The following post is Part I of a three-part series on the implications of our government’s “solution(s)” to our nation’s mortgage/foreclosure crisis. Parts II and III will be published between now and Sunday.
There is a tremendous amount of misinformation and/or propaganda circulating throughout the MSM and on both sides of the “blogosphere aisle” when it comes to our economic "recovery." Perhaps nowhere is this propaganda more dense than in all economic matters related to our nation’s real estate/mortgage sector. This series is my latest attempt (along with the work of many others, of course), from a decidedly progressive point of view, to sort out the often-inconvenient facts from the widely-distributed fiction.
Part I is comprised of what is, IMHO, one of the most important pieces that Yves Smith has published over at her Naked Capitalism blog. Ever. As I mentioned it to her in an email on Tuesday, once again, she’s absolutely on fire! In addition to her post, republished below, I would strongly urge readers to checkout her three-part series on private equity, which she just commenced publishing on Tuesday, as well. It, too (assuming the first part of the series is an indication of the quality of the series as a whole), is extremely well done.
Part II takes a look at various statistics and analyses (numbers and facts that do nothing less than blow massive holes through much of our current “conventional wisdom,” not to mention “accepted statistical facts”) relating to the current situation on Main Street as far as our nation’s mortgage mess is concerned. It relies heavily upon analysis from mortgage/real estate analysts Mark Hanson and Michael Olenick, among others.
Part III covers progressive solutions to our nation’s ongoing mortgage/real estate nightmares, with a fairly heavy emphasis on the thoughts of Columbia University economist and Nobel Prize-winner Joseph Stiglitz, along with input from other sources, as well. (Part III is about what should be done; as opposed to what is being done.)
As many have stated over the past few years, we will never right our country’s economy until we address record-breaking income inequality (I’ve covered this topic in numerous posts over the past few years) and resolve Main Street’s mortgage mess. Perhaps nothing amplifies this last truth moreso than the inconvenient, and very infrequently-publicized reality that, easily (and far more than the stats being publicized these days), HALF of all mortgaged homes in the U.S. are either: a.) in foreclosure, b.) in Wall Street’s shadow inventory (and not even on the market; and, in many cases not formally in foreclosure, either), or, c.) underwater; or, so close to being underwater that discerning the difference between those last two statuses is virtually irrelevant to the bigger picture at hand, as far as the adverse impact this mess continues to impose upon our nation’s overall economy. (Reiterating, this is covered in-depth in Part II.)
(Remember, roughly half of Main Street has most of their net worth—or what used to be their net worth—tied up in their home. The top 10% of our society owns somewhere north of 90% of all marketable securities in this country; and, that’s where the lion’s share of their net worth is. As for the remaining 40%-50% of us--the approximated numbers mentioned in this paragraph add up to more than 100%; there’s a lot of overlap between mortgageholders and those living day-to-day/week-to-week--we’re either living in or close to poverty, and/or from paycheck-to-paycheck; assuming one is fortunate enough to have a job. Put another way, to discuss our nation’s mortgage/housing nightmare is to, in effect, provide a large portion of the narrative relating to the ongoing destruction of America’s middle class.)
(NOTE: Naked Capitalism Publisher Yves Smith has provided written authorization to the diarist to reproduce her post in its entirety for the benefit of the Daily Kos community.)
Our Coming Rentcropper Society
August 21st, 2012 9:51AM
We are in the midst of a sea change in terms of the relationship of ordinary Americans to the housing market. Policymakers are not only in denial as to its magnitude, but are actively enabling courses of action that are likely to prove destructive.
One of the accidental and fortunate discoveries of the 1930s was that a long-dated mortgage, meaning 15 to 30 years, was a good fit with working conditions of that era. The Home Owners Loan Corporation refinanced borrowers who were delinquent and in danger of losing their homes from short maturity mortgages to 20 to 25 year ones, considerably lowering borrower payments. This was considered a radical experiment at the time, and was expected to lose $1 billion, a very large sum in those days. When its operations ceased, it had shown a profit. One of the big reasons was the stability of employment. Job tenures were much longer than now; in fact, being fired was rare, and usually a result of business failure or distress, not management whim or need to meet quarterly earnings targets. And with the exception of some very large corporations that liked transferring managers (IBM stood for “I’ve been moved”), families were more likely to remain in the same house over the husband’s working life.
Much of this equation has been turned on its head. A college degree is now an entry requirement for many jobs. 94% of recent graduates borrowed to finance their education and the average debt level across all student debtors is over $23,000. And the fact that student debt cannot be discharged in bankruptcy means that young people are less likely to buy a house than in the past, and will take longer to accumulate enough savings to do so. On top of that, the uncertainty of employment makes buying a house a much dodgier proposition than in the past. One of the paradigmatic stories of our day is how people in their 40s and 50s who lose a job either can’t find work at all, and join the ranks of the long-term unemployed, or take a large cut in pay. If they haven’t paid off their mortgage, that loss of income often leads to foreclosure. Ever shortening job tenures increases the odds of an abrupt, permanent fall in pay. And as Elizabeth Warren described in The Two Income Trap, two earner families are more vulnerable economically than the old working dad, stay at home model.
