How Wall St is blowing up US housing, again

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By Laura Gottesdiener, a journalist and the author of A Dream Foreclosed: Black America and the Fight for a Place to Call Home, published in August by Zuccotti Park Press. She is an editor for Waging Nonviolence and has written for Rolling Stone, Ms., Playboy, the Huffington Post, and other publications. She lived and worked in the People’s Kitchen during the occupation of Zuccotti Park.  Cross posted from Naked Capitalism

Over the last year and a half, Wall Street hedge funds and private equity firms have quietly amassed an unprecedented rental empire, snapping up Queen Anne Victorians in Atlanta, brick-faced bungalows in Chicago, Spanish revivals in Phoenix. In total, these deep-pocketed investors have bought more than 200,000 cheap, mostly foreclosed houses in cities hardest hit by the economic meltdown.

Wall Street’s foreclosure crisis, which began in late 2007 and forced more than 10 million people from their homes, has created a paradoxical problem. Millions of evicted Americans need a safe place to live, even as millions of vacant, bank-owned houses are blighting neighborhoods and spurring a rise in crime. Lucky for us, Wall Street has devised a solution: It’s going to rent these foreclosed houses back to us. In the process, it’s devised a new form of securitization that could cause this whole plan to blow up — again.

Since the buying frenzy began, no company has picked up more houses than the Blackstone Group, the largest private equity firm in the world. Using a subsidiary company, Invitation Homes, Blackstone has grabbed houses at foreclosure auctions, through local brokers, and in bulk purchases directly from banks the same way a regular person might stock up on toilet paper from Costco.

In one move, it bought 1,400 houses in Atlanta in a single day. As of November, Blackstone had spent $7.5 billion to buy 40,000 mostly foreclosed houses across the country. That’s a spending rate of $100 million a week since October 2012. It recently announced plans to take the business international, beginning in foreclosure-ravaged Spain.

Few outside the finance industry have heard of Blackstone. Yet today, it’s the largest owner of single-family rental homes in the nation — and of a whole lot of other things, too. It owns part or all of the Hilton Hotel chain, Southern Cross Healthcare, Houghton Mifflin publishing house, the Weather Channel, Sea World, the arts and crafts chain Michael’s, Orangina, and dozens of other companies.

Blackstone manages more than $210 billion in assets, according to its 2012 Securities and Exchange Commission annual filing. It’s also a public company with a list of institutional owners that reads like a who’s who of companies recently implicated in lawsuits over the mortgage crisis, including Morgan Stanley, Citigroup, Deutsche Bank, UBS, Bank of America, Goldman Sachs, and of course JP Morgan Chase, which just settled a lawsuit with the Department of Justice over its risky and often illegal mortgage practices, agreeing to pay an unprecedented $13 billion fine.

In other words, if Blackstone makes money by capitalizing on the housing crisis, all these other Wall Street banks — generally regarded as the main culprits in creating the conditions that led to the foreclosure crisis in the first place — make money too.

An All-Cash Goliath

In neighborhoods across the country, many residents didn’t have to know what Blackstone was to realize that things were going seriously wrong.

Last year, Mark Alston, a real estate broker in Los Angeles, began noticing something strange happening. Home prices were rising. And they were rising fast — up 20% between October 2012 and the same month this year. In a normal market, rising home prices would mean increased demand from homebuyers. But here was the unnerving thing: the homeownership rate was dropping, the first sign for Alston that the market was somehow out of whack.

The second sign was the buyers themselves.

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About 5% of Blackstone’s properties, approximately 2,000 houses, are located in the Charlotte metro area. Of those, just under 1,000 (pictured above) are in Mecklenberg County, the city’s center. (Map by Anthony Giancatarino, research by Symone New.)

“I went two years without selling to a black family, and that wasn’t for lack of trying,” says Alston, whose business is concentrated in inner-city neighborhoods where the majority of residents are African American and Hispanic. Instead, all his buyers — every last one of them — were besuited businessmen. And weirder yet, they were all paying in cash.

Between 2005 and 2009, the mortgage crisis, fueled by racially discriminatory lending practices, destroyed 53% of African American wealth and 66% of Hispanic wealth, figures that stagger the imagination. As a result, it’s safe to say that few blacks or Hispanics today are buying homes outright, in cash. Blackstone, on the other hand, doesn’t have a problem fronting the money, given its $3.6 billion credit line arranged by Deutsche Bank. This money has allowed it to outbid families who have to secure traditional financing. It’s also paved the way for the company to purchase a lot of homes very quickly, shocking local markets and driving prices up in a way that pushes even more families out of the game.

