Every day it seems a new report comes out praising the ongoing housing recovery. In
Georgia, home prices are up 5 percent over last year, a year in which we also had one of the
highest foreclosure rates in the country. Seems a little odd, doesn't it? That's because the
"recovery," as they're calling it, is fueled almost entirely by Wall Street private equity, hedge
funds, and the Fed's unwavering support. That's right. After creating a massive bubble in
home prices that eventually burst and caused our economy to go into a tailspin, these guys
have decided to come back for more, and figured out a way to profit off their destruction -- by
turning foreclosed homes into rentals and securitizing the rental income.
Many are claiming this is as the recovery we need to get the economy going again -- the
"private sector solution." The argument goes that investors snapping up these homes and
fixing them up does more for the community than letting the houses just sit there,
blighting the neighborhood and lowering values. Sure. That argument might have made
sense for the pilot program Fannie Mae launched last year. In that bulk auction deal, investors
had to agree not to sell the properties for a designated period of time. Many of the homes
were occupied with tenants, and vacant homes had been on the market and not sold for at
least six months. Of course, that deal proved too restrictive for most Wall Street types,
leading the sale in Atlanta to eventually fall through.
The Blackstone Group, the biggest player in the new REO to rental market, has spent $2.5
billion in the last year purchasing 16,000 homes, a number that amounts to over $100 million
per week. Property records show that many of the homes Blackstone has acquired in Fulton
County over the last few months were purchased on the courthouse steps at the monthly
foreclosure auction, or through short sales, when a lender agrees to accept less than the
amount owed on a sale. The vast majority of these homes are not empty, but in fact occupied
by homeowners who fell behind during the great recession. The sale often represents the last
nail in the coffin of foreclosure in Georgia, a non-judicial foreclosure state where there is very
little opportunity or time to make good once a homeowner falls into default. Blackstone,
operating under their subsidiary, THR Georgia, buys the homes for cash, usually at deep
discounts from the principal balance owed on the mortgage.
Take one of the homes they
snapped up at the November auction as an example: THR purchased the Southeast Atlanta
home at auction for $90,000. The principal due on the mortgage that was foreclosed upon
was $219,300. If banks were willing to offer principal reduction on these inflated mortgages
down to the same price they are willing to sell at auction, many homeowners would likely be
able to afford their payments, and stay in their homes for years to come, contributing to the
stability of the neighborhood. Instead, homeowners are getting a flier posted on their door the
day after Blackstone purchases it, offering them the opportunity to rent the home they once
owned. Meanwhile, the deep pockets of firms like Blackstone allows them to outbid virtually
everyone else in the market- eliminating any chance of owner occupants looking for a new
home, to get a good deal while prices and interest rates are low.
Blackstone has partnered with Dallas-based Riverstone Residential, the nation's largest
third party property management company, to form "Invitation Homes." In a 3-minute
commercial for Invitation Homes posted on the company's website, Jonathan Gray, head
of global real estate at Blackstone, claims that "there are 12 million single family homes for
rent in America, but it's not done on an institutional basis." The market has traditionally been
dominated by 'mom and pop' investors, most with fewer than a couple dozen
properties. Many landlords build relationships with their tenants, and the communities in which the homes are located. They hire local contractors to do maintenance work, and
spend the income generated from rent back in the local economy. That's not how Riverstone
operates. Their website touts the array of services they offer in-house for property owners,
from contracts with telecom and utility providers, and exclusive partnerships with suppliers, to
in-house screening and debt collection. Riverstone is a one-stop shop for property
management.
Probably the most disturbing of all is the partnership between Riverstone and credit reporting
agency, Experian. Riverstone entered into an agreement last year with Experian Rent, to turn
over real time payment history on all of their residents to be compiled into a national
database. A press release Experian put out when the deal was announced stated that "by
furnishing resident rental payment history data to Experian RentBureau, Riverstone will
immediately enhance the effectiveness of its rental collections while decreasing bad debt
levels and encouraging proactive rental payment practices among its residents, leading
directly to increases in net operating income (NOI) and the bottom line." This kind of data will
help Blackstone and other large firms to eliminate some of the doubt and uncertainty around
renters and their stability to investors. For the average renter however, the consequences
could be detrimental. Gone are the days of calling up your landlord to let them know rent will
be there on the 7th instead of the 1st
this month. As more and more Americans live paycheck
to paycheck, and wages continue to decline or remain stagnant, paying rent a few days late
could lead to a negative credit score, impacting their ability to secure resources and move up
the ladder of the middle class. Jonathan Gray wouldn't know much about that though. He
made $36.5 million in 2011. His boss, Blackstone CEO Stephen Schwarzman, made
$148.5 million. This new plan further grows the disconnect between Wall Street and Main
Street, and the difference between the 1 percent and the 99 percent.
Interestingly enough, purchasing single family homes isn't Blackstone's only recent foray into
the housing market. In the lead-up to the crash, Blackstone's hedge fund group, Blackstone Alternative Asset Management, chose to bet against the subprime market, purchasing credit default swaps and collecting
billions in profits when the cards fell. Blackstone's hedge funds are now spending millions
purchasing those very same subprime mortgage bonds for pennies on the dollar, betting
on home prices going up, leading more homeowners to refinance and reinstating the
value of these junk bonds. It's a constant game of speculation for Wall Street, which
culminates in bubbles being created, the rich getting richer, and communities losing control
over the places they live.
In the wake of one the greatest financial disasters in modern times, you'd think we'd have
learned our lesson. Like they say, fool me once, shame on you. Fool me twice, shame on me.
Maybe what we need this time around are solutions that help people find long-term housing
stability, instead of chasing short-term fixes that will land us right back where we started.