In an earlier
article, (before more pressing issues shelved the topic) we summarized
highlights from a recent New York Times Magazine article about the
ownership of a large share of the nation's single-family rental stock by
institutional investors. Part 1 recapped how private equity funds moved to
purchase distressed single-family homes during the housing crises, turning it
into rental stock. Their property management has been uneven, and tenants are
suffering from significant financial abuses.
The author, Francesca Mari, who
tells much of the story through the eyes of Chad who is now renting the home he
used to own, says the extent of the financial repercussions from Wall Street's
investment are not limited to the rapid rent increases and unfettered fees we
pointed to in the first article. The institutional owners are not always
maintaining property, failing to make needed repairs, or making them as cheaply
as possible. Some of the neglect has begun to manifest itself in health issues
such as black mold induced allergies.
Chad's problems with the series of
Wall Street investors that bought and sold the company that had originally
acquired his home were not unique. In 2017 he found a Facebook group of
disaffected tenants, many of them residing in homes owned by Chad's landlord, The
Blackstone Group's Invitation Homes. When he asked to join a year later its membership
had grown to 1,200 people with complaints much like his. The founder of that
group, Dana Chisholm, has become somewhat of an expert on the big owners, and a
thorn in their side.
After founding the group in February
2017, Chisholm found she was fielding messages and phone calls from tenants
around the country - particularly in Chicago; Phoenix; Atlanta; Florida; Los Angeles;
Riverside, and Las Vegas, all places where Wall Street had invested heavily.
She started to notice patterns of
abuse. In addition to the burdensome fees already mentioned, was false
advertising. One tenant, rushing to relocate to Los Angeles started searching for
housing online. She spotted an Invitation Homes listing in Van Nuys with central
air-conditioning and a yard suitable for her dogs. The agent cautioned that
houses were going fast and that, without a lease and deposits of $6,000 she
might miss out. When she arrived at the blazing hot house, she found the air
conditioning didn't exist, her lease was on an as-is basis, and getting out of
it would cost most of her deposit.
It was the habitability issues that
most alarmed Chisholm. One Georgia tenant rented a home with defective plumbing
and his house flooded six time. The landlord (again Invitation Homes) wouldn't
pay to remove the mildewed carpeting nor for a hotel while repairs were being
made. After one of his children developed a mold related rash, he moved out,
sued, and won.
Chisholm began intervening on behalf
of her group members and was persistent enough to finally be invited to a
meeting with the chief counsel and the COO of Invitation Homes. She tried to
convince them to set up a fund to resolve tenant complaints, they tried to hire
her as a consultant "to change the narrative" about their company. She refused
and now consults for other institutional investors.
Chisholm told Mari that the worst
thing about Invitation Homes is the way they create fear in their tenants. "You
either pay these fees and settle with us or we'll make you homeless, or we'll
ruin your credit with an eviction. That is the threat renters live under!"
Another feature of this investor
ownership model is how they are funding their operations. Initially they
created special real estate investment trusts (REITS) to fund their purchases. REITS
are usually used to purchase multifamily or commercial real estate but the
clusters of distressed and thus cheap properties within a neighborhood made
mass management feasible and millions of dollars flooded into the fund. Mari quotes
one economist who says there is no way to completely understand who owns them. "They've
got multiple layers of corporations within corporations within holding companies."
Credit tightened after the financial
crisis so the hedge funds created a new financial instrument, a single-family
rental securitization which Mari calls "a mix of residential mortgage-backed
securities, collateralized by home values, and commercial real estate-backed
securities, collateralized by expected rental income." Invitation Homes issued
its first security in 2013, collateralized by 3,200 homes at 75 percent of their
estimated value: $479 million. Buyers received 3 to 5 percent in monthly
interest until their principal was returned (generally in five years). Some of
the proceeds were used to repay the short-term credit lines taken out to buy
the houses, but home price appreciation gave them the cash to buy more homes. Other
firms soon followed Blackstone's lead.
Securitization meant rents had to
cover both the mortgages and interest payments to bondholders and as home
prices rose, companies looked away from acquisitions, growing income from tenants.
They raised rents, cut operating costs, and raised fees. In 2016, one company
made $14 million in fees and an additional $12 million from tenant claw backs such
as retaining security deposits.
Now the latest funding mechanisms
are through the GSEs Fannie Mae and Freddie Mac. Fannie Mae guaranteed a $1
billion 10-year fixed-rate loan to Invitation Homes in 2017, which was
securitized by Wells Fargo. The loan is collateralized by 7,204 Invitation
Homes rentals. Freddie Mac soon followed suit. Stung by a firestorm of
criticism from consumer groups, Fannie Mae announced it would not do another
loan but one critic, Eileen Appelbaum, co-director for the Center for Economic
and Policy Research told Mari said, "They won't have to do it again! This is
now an established industry." If something goes wrong, Invitation Homes is on
the hook for 5 percent of losses; the government is on the hook for the
remaining 95 percent. So far, more than 10 S.F.R. companies have securitized
rental debt, generating 70 securitizations totaling some $35.6 billion."
Mari's article also details some of
the damage done to neighborhoods, and points out that, having bought the bulk
of foreclosed homes in certain desirable neighborhoods - many of which didn't
have rental inventory before the crisis now have "oligopolistic" power over
some local markets. Institutional investors own 11.3 percent of
single-family-rental homes in Charlotte, 9.6 percent in Tampa and 8.4 percent
in Atlanta.
As we appear to be quickly sliding
into perhaps even a greater recession than the one in 2008, Mari's research
should be a cautionary tale for those who will have to manage the housing
fallout from the pandemic. Will these big investors be allowed to purchase more
homes from any new inventory of REO or distressed loans in bulk without some
safeguards for consumers? Mari quotes Daniel Immergluck, a professor of urban
studies at Georgia State University; "During one of the greatest recoveries of
land value in the history of the country, from 2010 and 2011 at the bottom of
the crisis to now, we've seen huge gains in property values, especially in
suburbs, and instead of that accruing to many moderate-income and middle-income
homeowners, many of whom were pushed out of the homeownership market during the
crisis, that land value has accrued to these big companies and their
shareholders."