“You can’t compete with a company that’s betting on speculative future value when they’re playing with cash,” says Alston. “It’s almost like they planned this.”

In hindsight, it’s clear that the Great Recession fueled a terrific wealth and asset transfer away from ordinary Americans and to financial institutions. During that crisis, Americans lost trillions of dollars of household wealth when housing prices crashed, while banks seized about five million homes. But what’s just beginning to emerge is how, as in the recession years, the recovery itself continues to drive the process of transferring wealth and power from the bottom to the top.

From 2009-2012, the top 1% of Americans captured 95% of income gains. Now, as the housing market rebounds, billions of dollars in recovered housing wealth are flowing straight to Wall Street instead of to families and communities. Since spring 2012, just at the time when Blackstone began buying foreclosed homes in bulk, an estimated $88 billion of housing wealth accumulation has gone straight to banks or institutional investors as a result of their residential property holdings, according to an analysis by TomDispatch. And it’s a number that’s likely to just keep growing.

“Institutional investors are siphoning the wealth and the ability for wealth accumulation out of underserved communities,” says Henry Wade, founder of the Arizona Association of Real Estate Brokers.

But buying homes cheap and then waiting for them to appreciate in value isn’t the only way Blackstone is making money on this deal. It wants your rental payment, too.

Securitizing Rentals

Wall Street’s rental empire is entirely new. The single-family rental industry used to be the bailiwick of small-time mom-and-pop operations. But what makes this moment unprecedented is the financial alchemy that Blackstone added. In November, after many months of hype, Blackstone released history’s first rated bond backed by securitized rental payments. And once investors tripped over themselves in a rush to get it, Blackstone’s competitors announced that they, too, would develop similar securities as soon as possible.

Depending on whom you ask, the idea of bundling rental payments and selling them off to investors is either a natural evolution of the finance industry or a fire-breathing chimera.

“This is a new frontier,” comments Ted Weinstein, a consultant in the real-estate-owned homes industry for 30 years. “It’s something I never really would have dreamt of.”

However, to anyone who went through the 2008 mortgage-backed-security crisis, this new territory will sound strangely familiar.

“It’s just like a residential mortgage-backed security,” said one hedge-fund investor whose company does business with Blackstone. When asked why the public should expect these securities to be safe, given the fact that risky mortgage-backed securities caused the 2008 collapse, he responded, “Trust me.”

For Blackstone, at least, the logic is simple. The company wants money upfront to purchase more cheap, foreclosed homes before prices rise. So it’s joined forces with JP Morgan, Credit Suisse, and Deutsche Bank to bundle the rental payments of 3,207 single-family houses and sell this bond to investors with mortgages on the underlying houses offered as collateral. This is, of course, just a test case for what could become a whole new industry of rental-backed securities.

Many major Wall Street banks are involved in the deal, according to a copy of the private pitch documents Blackstone sent to potential investors on October 31st, which was reviewed by TomDispatch. Deutsche Bank, JP Morgan, and Credit Suisse are helping market the bond. Wells Fargo is the certificate administrator. Midland Loan Services, a subsidiary of PNC Bank, is the loan servicer. (By the way, Deutsche Bank, JP Morgan Chase, Wells Fargo, and PNC Bank are all members of another clique: the list of banks foreclosing on the most families in 2013.)

According to interviews with economists, industry insiders, and housing activists, people are more or less holding their collective breath, hoping that what looks like a duck, swims like a duck, and quacks like a duck won’t crash the economy the same way the last flock of ducks did.

“You kind of just hope they know what they’re doing,” says Dean Baker, an economist with the Center for Economic and Policy Research. “That they have provisions for turnover and vacancies. But have they done that? Have they taken the appropriate care? I certainly wouldn’t count on it.” The cash flow analysis in the documents sent to investors assumes that 95% of these homes will be rented at all times, at an average monthly rent of $1,312. It’s an occupancy rate that real estate professionals describe as ambitious.

There’s one significant way, however, in which this kind of security differs from its mortgage-backed counterpart. When banks repossess mortgaged homes as collateral, there is at least the assumption (often incorrect due to botched or falsified paperwork from the banks) that the homeowner has, indeed, defaulted on her mortgage. In this case, however, if a single home-rental bond blows up, thousands of families could be evicted, whether or not they ever missed a single rental payment.

