New Landlord in Town

Lionel Barrymore as Mr. Potter in "It's A Wonderful Life"

Lionel Barrymore as Mr. Potter in “It’s A Wonderful Life”

Bloomberg quoted me in Wall Street, America’s New Landlord, Kicks Tenants to the Curb. It opens,

On a chilly December afternoon in Atlanta, a judge told Reiton Allen that he had seven days to leave his house or the marshals would kick his belongings to the curb. In the packed courtroom, the truck driver, his beard flecked with gray, stood up, cast his eyes downward and clutched his black baseball cap.

The 44-year-old father of two had rented a single-family house from a company called HavenBrook Homes, which is controlled by one of the world’s biggest money managers, Pacific Investment Management Co. Here in Fulton County, Georgia, such large institutional investors are up to twice as likely to file eviction notices as smaller owners, according to a new Atlanta Federal Reserve study.

“I’ve never been displaced like this,” said Allen, who said he fell behind because of unexpected childcare expenses as his rent rose above $900 a month. “I need to go home and regroup.”

Hedge funds, large investment firms and private equity companies helped the U.S. housing market recover after the crash in 2008 by turning empty foreclosures from Atlanta to Las Vegas into occupied rentals.

Now among America’s biggest landlords, some of these companies are leaving tenants like Allen in the cold. In a business long dominated by mom-and-pop landlords, large-scale investors are shifting collections conversations from front stoops to call centers and courtrooms as they try to maximize profits.

“My hope was that these private equity firms would provide a new kind of rental housing for people who couldn’t — or didn’t want to — buy during the housing recovery,” said Elora Raymond, the report’s lead author. “Instead, it seems like they’re contributing to housing instability in Atlanta, and possibly other places.”

American Homes 4 Rent, one of the nation’s largest operators, and HavenBrook filed eviction notices at a quarter of its houses, compared with an average 15 percent for all single-family home landlords, according to Ben Miller, a Georgia State University professor and co-author of the report. HavenBrook — owned by Allianz SE’s Newport Beach, California-based Pimco — and American Homes 4 Rent, based in Agoura Hills, California, declined to comment.

Colony Starwood Homes initiated proceedings on a third of its properties, the most of any large real estate firm. Tom Barrack, chairman of U.S. President-elect Donald Trump’s inauguration committee, and the company he founded, Colony Capital, are the largest shareholders of Colony Starwood, which declined to comment.

Diane Tomb, executive director of the National Rental Home Council, which represents institutional landlords, said her members offer flexible payment plans to residents who fall behind. The cost of eviction makes it “the last option,” Tomb said. The Fed examined notices, rather than completed evictions, which are rarer, she said.

“We’re in the business to house families — and no one wants to see people displaced,” Tomb said.

According to a report last year from the Harvard Joint Center for Housing Studies, a record 21.3 million renters spent more than a third of their income on housing costs in 2014, while 11.4 million spent more than half. With credit tightening, the homeownership rate has fallen close to a 51-year low.

In January 2012, then-Federal Reserve Chairman Ben Bernanke encouraged investors to use their cash to stabilize the housing market and rehabilitate the vacant single-family houses that damage neighborhoods and property values.

Now, the Atlanta Fed’s own research suggests that the eviction practices of big landlords may also be destabilizing. An eviction notice can ruin a family’s credit and make it more difficult to rent elsewhere or qualify for public assistance.

Collection Strategy?

In Atlanta, evictions are much easier on landlords. They are cheap: about $85 in court fees and another $20 to have the tenant ejected, according to Michael Lucas, a co-author of the report and deputy director of the Atlanta Volunteer Lawyers Foundation. With few of the tenant protections of places like New York, a family can find itself homeless in less than a month.

In interviews and court filings, renters and housing advocates said that some investment firms are impersonal and unresponsive, slow to make necessary repairs and quick to evict tenants who withhold rent because of complaints about maintenance. The researchers said some landlords use an eviction notice as a “routine rent-collection strategy.”

Aaron Kuney, HavenBrook’s former executive director of acquisitions, said the companies would rather keep their existing tenants as long as possible to avoid turnover costs.

But “they want to get them out quickly if they can’t pay,” said Kuney, now chief executive officer of Piedmont Asset Management, a private equity landlord in Atlanta. “Finding people these days to rent your homes is not a problem.”

Poor Neighborhoods

The Atlanta Fed research, based on 2015 court records, marks an early look at Wall Street’s role in evictions since investment firms snapped up hundreds of thousands of homes in hard-hit markets across the U.S.

Researchers found that evictions for all kinds of landlords are concentrated in poor, mostly black neighborhoods southwest of the city. But the study found that the big investors evicted at higher rates even after accounting for the demographics of the community where homes were situated.

