I knew a woman with lung cancer who almost blew her face off while sneaking a smoke under an oxygen mask. Wall Street reminds me of her. The Masters of the Universe (hedge fund guys, private equity managers, parasites, whatever you wish to call them) are so addicted to subprime lending they can’t give it up, even though they are still in traction from the last time it blew them up (and evicted ten million Americans from their homes).
Immediately — and I mean, immediately — after the collapse of the subprime-mortgage bubble brought the entire world’s financial system to its knees, the MOTU decided that the remedy to the destruction wrought by subprime mortgages was — subprime rental contracts. (Not to mention subprime auto loans, which is another story.) They would take the lemons — the hundreds of thousands of foreclosed homes littering the real estate landscape whose owners had been unable to make the mortgage payment — buy them on the cheap and rent them to people unable to make the rent. Then , as they learned to do so successfully 15 years ago, they would wrap a bunch of subprime loans in a bundle and sell shares in the bundle. What could go wrong?
Wall Street’s appetite for idiocy is endless. Just in the past two years, the MOTU have bought 200,000 single-family homes, cheap, for cash, in urban areas devastated by their prior depredations, in order to rent them out, in some cases to the former owners. In April of last year, in Atlanta, one investment firm bought 1,400 houses in one day.
The biggest operator in this new Next Big Thing is the Blackstone Group, the world’s largest private equity firm. (Their job, then, is to find obscene rates of return for obscene amounts of money possessed by the .01% of people who need professional help in thinking what to do with their money.) It is also, through its subsidiary Invitation Homes, the largest single owner of single family homes in the United States, having spent $7 billion for 41,000 houses.
It was Blackstone, in partnership with Deutsche Bank (whose excesses in the previous housing meltdown are legendary), that brought to the market the first offering of rental-backed securities, in October of last year. They asked for $480 million dollars for a bundle of 3,000 rental contracts. They got it. Since then, they have reaped $3 billion more, and analysts working for the MOTU predict a trillion-dollar market in a few years. Definitely, the Next Big Thing.
But wait. Could there be trouble in this paradise? Blackstone’s business plan envisioned an occupancy rate of 95%. (A brief pause here to wait out the hysterical laughter of anyone who has ever been a landlord.) Early this year, when investigative reporters from In These Times checked on a sample of 50 Invitation Homes properties in Chicago, only 17 were occupied. In just two months, Bloomberg reported, income from the securitized contacts fell by 7.6 per cent, while the number of houses either empty or occupied by delinquent renters shot up to over 8%. In two months. These appalling numbers did nothing to quench Wall Street’s thirst for the rental-housing Kool Aid.
Complaints are coming in from all over the country that Invitation Homes (and now the several companies that are trying to emulate it) are failing to deal with electrical, plumbing, appliance and structural issues that inevitably arise in aging houses. There are also abundant allegations that they are trampling on landlord-tenant law, insisting that tenants rent properties “as is,” (meaning whatever goes wrong is your problem, sucker. Illegal.) and issuing eviction notices days — even hours — after the rent comes due (illegal).
So with their tenants disappearing or going broke, their properties deteriorating and/or vandalized, and their legal challenges mounting, the MOTU merely accelerate their lemming-like stampede toward the next Correction Cliff, oxygen masks and cigarettes going strong.