“We could well end up in that situation where you get a lot of people getting evicted… not because the tenants have fallen behind but because the landlords have fallen behind,” says Baker.

Bugs in Blackstone’s Housing Dreams

Whether these new securities are safe may boil down to the simple question of whether Blackstone proves to be a good property manager. Decent management practices will ensure high occupancy rates, predictable turnover, and increased investor confidence. Bad management will create complaints, investigations, and vacancies, all of which will increase the likelihood that Blackstone won’t have the cash flow to pay investors back.

If you ask CaDonna Porter, a tenant in one of Blackstone’s Invitation Homes properties in a suburb outside Atlanta, property management is exactly the skill that Blackstone lacks. “If I could shorten my lease — I signed a two-year lease — I definitely would,” says Porter.

The cockroaches and fat water bugs were the first problem in the Invitation Homes rental that she and her children moved into in September. Porter repeatedly filed online maintenance requests that were canceled without anyone coming to investigate the infestation. She called the company’s repairs hotline. No one answered.

The second problem arrived in an email with the subject line marked “URGENT.” Invitation Homes had failed to withdraw part of Porter’s November payment from her bank account, prompting the company to demand that she deliver the remaining payment in person, via certified funds, by five p.m. the following day or incur “the additional legal fee of $200 and dispossessory,” according to email correspondences reviewed by TomDispatch.

Porter took off from work to deliver the money order in person, only to receive an email saying that the payment had been rejected because it didn’t include the $200 late fee and an additional $75 insufficient funds fee. What followed were a maddening string of emails that recall the fraught and often fraudulent interactions between homeowners and mortgage-servicing companies. Invitation Homes repeatedly threatened to file for eviction unless Porter paid various penalty fees. She repeatedly asked the company to simply accept her month’s payment and leave her alone.

“I felt really harassed. I felt it was very unjust,” says Porter. She ultimately wrote that she would seek legal counsel, which caused Invitation Homes to immediately agree to accept the payment as “a one-time courtesy.”

Porter is still frustrated by the experience — and by the continued presence of the cockroaches. (“I put in another request today about the bugs, which will probably be canceled again.”)

A recent Huffington Post investigation and dozens of online reviews written by Invitation Homes tenants echo Porter’s frustrations. Many said maintenance requests went unanswered, while others complained that their spiffed-up houses actually had underlying structural issues.

There’s also at least one documented case of Blackstone moving into murkier legal territory. This fall, the Orlando, Florida, branch of Invitation Homes appeared to mail forged eviction notices to a homeowner named Francisco Molina, according to the Orlando Sentinel. Delivered in letter-sized manila envelopes, the fake notices claimed that an eviction had been filed against Molina in court, although the city confirmed otherwise. The kicker is that Invitation Homes didn’t even have the right to evict Molina, legally or otherwise. Blackstone’s purchase of the house had been reversed months earlier, but the company had lost track of that information.

The Great Recession of 2016?

These anecdotal stories about Invitation Homes being quick to evict tenants may prove to be the trend rather than the exception, given Blackstone’s underlying business model. Securitizing rental payments creates an intense pressure on the company to ensure that the monthly checks keep flowing. For renters, that may mean you either pay on the first of the month every month, or you’re out.

Although Blackstone has issued only one rental-payment security so far, it already seems to be putting this strict protocol into place. In Charlotte, North Carolina, for example, the company has filed eviction proceedings against a full 10% of its renters, according to a report by the Charlotte Observer.

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About 9% of Blackstone’s properties, approximately 3,600 houses, are located in the Phoenix metro area. Most are in low- to middle-income neighborhoods. (Map by Anthony Giancatarino, research by Jose Taveras.)

Forty thousand homes add up to only a small percentage of the total national housing stock. Yet in the cities Blackstone has targeted most aggressively, the concentration of its properties is staggering. In Phoenix, Arizona, some neighborhoods have at least one, if not two or three, Blackstone-owned homes on just about every block.

This inundation has some concerned that the private equity giant, perhaps in conjunction with other institutional investors, will exercise undue influence over regional markets, pushing up rental prices because of a lack of competition. The biggest concern among many ordinary Americans, however, should be that, not too many years from now, this whole rental empire and its hot new class of securities might fail, sending the economy into an all-too-familiar tailspin.

“You’re allowing Wall Street to control a significant sector of single-family housing,” said Michael Donley, a resident of Chicago who has been investigating Blackstone’s rapidly expanding presence in his neighborhood. “But is it sustainable?” he wondered. “It could all collapse in 2016, and you’ll be worse off than in 2008.”

