The Housing Vultures
In an alternate reality, the one progressives wanted, the government wouldn’t have bailed out the banks during the 2008 crash. When mortgage-backed securities began catching flame like newspaper under logs, the government would have prioritized struggling homeowners instead. It would have created a corporation to buy back the distressed mortgages and then worked to refinance those mortgages—lowering monthly payments to reflect the real underlying values of the homes or adding years to the mortgages to make the monthly payments more manageable. If a homeowner missed mortgage payments, rather than initiating a foreclosure after two months, as was done by many banks during the recession, the government would have held off for an entire year, maybe more. In the event the homeowner still couldn’t keep up, the government would have acquired the home, fixed it up, and rented it out until another person bought it.
Who could ever dream up such wild ideas? Franklin Delano Roosevelt, for one. To stanch foreclosures during the Great Depression, FDR created the Home Owners’ Loan Corporation (HOLC), which bought more than a million distressed mortgages from banks and modified them. When modification didn’t work, it sold the foreclosed homes—200,000 of them—to individuals. While the program was costly, in the end it pretty much paid for itself: because homes weren’t dumped on the market all at once, they almost always sold for close to the amount of the original loan. The New Deal—which also created the Federal Housing Administration (FHA), to guarantee mortgages with banks, and the US Housing Authority, to build public housing—inaugurated the golden era of homeownership and middle-class prosperity. It wasn’t without significant problems—the HOLC invented redlining, only providing FHA-backed loans to white people purchasing in white neighborhoods—but if you were white, this was a stabilizing and egalitarian response that held speculators at bay.
Homewreckers, Aaron Glantz’s recent book about the investors who exploited the 2008 financial crisis, is essential reading as we plunge headlong into a new financial catastrophe. Glantz, a senior reporter for the Center for Investigative Reporting’s public radio show, Reveal, has written books on the mishandling of the Iraq War (How America Lost Iraq) and the neglect of veterans that followed (The War Comes Home). He observes that there are two ways a government can respond to a crisis caused by reckless speculation: by stepping in or by stepping aside. Roosevelt stepped in; Ronald Reagan, dealing with the savings-and-loan crisis, stepped aside. Starting in 1986, as a result of Reagan’s deregulation, countless savings-and-loan associations had run amok with other people’s money, taking risky bets; 747 of them imploded.1 But rather than restructuring the toxic debt, the Reagan administration sold it to “vulture investors,” those who profit off disaster by swooping in to gobble up the cheapest, most troubled assets from failing entities. The government sold at firesale prices with lucrative loss-share agreements: whatever money an investor recovered on the debt was theirs to keep, but losses would be guaranteed by the government. The deals cost the US government more than $124 billion in subsidies.
The George W. Bush and Barack Obama administrations, alas, hewed closer to Reagan’s example, spending $700 billion on the Wall Street bailout and frantically trying to attract investors to the collapsed housing market by auctioning off delinquent mortgages at low prices and with loss-share agreements that essentially guaranteed that the investors wouldn’t lose money. These policies not only provided firms with financial incentives to pursue foreclosures but also enabled an enormous and permanent transfer of wealth from homeowners to private equity firms, as thousands of homes were flipped or converted to single-family rental homes and rented at above-market prices.
Glantz’s book is an unabashedly partisan tale of how some extremely wealthy investors—many of them now Trump’s cronies—preyed on panic at the expense of middle-class homeowners. Homewreckers opens with two such victims in 2005: Dick and Patricia Hickerson, seventy-nine and seventy-seven, with liver cancer and Alzheimer’s. After seeing a television ad for a reverse mortgage, a financial product that allowed seniors to borrow cash against their homes without repayment during their lifetimes, the couple called the number on the screen and were pressured into signing by a pushy salesmen working on commission. They didn’t understand the price their daughter Sandy, who had quit her job and moved home to take care of them, would pay.
