By Jerry Goldberg
In the midst of the Covid-19 crisis, housing activists have shown tremendous initiative in raising demands for moratoriums on eviction and rental payments during the emergency and in the months to come. Organizations like the Right to the City Alliance, Moratorium Now Coalition, Detroit Eviction Defense, Michigan Environmental Justice Coalition and others have called for canceling rent, mortgage and utility payments during the emergency and in the months that follow after it is lifted.
24 states have suspended evictions for at least some time during the emergency. However, in most cases there has been no canceling of rent payments, meaning that when the moratorium is lifted millions will face imminent removals from their homes. Out of work and with no income coming in, 31% of renters failed to pay their April rent, and the numbers are certain to go up in coming months.
The Covid-19 crisis appears to be leading to a housing crisis every bit as large as the subprime mortgage crisis of approximately 2005-2013. This crisis will offer openings for housing activists to intervene boldly to assert that affordable housing is a human right that must be guaranteed for all. But to be effective, we must learn from the lessons of the subprime disaster. Today, much of the rental market is now controlled by the same kind of Wall Street institutions that brought on the collapse of the mortgage industry, and who will surely be in line for a massive bailout at the expense of renters and their families if we do not intervene.
The Housing/Foreclosure Crisis of the Early 2000’s
The housing foreclosure crisis was a product of the major banks and financial institutions perpetrating a massive predatory lending scheme. Beginning in the early 2000’s they would train brokers to go into neighborhoods, especially where people of color predominated. These brokers would lure prospective home buyers, as well as existing homeowners, into taking out mortgages and home refinancings, based on inflated appraisals, and with no loan documentation required. The mortgages would contain low interest teaser rates for the first couple of years making the note affordable for a period. However, after a couple of years, the interest rate would dramatically adjust upward and the payment would become unaffordable. The mortgage holder was initially assured that when the adjustment occurred they would be able to refinance and remain in their home. But as the fraud grew, and the defaults multiplied, home prices plummeted, refinancings stopped, and millions of homeowners lost their homes to foreclosure.
The individual mortgages would be bundled into security instruments that were sold on Wall Street, at a rate of profit far greater than the similar rate on fixed rate securities. However, as the crisis intensified, and more and more mortgages failed, the biggest buyer of the subprime securities became Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac, formerly quasi-government corporations, were taken over by the federal government and placed under the Federal Housing Finance Authority (FHFA) in 2008. In what amounted to a huge bailout by the federal government, Fannie Mae and Freddie Mac used government funds to buy hundreds of billions of subprime mortgage securities. By 2009, Fannie Mae and Freddie owned or guaranteed about ½ of all outstanding mortgages in the U.S, totaling $4.8 trillion in residential mortgage debt. In addition, federal agencies including the Federal Housing Administration and Veterans Administration, insured approximately 20% of mortgages. This amounted to a virtual nationalization of the mortgage industry.
The beneficiaries of this nationalization were the very banks and financial institutions that created the crisis. As the backer of 70% of mortgage loans, when a home was foreclosed, the federal government would pay the bank that held the mortgage full value on what was owed, an amount far in excess of the actual value of the home. Fannie Mae or Freddie Mac would then carry out the eviction of the family that occupied the home (the FHA would purchase the home post eviction but still pay full value to the banks). This bailout amounted to hundreds of billions of dollars to the banks and financial institutions on top of the direct grant of $700 billion in TARP funds to the banksters.
10 million families lost their homes to mortgage foreclosures between 2006-2014, and this doesn’t include “zombie” foreclosures, where families left before the process was completed. Detroit alone experienced 70,000 bank foreclosures. When you include the effect of tax foreclosures that derived from the bank foreclosures, Detroit, which once had the highest Black home ownership rate in the US, saw its home ownership decline from 192,043 in 2010 to 104,751 in 2016 (U.S. census bureau statistics). From 2005-2009, as a result of the foreclosure epidemic, median net worth across the US declined by 66% for Latinos and 53% for African American.
Foreclosure Crisis Changed Character of Residential Rental Market
After paying full value on inflated mortgages to the banks and financial institutions, Fannie Mae, Freddie Mac and the FHA would then sell off the properties at drastically reduced prices to large investors. By 2016, 95% of the distressed mortgages on Fannie Mae and Freddie Mac’s books were auctioned off to Wall Street investors. These investors would load up on foreclosed properties at a huge discount, and then make a quick killing on them as rental properties or through land contracts.
