Published on naked capitalism, by Yves Smith, August 21, 2012.
We are in the midst of a sea change in terms of the relationship of ordinary Americans to the housing market. Policymakers are not only in denial as to its magnitude, but are actively enabling courses of action that are likely to prove destructive.
One of the accidental and fortunate discoveries of the 1930s was that a long-dated mortgage, meaning 15 to 30 years, was a good fit with working conditions of that era.
The Home Owners Loan Corporation refinanced borrowers who were delinquent and in danger of losing their homes from short maturity mortgages to 20 to 25 year ones, considerably lowering borrower payments. This was considered a radical experiment at the time, and was expected to lose $1 billion, a very large sum in those days. When its operations ceased, it had shown a profit. One of the big reasons was the stability of employment. Job tenures were much longer than now; in fact, being fired was rare, and usually a result of business failure or distress, not management whim or need to meet quarterly earnings targets. And with the exception of some very large corporations that liked transferring managers (IBM stood for “I’ve been moved”), families were more likely to remain in the same house over the husband’s working life … //
… Now readers might wonder: wouldn’t it be in the best interest of these landlords to do at least an adequate job of taking care of the properties? After all, don’t they intend to sell the houses, preferably as soon as they seem some price appreciation? Don’t be so sure. First, one possible acquirer is the current tenant; you might see financed sales or rent to own structures. And prospective owners would presumably buck the efforts to dump maintenance on them less than those who weren’t potential buyers. Second, the mortgage industry has long been keen to securitize rentals, and these bulk sales programs would give them enough properties to move this scheme forward. Imagine the fees! And imagine how well this will work from the perspective of tenants. As with mortgages, you’d presumably have a servicer who’d handle taking and accounting for the rental payments and lease renewals as well as handling whatever in the way of repairs and maintenance they deigned to provide. Given how accountable and responsive servicers have been, I shudder to think how these securitization servicers would perform.
So as we indicated, there is good reason to expect that the new PE landlords will undermaintain the properties they buy. That in turn has implications for the neighboring properties. At a minimum, you can expect to see more turnover in those homes (tenants less inclined to renew leases) and/or bad landlords getting a name (in this world of pervasive connectivity, it will be much easier to find that sort of thing out). Thus it is in the interest of homeowners to push for tougher rental standards to help protect property values and encourage long-term stable tenancy (something you see in places like New York where tenants have solid legal protections).
This program is troubling not just on its own, but also as another manifestation of the falling status of the American middle class. As Matt Stoller wrote:
- Debt is not just a credit instrument, it is an instrument of political and economic control.
- It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien places on their crops. When approaching a furnishing agent, who could grant them credit for seeds, equipment, even food itself, a farmer would meekly look down nervously as his debts were marked down in a notebook. At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing. Their land was often forfeit, and eventually most of them became tenant farmers…
- [W]e are in the midst of creating a second sharecropper society..Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages…Young people and what only cynics might call ‘homeowners’ have no choice but to jump on the treadmill of debt, as debtcroppers. The goal is not to have them pay off their debts, but to owe forever. Whatever a debtcropper owes, a wealthy creditor owns. And as a bonus, the heavier the debt burden of American citizenry, the less able we are able to organize and claim our democratic rights as citizens. Debtcroppers don’t start companies and innovate, they don’t take chances, and they don’t claim their political rights.
The one plus ordinary Americans have in the coming rental conversion is that this is a battle that can be fought on a local level, where major financial players seldom bother buying political favors and can easily misjudge who the key players are. Stronger rental rights, which would discourage absentee rentiers from bidding up properties, would also work to the advantage of local landlords who have been the traditional owners of residential rental properties. This is a battle that can be won, provided homeowners get word soon enough that a quiet battle for their communities is about to be joined.
(full text and many comments).
Private Equity: A Government Sponsored Enterprise, on naked capitalism, by Nanea, a private equity insider, and Yves Smith, August 21, 2012;
Private equity, on en.wikipedia;
History of private equity and venture capital,on en.wikipedia.