Tomb, of the National Rental Home Council, said institutional investors at times buy large blocks of homes from other landlords and inherit tenants who can’t afford to pay rent. They also buy foreclosed homes whose occupants may refuse to sign leases or leave.

Those cases make the eviction rates appear higher than for smaller landlords, according to Tomb, whose group represents Colony Starwood, American Homes 4 Rent and Invitation Homes. The largest firms send notices at rates similar to apartment buildings, which house the majority of Atlanta renters.

Staying Home

Not all investment firms file evictions at higher rates. Invitation Homes, a unit of private equity giant Blackstone Group LP that is planning an initial public offering this year, sent notices on 14 percent of homes, about the same as smaller landlords, records show. In Fulton County, Invitation Homes works with residents to resolve 85 percent of cases, and less than 4 percent result in forced departures, according to spokeswoman Claire Parker.

The Fed research doesn’t say why many institutional investors evict at higher rates. It could be because their size enables them to negotiate less expensive legal rates and replace renters more quickly than mom-and-pop operators.

“Lots of small landlords, when they have good tenants who don’t cause trouble, they’ll work with someone who has lost a job or can’t pay for the short term,” said David Reiss, a Brooklyn Law School professor who specializes in residential real estate.

Preserving Affordable Housing

photo by Rgkleit

Alexander von Hoffman of the Harvard Joint Center for Housing Studies has posted an interesting working paper, To Preserve Affordable Housing in the United States. It opens,

Most Americans who have any idea about low-income housing policy in the United States think of it as composed of programs that either build and manage residences – such as public housing – or help pay the rent – such as rental vouchers. Few people realize that much, perhaps most, of the government’s effort to house poor families and individuals is now devoted to supporting privately owned buildings that, courtesy of government subsidies, already provide low-income housing. Similarly, few know of the national movement to prevent these rental homes from being converted to market-rate housing or demolished and to keep them affordable and available to low-income households.

The problem of “preservation of affordable housing” generally refers to privately owned but government-subsidized dwellings developed under a particular set of federal subsidy programs. Although the first of these programs was enacted in 1959, their heyday – when they produced the bulk of government-subsidized low-income housing – lasted from the late 1960s until the mid-1980s. Before these programs were adopted, the government’s chief low-income housing program had been public housing, in which government agencies funded, developed, owned, leased, and managed apartments for people of limited incomes on a permanent basis.

Starting about 1960, however, the government shifted to a new policy in which it provided subsidies limited to a specific length of time to private developers of low-income rental housing. These private developers could be nonprofit organizations or for-profit companies operating through entities that earned limited dividends. In the low-income rental programs of the 1960s the government subsidized the rents of poor tenants by providing low-interest mortgage loans (through mortgage insurance and/or direct payments) to the projects’ developers. In 1974, Congress added another program, Section 8, in which the government signed a contract to pay a portion of the tenants’ rents for up to twenty years, which was as long as the mortgage subsidies had been.

After the low-income rental projects were completed, a number of circumstances threatened to displace the projects’ low-income occupants from their homes. In the early years especially, some owners faced financial difficulties, including foreclosures. Starting in the boom years of the 1980s, others desired to pay back their subsidized mortgages early (or “prepay”) to rent or sell the apartments at lucrative market rates. And eventually all owners reached the end of the time limit of their original subsidies. To keep low-income tenants in the subsidized apartments, housing advocates fought to keep the subsidized projects livable and within the means of poor people. The cause they rallied to was the “preservation of affordable housing.”

*    *    *

Since the late 1980s a wide array of interests – including for-profit owners and investors, non-profit developers and managers, and tenants – have organized their interest-group associations and entered into coalitions with one another to shape government policies. They have worked with sympathetic members of Congress and their aides to preserve the subsidized housing stock for low-income Americans. The road has been rough at times. The Reagan administration was indifferent at best to the issue. Legislation in 1987 and 1990 for all practical purposes banned prepayments, angering the owners’ representatives who opposed these laws. After prepayments were again allowed, advocates and owners joined together again to push for affordable housing preservation programs and procedures. The government programs that they attained in the 1990s became a major component of low-income housing policy in the United States.

Until relatively recently, the interest groups focused on shaping federal policy. They worked to pass – or repeal – national legislation and to influence program rules set by the Department of Housing and Urban Development (HUD). Although the federal government continues to be essential to housing policy, the growing political opposition to large federal spending programs has led advocates of affordable housing preservation to press state governments for financial support. (3-5)

This working paper clearly identifies the problems with “[p]oorly thought out programs” that “encouraged bad underwriting and long-term management” and how they played out in affordable housing projects that were not intended to provide for permanent affordability. (73) It also provides a good foundation for a discussion of where affordable housing policy should be heading now.