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.


  1. This is truly despicable… You have to wonder if anyone at all cares about those less fortunate these days..

    • “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered”

      The words from Thomas Jefferson have never sounded more prescient.

      • Wow. I have heard that quote before but never in full. Looks like someone took Jefferson’s words to heart and created the system we have today.

        Goes to show, how ahead of times some of the thinkers back than were.

  2. +10 for posting this article!

    I hope this will open up MB reader’s eye to the fact the green shoots of US housing “recovery” is just astro turf, laid by Ben Bernanke and his Wall St buddies.

    • A lot of people say there are advantages to the way the housing market in Germany and Switzerland work, with home ownership low and renting regarded as the norm.

      Theoretically, in a free market, ordinary people should not be hurt by large-scale institutional involvement in housing rental, in fact the NZ Productivity Commission has lamented the very low institutional involvement in the NZ rental housing market. So this rising institutional involvement in housing in US cities does not seem to me to deserve condemnation in its own right.

      What does deserve condemnation is the rigging of financial markets to produce massive volatility from which a minority of very smart people benefit, while the costs in the subsequent crash will probably be socialised. And the layering of this onto “housing” which is a basic human right.

      I also believe there is nothing inherently wrong with securitisation on principle, but what is wrong is piling “leverage” on “leverage” with tickets being clipped at every stage. What beggars belief, to me, is that there are so many suckers out there in investment markets who will actually entrust part of their portfolios to the dealers in this precarious gambling racket. For every idiot who falls for Nigerian money-laundering frauds, there must be hundreds more who fall for “too good to be true” securities offerings.

      The presence of thousands more bureaucrats than ever before in history, working for regulatory agencies, has done jack to identify and warn of the downside risks – there is always some systemic belief that everything is “safe as houses” – the layer upon layer of securitisation and leverage is presumed on house prices, and now rents, never falling, and debtors and renters never defaulting – no matter how high the house prices/rents go and no matter how over-stretched households and “main street” get.

      Why wouldn’t Australia start falling for schemes of this nature, there is nothing that can go wrong with them, is there? Australian house prices and rents will never fall, everyone knows that. So why not introduce a few more layers into the system from which “wealth” can be created?

      • Theoretically, in a free market, ordinary people should not be hurt by large-scale institutional involvement in housing rental…

        The large-scale institution mentioned in this article managed to pump up housing 20% in one year. Surely you would admit that hurts the ordinary people that actually live around that area and want to buy a home. It will also be interesting to see what a large single player does to rental inflation.

        There’s also the moral issue here. The people that had their wealth wiped out are now being turned into serfs by the very cohort responsible for bankrupting many of them in the first place. This is vampire capitalism and should churn the stomach of any person.

        • There is this to be said: in Atlanta, the house price median multiple has crashed to 2.1 from 3.3

          So pumping up prices in that market by 20% is not the same as pumping up prices in Sydney right now at a median multiple of around 8.

          It seems to me that this institutional investor is concentrating on buying up property in truly “crashed” local markets. Also, these markets are “housing supply elastic” markets, so that the median multiples are unlikely to go back to much higher than 3.

          There is a huge difference between this, and an institutional investor doing the same in an already-unaffordable city. In fact institutional investors are tending to shy away from investing in already-unaffordable cities, whether in the US or Australia and NZ.

      • Theoretically, in a free market, ordinary people should not be hurt by large-scale institutional involvement in housing rental

        I disagree. The rental business simply does not scale up. You do not want to call a call centre when your heater goes up in flames as you are having a shower (not even if said call centre is located onshore and not in India ;).. though that is the next step in cost cutting) You would want immediate remedy and deal with a local human being (aka property manager).

        Note to self: if migrating to US, never ever rent from Colony , Invitation Homes (Blackstone) and American Homes 4 Rent.

        • This should not be a problem in housing-supply-elastic cities. It will not cause unaffordability and will ultimately find its own balance. The underlying problems we are constantly discussing here relate to severely inelastic-housing-supply cities in this part of the world, and this colours our perceptions of the rest of the world, sometimes misleadingly.

  3. Ugly indeed. But there doesn’t appear to be any social backlash against the financialisation and feudalism of housing so it can only be assumed that this is what voters want.

    • I’m sorry to say this – but not many of the new western worlds have any experience in revolutionary uprisings. The old western world does – good old Europe has seen its share of revolutions, but none of those would happen in the new world. They’re just too… too widespread, too hard to concentrate the anger, too many distractions for the potential participants to an uprising.

