Unless you were involved in the housing industry or
suffered the loss of your home, you probably didn't notice or have by now
forgotten one of the most lasting effects of the Great Recession. As home
prices plummeted and an estimated six million homes were lost to foreclosure or
short sales, there was a massive influx of institutional investors into the
rental market.
According to Ian Formigle Chief
Investment Officer of CrowdStreet, almost 83 percent of single-family rental residences
were owned by individual, so-called mom and pop, investors in 2001, By 2015
that had dropped to about 75 percent as Wall Street firms gobbled up, per Zillow,
5.4 million single family homes between 2006 and 2017. This, by the way, was
approximately the same time when the national homeownership rate declined from
69 percent to around 63 percent.
At the time, these private investment groups and hedge
funds were credited with putting a floor under plunging home prices. However, there
were also fears that the difficulty of managing properties dispersed across a
number of cities and hundreds of neighborhoods would cause them to cut and run
once the market stabilized and prices
climbed. The sudden return of thousands of properties back to the market could
knock the housing recovery back on its heels.
The latter did not happen and now there is a school of
thought that the vast holdings of investors, who have been merging,
consolidating, and growing larger, are exacerbating the already tight numbers
of available homes for sale, especially starter homes,
There hasn't been much attention to the current effect
of this institutional ownership, but this past weekend, the New York Times
Magazine spotlighted how they funded their acquisitions, and how they are
profiting, often through some questionable practices, and now with taxpayers
assuming some of the risk. While the
article, "A $60 Billion Housing Grab by Wall Street" by Francesca Mari, focuses on the California market, the
companies involved own homes in numerous metro areas. Some of the story she
tells is anecdotal, built around the experience of one homeowner, Chad, who has
been renting back his former home for nearly a decade. Mari does back up his
story and we found other, less comprehensive, sources to validate her
reporting. The NYT article is extremely long and even hitting the highlights
requires our covering it in several parts.
There
are about 25 to 30 big investors operating in the single-family rental market,
the largest of which, Invitation Homes owned by the Blackstone Group, at its
height controlled an estimated 80,000 units. In addition to California, various
investors have a large presence in Phoenix, Atlanta, Las Vegas, Sacramento,
Miami, Charlotte, Los Angeles, and Denver.
The
Wall Street companies not only bought real estate, they also bought distressed
mortgages in bulk. By 2016, 95 percent of the distressed mortgages on Fannie
Mae and Freddie Mac's books had been auctioned off to Wall Street investors
without any guarantee the new owners would provide recourse to workouts or
modifications. This allowed private firms to acquire another 200,000 properties
through their own foreclosures.
After a series of misfortunes
abetted by more than a little poor financial judgment, Chad lost his suburban
Los Angeles home in 2012. The house was purchased by a company called Strategic
Acquisitions and a few months later they offered to sell it back to him for
$100,000 more than they paid for it and substantially less than the total of
his mortgages pre-foreclosure. He asked for time to put together a down payment
but when, in the winter of 2013 he was ready to buy, Strategic was no longer
interested in selling. Instead they rented it back to him under a two-page
rental agreement with a two-page addendum.
They were atypical landlords. Rather
than mailing his rent to a management office, it would be picked up at his
home. Payments weren't always posted and when he withheld rent to force an
accounting, they tried to evict him.
Mari says that over the next seven
years Chad was cycled through a series of owners and management companies and
his home is now owned by Blackstone's Invitation Homes. Offices moved,
downsized, rents were hiked, and he was subjected to increasingly punitive
fees. "Chad was required to submit his rent in different ways - online,
certified mail, cashier's check, in person - with slightly different rules, by the
1st, by the 3rd. The leases grew in length from four pages to 18 to 43 as the
companies doubled down on strictures and transferred more responsibilities -
mold remediation, landscaping, carbon-monoxide detectors - onto the renter." Mari
says that, while he didn't know it at the time, Chad's story was that of
millions of renters "the beginning of a downward spiral into the financial
industry's newest scheme to harvest money from housing."
Private equity firms have an imperative
to make money and their methods of management were designed to facilitate that
goal. Chad was soon paying more in rent than the $3,300 he had paid for his
first and second mortgage combined. Strategic Acquisitions and its successors increased
his rent from $3,500 to $3,800 in just a few years and in August 2017 it jumped
9.2 percent to $4,150. That didn't include fees. One owner required all tenants
to use an online payment portal for which they charged a $121 "convenience
fee." Chad was once assessed a landscaping charge even though no one was
landscaping his property. He was able to get it removed, "But the fees, many of
which were outlined in his lease, kept coming: lawyer fees, utilities
conveyance fees, pipe-snaking fees." Once it appeared they were attempting to
levy a fee on appliances which he had bought.
There were also late fees. One of
the first times he was late, a notice of eviction was posted to his door. He
paid the rent - and the $50 late fee. But three days later, there was another
pay-or-quit notice - this time because he hadn't paid a $35 delivery fee for
the late-fee notice. The second eviction notice, in turn, incurred a second $35
delivery fee. Over the years, he amassed a stack of late fees, more than 40 of
them, some because he was struggling to keep up with the rent increases, some
when he was trying to put pressure on his landlord to make repairs or take
other actions.
Other tenants suffered abuses that
went beyond the financial. We will detail some of Mari's findings about those
in a subsequent summary.