Over a period of years, as a result of this process, the residential home market, especially in areas where land values began to come back, became dominated by a small set of Wall Street investment companies. Just like the mortgage industry, the investors began to bundle hundreds of rental properties and sell them as Wall Street securities called real estate investment trusts, or REITS. These securitized instruments allowed the institutional investors to raise cash to purchase more properties, while paying interest on the bonds to the funds that purchase them.
Today, Wall Street’s real estate grab of residential home rental properties has ballooned to about $60 billion, representing hundreds of thousands of properties. As of 2018, the largest single family rental property holders, all of which securitize their holdings, included Invitation Homes (formerly a subsidiary of Blackstone (82,570), American Homes 4 Rent (51,840), Progress Residential (20,000) Main Street Renewal (17,000), Tricon American Homes (18,800) and Front Yard Residential (12,416).
In Detroit, especially hard hit by the foreclosure crisis, this process went to the extreme. Investors would purchase blocks of hundreds and even thousands of homes for as low as $500 per home. They milked the properties for short term profit, performing no repairs and not even paying the property taxes that were owed. This contributed to causing mass tax foreclosures in the city, with over 25% of Detroit’s homes foreclosed on for unpaid taxes from 2011-2015. In 2012, 90% of tax foreclosed properties were purchased by investors.
Just as with mortgage foreclosures, the investors holding residential rental properties are completely disconnected from the residents. Their only concern is milking the properties for maximum profits. They have to pay off the bondholders to whom they sold rental security instruments. They are quick to evict when lost rental payments cause their revenues to go down.
Detroit averaged 35,000 evictions a year between 2010 and 2017. IThe investors who purchased the homes in bulk through foreclosure auctions, or through special deals with the City or County when they exercised their right of first refusal and purchased homes pre-auction, are now responsible for the bulk of the evictions in 36th District Court. In a report titled Stopping the Eviction Machine in Detroit by Joshua Akers and Eric Cooney, the authors note that “one investor filed for more than 1700 evictions since 2009; another bulk buyer has filed for eviction more than 800 times; and 60% of the top 20 auction buyers experienced two or more eviction filings between 2009-2015.
Is a new government bailout on the horizon?
Faced with a large decline in rental payments in the current crisis, we can be sure that the pace of evictions by these investors will step up dramatically in the period to come. What will be the government’s response?
A report by the Urban Institute, noted that as of 2017, Fannie Mae and Freddie Mac already financed 34% of all multifamily rental housing. That same year, it was reported that Fannie Mae was backing $1 billion of rental securities issued by Invitation Homes, then owned by the Blackstone Group. There is some indication that the federal government was pulling back from being the owner or guarantor of residential rental securities in 2018. However, if the residential rental investors begin suffering lost revenue, similar to what happened to the financial institutions during the foreclosure crisis, it is likely the government will step in to bail out the investors at the expenses of the residents, just as they did during the subprime foreclosure epidemic.
Government action must be to defend the renters, not the investors
As the eviction numbers inevitably rise during the current state of emergency and in the months and perhaps years to come, housing activists must raise the demand that the government bail out the residents, not the investors and landlords. During the 1930’s, there were foreclosure moratoriums in Michigan and 25 other states, won by the militant actions of the unemployed councils led by the Communist and Socialist parties. The Michigan Moratorium act, which was in force for 5 years from 1933-1938, provided that judges had to stop the foreclosures and then set a reasonable payment based on the homeowner’s income. The Michigan moratorium and the others across the US were upheld by the Michigan Supreme Court in the case of Home Building and Loan Association v Blaisdell. This is a good model for the kind of moratorium on evictions and rental payments, with an accompanied affordable rent mandate before payments are reinstated, that is needed today and will be needed in the months to come.
We are for a nationalization of the rental industry, but such a nationalization must be to benefit the residents, not the investors. Housing is a human right and should be publicly owned and controlled. And that control should be exercised by tenant organizations, not landlords or servicers for whom profit is the number one concern.
The current crisis is showing the complete failure of the capitalist system, based on private ownership for profits, to function in the face of a global pandemic that is affecting all of humanity. The time is overdue to move forward to building a socialist society where public ownership based on production of services to meet the needs of humanity is the order of the day.