      They will need to find another way to instigate change – because a revolution or even a revolt is not possible in their conditions.

  4. The problem now is that more people are satisfied by economic health gauges such as the S&P 500 that have zombie economy baked in. Keynesian Democrats in an effort to demonstrate how wonderfully this crisis has been handled by the administration are waltzing us into Buffett’s “sharecropper economy”.

    Substitute negative gearers for US private equity and we’ve got essentially the same thing. Maybe the US will introduce negative gearing!

  5. Of course the great enabler of this outrageous shakedown has been the policy response, particularly monetary, by govt and central banks around the globe.

    All that easy money and TBTF protection of the incompetent has simply armed the miscreants that drove the GFC on to bigger and badder scams.

    What we are seeing in the Sydney property market is just a piss weak variant of the same.

    Governor Glenn has forced those who save to underwrite with cheap money the activities of speculators and the affluent.

  6. Substitute negative gearers for US private equity and we’ve got essentially the same thing here. Maybe the US will introduce negative gearing!

    We’re waltzing towards Buffett’s sharecropper economy with stupid smiles on our faces.

    • Pretty true.
      Aus export predatory negative gearing practices & open-arm approach to foreign ownership.
      In return, US could send a Blackstone delegation to smarten up RBA, Big4 freeloaders and RE industry in how to more ruthlessly shaft the working class.
      The Blackstone story is perfect example of disaster capitalism.
      But Aus has its measure, evidence up-coming public asset firesales, eg. Medicare & Qantas.

      • Aussie might be glad to have a “disaster capitalist” if its house price median multiples fell to 2.1 like in Atlanta, where Blackstone has been buying up houses.

  7. The word is about, there’s something evolving
    Whatever may come, the world keeps revolving
    They say the next big thing is here
    That the revolution’s near
    But to me it seems quite clear
    That it’s all just a little bit of history repeating….

  8. Isn’t finance a grand industry? These people are at your service 24 hours a day. They never sleep.

    The moral of this story is- go credit unions and not-for-profit mutuals. Use only their financial counsellors- because when they say “no”, they are usually saving you money.

  9. I don’t know anywhere enough about this situation to make fully informed comments, but let me offer a few countervailing views.

    First, Blackstone would appear to be performing a valuable role in stepping in to the breach and buying these distressed houses. It’s an open market and anyone else has been free to buy, but post-GFC buyers have been thin on the ground. Surely there’s some value in having a cashed up party willing and able to buy and reduce the size and extent of the house price crash?

    Second, the author seems to complain in the same breath that Blackstone is going to make out like a bandit (ie it’s a vulture) but at the same time it’s paying top dollar and pricing locals out of the market. It’s a bit hard to do both.

    Third, the holdings in Blackstone by the listed banks are very likely to be in their capacity as nominees or custodians, ie on behalf of investment funds. I’d be very surprised if JP Morgan et al held any shares in Blackstone as beneficial owners. It’s not a case that the same Wall St banks that caused the crash are profiting through Blackstone (although, in some way, wouldn’t we want them too?).

    I can’t comment on the viability of their rent securitisation scheme, or whether they are worse landlords than the norm. It’s entirely possible these are bad things.

    • Thanks for that comment; as I am arguing above, the fact that Blackstone are doing this in cities with very low crashed house prices and yet little opportunity for dizzy capital gains in future due to elastic supply of housing (absence of UGB’s) indicates to me that they are not up to anything much more than a wise long term position in the rental property market.

      If I was them and wanted to be a real ratbag, I would be funding activism in Atlanta for urban growth containment policies. This is where we should constantly be looking for evidence of capitalist rat-baggery surrounding housing. We have left it too late in Australia and it would not surprise me at all if there has been unrevealed relationships between “big property” and “save the planet” activism and policy advice.

  10. The whole thing is probably financed with junk bonds. It might work out for them, on the other hand, it might all blow up and they’ll lose their shirts.

    • Of course if there are no sucker investors, there is not so much reckless securitization. It takes two to tango. We are in an era not just of shameless ticket-clipping capitalism, but of “too many suckers being born every minute”.

      THIS is really what far more investors SHOULD do with a LOT MORE of their money:—Resilience/dp/160

      But of course every bureaucrat in town will be out to “get” the enterprises they have invested in, over their “environmental impact”, their “health and safety”, their “workplace practices”, their “carbon footprint” etc etc etc.