The interest rates and fees were so high that by the time they died, in 2011, their $80,000 loan had ballooned to a debt of $300,000. Their $500,000 home went to foreclosure auction, where it was bought by a private equity–backed real estate investment trust. The Hickerson’s mortgage had been $600 per month. Now the private equity company was offering to rent the home back to Sandy for $2,400, a rent 30 percent higher than that of other properties in the area. Too overwhelmed to move, she signed the lease. It included a variety of fees (such as a $141 monthly fee to rent the house month to month) and left her responsible for typical landlord duties, like landscaping. In return, the company shirked maintenance, at one point declining to fix a broken water pipe, sticking Sandy with a $586 water bill and a $450 repair. (As I’ve noted in The New York Times Magazine, minimizing maintenance costs and maximizing service fees are integral to single-family rental companies’ business models because private equity generally seeks double-digit returns within ten years.2)
This exploitation of a regular family may seem like a minor story. But as Glantz shows, it happened over and over in similar ways across the country, systematically turning middle-class homeownership into immiseration and corporate profits, facilitated at every stage by the federal government.
SubPrime.
By February 2008 the subprime mortgage problem was evident—housing prices were plummeting—but Bear Stearns was still a month away from collapse. Connecticut senator Christopher Dodd and former vice chairman of the Federal Reserve Alan Blinder were calling for a revival of the Home Owners’ Loan Corporation to lend homeowners between $200 billion and $400 billion. “I was laughed out of court,” Blinder told Glantz. Instead, eight months later, Congress approved a $700 billion bailout of the banks.
The first FDIC-insured bank to fail had been IndyMac, on July 11, 2008, after an eleven-day bank run resulting in $1.3 billion in withdrawals. The day it failed, FDIC employees reluctantly boarded a flight from Washington, D.C., to Los Angeles. They seized control of the Pasadena-based bank, a notorious generator of reverse mortgages (including the one the Hickersons signed) and Alt-A mortgages (riskier than prime but less risky than subprime), and sought a buyer. They hoped it would take days; it took nearly nine months, the value of the bank decreasing with every passing week.3
That’s when a band of billionaires stepped in. Exploiting the Fed’s angst about continuing to manage IndyMac, the group, which included George Soros, Michael Dell, John Paulson, J.C. Flowers, and Steve Mnuchin (the only nonbillionaire of the bunch), offered to invest $1.6 billion in the bank in exchange for all of its assets—its branches, real estate deposits, and loans, which were valued at more than $20 billion. Concerned about the appearance of a prolonged federal takeover and thus anxious to close the deal, the government also agreed to extend a generous loss-share agreement: If, for instance, a homeowner owed $300,000 on an FHA-insured mortgage, but the home only sold at foreclosure auction for $100,000, the government agreed to reimburse the rest, all $200,000. While the sale technically required the company to continue the FDIC’s limited loan modification, as Glantz writes, the loss-share agreement “effectively removed economic incentives that would have otherwise caused Mnuchin’s group to think twice about foreclosing on homeowners.” Upon acquiring IndyMac, Mnuchin and his group renamed it OneWest and proceeded to foreclose on more than 77,000 households, including those of 35,000 Californians.
The California attorney general’s office put together a robust report against the bank, detailing widespread misconduct, which included backdating false documents, performing foreclosure actions without legal authority, and violating proper foreclosure notification practices. “If the state of California found that OneWest violated those rules,” Glantz writes, the loss-share payments could stop—saving both homeowners, since the bank would have much less incentive to foreclose if it wasn’t being paid when it did so, and government money. But the attorney general at the time, Kamala Harris, did nothing.
With its loads of recovered debt, OneWest—which newly billed itself as a “community” bank—could begin to offer loans. But rather than financing community initiatives or middle-class mortgages (it denied both in great numbers), it lent vast sums to the investors’ friends, like Thomas Barrack, the private equity titan, Trump megadonor, and founder of Colony Capital.4 Barrack, in turn, used the money to pursue a new idea. Starting in 2012, he began to buy foreclosed homes in bulk—to turn them into rental properties and keep them forever, or for as long as he retained interest. He targeted heavily discounted houses in areas with high employment, good transportation, and strong school districts. His hometown of Los Angeles certainly fit the bill. He scooped up more than three thousand houses there, including the Hickersons’, which would eventually be managed under a Colony subsidiary, Colony American Homes.
As Eileen Appelbaum, the codirector for the Center for Economic and Policy Research, told me:
This industry of rental homes at this kind of scale is a product of government policy. I know that the private sector says they don’t like government interfering, but in fact they love the government in their business.
Or, as Barrack has said, “Anytime the government is intervening in our business, if you buy, you will be successful.” Overdue and panicked government intervention is the vulture investor’s best friend.
