The Hill, February 1, 2018
The stealth invasion of Main Street by Wall Street continues. You can hardly buy a cup of coffee without lining the pockets of a private-equity firm. Peet’s Coffee and Panera Bread are private-equity (PE) owned.
The bankruptcies of popular retail chains like Gymboree, Toys "R" Us, and Payless Shoes can be chalked up to the high debts and excessive rents loaded onto these companies by their private-equity owners. With company resources drained by private-equity owners, these retailers were hard pressed to respond to Amazon and invest in online shopping.
But perhaps most insidious infiltration of private equity is into single-family home rentals, turning these homes into an investment-grade asset that can be sliced, diced and sold to investors and managed with investors — not tenants — in mind. Wall Street landlords extract the highest rents with the least investment, allow building conditions to deteriorate, then dump the property on the market or abandon it.
When the housing market crashed 10 years ago, more than nine million disproportionately low- and middle-income homeowners, often situated in communities of color, lost their homes. Mortgage lenders made their money originating loans; it was someone else’s problem if the loans went bad.
Wall Street banks and other financial institutions got billions of dollars in government bailouts to see them through the financial crisis, but few families got loan modifications to help them keep their homes.
What to do with those vacant houses? In 2012, the Federal Housing Finance Agency (FHFA) introduced a pilot plan that actively sought investors to buy foreclosed homes in hard-hit cities at a steep discount if they agreed to turn them into rental properties.
Fannie Mae and Freddie Mac, quasi-government agencies, and the Federal Housing Finance Agency (FHFA), which oversees them, could have paved the way for local homeowners and community groups to buy up vacant homes in their neighborhoods.
They could have given them preference over absentee landlords and Wall Street speculators. Instead, the FHFA, Fannie Mae, Freddie Mac and other government agencies turned to Wall Street buyers — sometimes providing them with loan guarantees that put taxpayers on the hook if the deal soured.
As painstakingly documented in an important new report, the government’s stamp of approval made single-family rentals a legitimate space for financial investors. Private-equity giant Blackstone Group created Invitation Homes to buy up pools of houses.
Beginning in 2013, Wall Street firms, starting with Blackstone, have bundled the rents together and created new securities: single-family rental bonds that are being sold to investors. Some of these securities got triple-A ratings from bond agencies reminiscent of the scandalous mortgage-backed securities that contributed to the 2008 financial meltdown.
By 2016, more than 100,000 mortgage loans had been sold to investors, 98 percent to private-equity firms, of which nearly one-third went to Blackstone affiliate, Bayview.
In 2017, Fannie Mae agreed to back a $1-billion loan to Invitation Homes to buy up more single-family rentals. This again shifted the risk to U.S. taxpayers and created a huge financial windfall for one of the biggest PE-backed landlords in the United States, which can now borrow at a lower interest rate.
Yet, the government made no demands on Invitation Homes to limit rent increases, maintain the properties in good condition or work with renters in a good-faith effort to avoid evictions in exchange for this benefit.
The federal government missed a major opportunity to use these large pools of vacant houses to help families rebuild their lives and communities.
Even now, after transferring so much wealth from local communities to Wall Street firms, there are steps that states and the federal government can take to level the playing field for renters whose landlords are multi-billion dollar businesses.
Federal agencies can adopt rules that make it easier for families and nonprofits to buy up vacant properties. States can impose common sense requirements that limit rent increases and eviction rules to curb the uniquely high eviction rates by some corporate landlords and Wall Street investors.