Given this sea change in the stability of middle class income, it seems obvious that home ownership will not be attainable for many workers. Moreover, some may recognize that even if they can afford to buy, that the risk/return tradeoff may still make rental more attractive for them.
In some respects, this transition is already underway. Homeownership is now at its lowest level in 15 years. And some societies have much higher levels of renting than the US, most notably Germany.
But there is a second major shift underway, which is a planned transfer of large number of homes into the hands of private equity landlords. Fannie and Freddie are now piloting programs for bulk sales of foreclosed home. Historically, they’ve sold them individually or in geographically dispersed packages, but since February, Fannie has been experimenting with selling homes in large volumes in Phoenix, Atlanta, Chicago, Florida, Los Angeles and Las Vegas. There are also reports of investors making significant buys in Florida. Bank of America is also experimenting with bulk sales. It’s likely that once the Fannie and Freddie programs are up and running, the servicers will copy their template with private label loans.
While the bulk sales programs allows not for profits and government bodies to participate, the main target is private equity investors. And the expectation is that fortunes will be made. As one prospective buyer said, “If the government is selling, I want to be on the other side of that trade.” Major PE firms are raising multi-billion dollar funds dedicated to this opportunity.
There are several grounds for concern. One is that there is no model for large-scale, absentee landlords of single family homes. In the past, institutional investment in residential rental has been in multifamily properties, often apartment buildings. And these almost without exception had property management in place at the time of acquisition or was in dense urban areas where it was easy to find experienced management firms. And even in locales where those services are available, PE firms have too often proven to be bad landlords by design.
Consider New York City, which provide considerable protections for tenants (both in rent regulated and market price units) that cannot be waived in a rental agreement (although sneaky landlords are known to try to persuade tenants otherwise). One would think that would make it plenty uninviting for private equity investors, since they have high return targets. But in fact the PE crowd has made acquisitions, and as of 2008 owned 6% of the rent regulated apartments in the city. Their plan was not simply to wait for normal turnover to allow them to increase rents to market rate but to help nature along. As Gretchen Morgenson wrote:As regulatory filings and promotional materials show, the companies expect to generate higher returns quickly by increasing rents after existing tenants vacate their units. Their success depends upon far higher vacancy rates than are typical in rent-regulated apartments in New York.The highest profile example was Stuyvesant Town, a $5.4 billion acquisition by Blackrock and Tishman Speyer that filed for bankruptcy in 2010. This anodyne section of a New York Times story gives a sense of the level of landlord misbehavior:
Some residents and tenant advocates say that they began seeing what they consider a pattern of harassment of low-income tenants this year and suspect that it is a result of the new owners’ business models. Tenants have been sued repeatedly for unpaid rent that has already been received by the landlords; they have been sent false notices of rent bills, lease terminations and nonrenewals; and they have been accused of illegal sublets.
Ultimately, Tishman Speyer, like many similar buyers, was unable to convert rent-regulated apartments to market-rate rents as quickly as it had anticipated. Rents fell as the recession deepened, and then last fall the state’s highest court ruled that the owners had improperly deregulated and raised rents on about 4,400 of the apartments while getting special tax breaks from the city.Similarly, in 2010, the Village Voice listed two private equity firms, Vantage and Cronos Capital, among the ten worst landlords.
The 15-story red-brick buildings are in good shape, tenants say, but they noted that the maintenance and security staffs had been cut. And the owners may owe $200 million in rent overcharges to thousands of tenants as a result of the court ruling.
One name often bandied about as a prospective bulk sales buyer is Fortress. Tenants beware. The model for Fortress appears to be the Gagfah. Some cash-strapped German cities were privatizing housing, and Fortress-controlled Gagfah bought 45,000 rental units from Dresden. Gagfah agreed to give existing tenants the right of first refusal on any sale. It was also criticized in local media for neglecting repairs. Gagfah was sued for €1 billion by Dresden and settled for €40 million.
What can we expect from our new suburban absentee landlords? First is they don’t seem to appreciate how operationally intensive property management is. Second is that they plan to make tenants responsible for maintaining properties. Yes, you read this correctly; we’ve heard this from various sources. Having both owned and rented, one of the nice things about renting is that when Shit Happens, like a leak, reasonably well run buildings are on top of it pronto. By contrast, what does “renting” mean if you as tenant are responsible for some, potentially a lot, of what would seem to be the owner’s responsibility?
