You can hardly turn on the television or open a newspaper without
hearing about the nation’s impressive, much celebrated housing recovery.
Home prices are rising! New construction has started! The crisis is
over! Yet beneath the fanfare, a whole new get-rich-quick scheme is
brewing.
(Cover for the book of the same title by Bryan M. Chavis)
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.
"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."
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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“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.”
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