Foreclosure Crisis in NYC

The Silent Sandy in progress (New Economy Project)

The Silent Sandy in progress (New Economy Project)

In following up on my previous post about how the foreclosure crisis never really ended nationally, I want to discuss how it has been playing out in New York City, particularly for minority homeowners.

Though the national narrative during the crisis in 2008-2009 focused on the Sun Belt states, certain neighborhoods in NYC (particularly in Queens and Brooklyn) were ravaged at even higher rates.  Disturbingly, the numbers of people affected today have effectively stayed at the numbers from this period.  Much of this blog post pulls information from testimony given in 2015 by Linda Jun, a staff attorney with MFY Legal Services, a non-profit legal aid group, and a 2011 report issued by NY Communities for Change. 

Before discussing the current situation in NYC, it is worth going back over some numbers from the 2008 crash, which help to explain why today is just as bad for minorities. Though traditionally only about 1/3 of New Yorkers own their home, the racial breakdown of ownership is stark: 41% of Whites and Asians, 26.5% of Blacks, 16% of Latinos own homes.  

In 2009, Black and Latino homeowners represented 32% of all NYC homeowners, but 56% of all pre-foreclosure notices, and 53% of all underwater mortgages - making them 175% more likely to be at risk of foreclosure than White homeowners. (Pre-foreclosure notices are triggered when a homeowner has missed 90 days of payments. Underwater mortgages mean the payments on the mortgage are higher than the value of the home itself.)  

State court filings for actual foreclosures totaled 47, 664 for that year.  Given that this was the peak of the crisis, it's not a surprise that that number was a record. Keep that number in mind.

Much of this can be explained by the concentration of subprime loans that disproportionately affected minority homeowners (which has been grossly under-prosecuted despite multiple settlements). Black and Latino homeowners were 5.5 and 4.1 times more likely to receive these types of loans than White homeowners. Subprime loans are now infamous, but it's easy to forget that they were intended to extend loans to people with poor or almost no credit, seemingly a good intention to encourage homeownership.  Also, the assumption was that property values would continue to rise, making any loan viable.

In practice, these loans offered exploding interest rates and hidden charges that were intentionally deceptive and intentionally designed to target minority homeowners (who historically have bad credit because scores are based on out-dated and discriminatory models).  When property values failed to keep climbing as required for the deals to make sense, and these higher rates kicked in, the result was the loss of thousands of minority-owned homes across the city. 

There were alarm bells about the practice even before the bubble burst in the city, including from Senator Schumer's office, but not enough was done to prevent it.  And sadly, not enough is currently being done to fix it or, heaven forbid, prevent another one. 

You can see this lack of action play out over the last 7-8 years.  After some dips in 2010-2011, numbers have started to climb and by 2013 there were 46,696 new filings for foreclosures - almost the same levels of 2009 (though the numbers appeared to have dipped slightly in 2014). You wouldn't know that from the rather rosy images of New York City real estate because the boom continues at the upper end of the market.  Therefore it's easy to miss the extent of the crisis because it's so concentrated in minority-majority neighborhoods.

With thousands of homeowners still at risk of losing their homes, it is depressing how little this is discussed in New York City at the public level. Rightfully, the need for affordable rental housing has been a major issue that has dominated the housing conversation, but 13% of homeowners are underwater in the city.  That represents a huge portion of New Yorkers, not to mention a huge portion of property tax money lost to the city (Ms. Jun estimates $84m.) 

As I discussed in the previous post, there have been national programs put together to assist homeowners in refinancing or permanently reducing payments, but many were difficult to qualify for and were short-term fixes based on the faulty assumptions that wages and property values would eventually return to pre-recession levels.  This has simply not happened and many homeowners have received little or no reduction in principal payments, interest rates, or other fees. More concerning is that only 16% of NYC homeowners that have applied for permanent reductions have received them. Discriminatory practices still lurk in the housing market at every financial turn.

This has left New York City with two housing crises - the well-known rental housing one, and the lesser known mortgage one.  Both have harrowing implications for thousands of New Yorkers right now.  Mayor De Blasio has outlined a detailed, if, in many tenant circles, controversial Housing Plan that at the very least addresses many of the issues in the rental housing crisis, but the city, state, and federal governments must act on the mortgage crisis or a repeat of 2008  or worse isn't out of the question.

The need for principal reduction, advocated for in this blog before, is plain to see. The often sited 'moral hazard' argument doesn't hold up when compared to the bailout or the fact that many lenders settled with the federal government for billions of dollars for unlawful lending practices.  Fixing said lending practices (including how credit scores are calculated) to create manageable and transparent payment plans would help those interested in homeownership.  Finally, finding new housing systems and ownership structures to diversify the housing options for people would remove the binary "Sophie's Choice" of getting a mortgage you can't afford or getting priced out of a rental.

What can be so frustrating about surveying this landscape is how many solutions are actually out there, waiting to be tested.  We have two housing crises in this city because choices were made that could have easily not been made and can in fact be unmade. We can address these issues if we choose to.