A comment from a PE investor in a recent post breezily presents their assumptions:In many markets, the maintenance obligations fall to the tenant. Grab a sample set of local real estate board form leases and you’ll find this to be the case. Moreover, while these same form leases do place the burden of capital repairs on the landlord’s side (as is the case with multi-family properties), this is an identifiable risk that can be assessed just as it would be by a skilled operator acquiring larger-scale multi-family properties. Falling trees are non-discriminatory – they will crush the roof of a single-family home and a two or three story garden-style apartment building with equal vigor. The previous run of the “for sale” cycle has created legions of well-qualified providers of ownership related services, from inspectors to repair specialists, many of whom are thrilled to raise the tenor of their operations by contracting locally and regionally on a bulk basis with professional owners. At the risk of introducing cliche, don’t overlook how frictionless the management oversight of this type of service effort has become in this age of pervasive connectivity.First, the “well qualified providers of ownership services” are the companies services now hire to manage real estate they’ve foreclosed on. I’m sure readers will elaborate in comments, but there is considerable evidence that their competence level is low: homes that have not been secured properly and were stripped for copper and appliances (even in upscale neighborhoods), death because children fell in pools that weren’t drained; squatting; and more mundane problems like overgrown lawns. And what is this “pervasive connectivity” about? So you can text rather than call an emergency service?
So what is the line between “capital repairs” and “maintenance”? The subtext is that the PE crowd intends to take as narrow a view of what constitutes required repairs as possible; the reports of PE landlords from hell and underinvestment in Stuy Town would tend to confirm that. Reader Doug Terpstra also begged to differ with the remark quoted above (boldface his):….your current “frictionless management” can become gooey very quickly when the blood-flow from stones turns into a trickle and the current rent bubble land-rush pops and inevitably follows RE values on a time-delayed graph.Now readers might wonder: wouldn’t it be in the best interest of these landlords to do at least an adequate job of taking care of the properties? After all, don’t they intend to sell the houses, preferably as soon as they seem some price appreciation? Don’t be so sure. First, one possible acquirer is the current tenant; you might see financed sales or rent to own structures. And prospective owners would presumably buck the efforts to dump maintenance on them less than those who weren’t potential buyers. Second, the mortgage industry has long been keen to securitize rentals, and these bulk sales programs would give them enough properties to move this scheme forward. Imagine the fees! And imagine how well this will work from the perspective of tenants. As with mortgages, you’d presumably have a servicer who’d handle taking and accounting for the rental payments and lease renewals as well as handling whatever in the way of repairs and maintenance they deigned to provide. Given how accountable and responsive servicers have been, I shudder to think how these securitization servicers would perform.
Also, your perception of being able to put all maintenance responsibility on plantation tenants only goes so far. Beyond neglect, a whole lot can go wrong in a hurry from a disgruntled or distressed tenant. And even in regressive red states like Arizona, there’s a lot of legal wiggle room for a put-upon tenant who might decide to get uppity:“The landlord and tenant of a single family residence may agree in writing, supported by adequate consideration, that the tenant perform the landlord’s duties specified in subsection A, paragraphs 5 and 6 of this section, and also specified repairs, maintenance tasks, alterations and remodeling, but only if the transaction is entered into in good faith, not for the purpose of evading the obligations of the landlord and the work is not necessary to cure noncompliance with subsection A, paragraphs 1 and 2 of this section.”(Subsection A, BTW, is quite comprehensive and affords tenants considerable leverage, including damages for untimely compliance)
So as we indicated, there is good reason to expect that the new PE landlords will undermaintain the properties they buy. That in turn has implications for the neighboring properties. At a minimum, you can expect to see more turnover in those homes (tenants less inclined to renew leases) and/or bad landlords getting a name (in this world of pervasive connectivity, it will be much easier to find that sort of thing out).
Thus it is in the interest of homeowners to push for tougher rental standards to help protect property values and encourage long-term stable tenancy (something you see in places like New York where tenants have solid legal protections).
This program is troubling not just on its own, but also as another manifestation of the falling status of the American middle class. As Matt Stoller wrote:Debt is not just a credit instrument, it is an instrument of political and economic control.The one plus ordinary Americans have in the coming rental conversion is that this is a battle that can be fought on a local level, where major financial players seldom bother buying political favors and can easily misjudge who the key players are. Stronger rental rights, which would discourage absentee rentiers from bidding up properties, would also work to the advantage of local landlords who have been the traditional owners of residential rental properties. This is a battle that can be won, provided homeowners get word soon enough that a quiet battle for their communities is about to be joined.
It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien places on their crops. When approaching a furnishing agent, who could grant them credit for seeds, equipment, even food itself, a farmer would meekly look down nervously as his debts were marked down in a notebook. At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing. Their land was often forfeit, and eventually most of them became tenant farmers…
We are in the midst of creating a second sharecropper society..Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages…Young people and what only cynics might call ‘homeowners’ have no choice but to jump on the treadmill of debt, as debtcroppers. The goal is not to have them pay off their debts, but to owe forever. Whatever a debtcropper owes, a wealthy creditor owns. And as a bonus, the heavier the debt burden of American citizenry, the less able we are able to organize and claim our democratic rights as citizens. Debtcroppers don’t start companies and innovate, they don’t take chances, and they don’t claim their political rights.