Renita Barbee, 52, was still grieving the death of her mother last fall when she received another shock. Her landlord, the Wall Street rental behemoth Invitation Homes, was raising her rent to $3,000 a month, an increase of more than $800 all at once. Barbee had shared the three-bedroom Los Angeles rental home with her mother, husband, and daughter. But her husband wasn’t working after a recent stroke, and without her mother’s Social Security payments to help cover the bills, there was no way that Barbee’s family could afford to stay put on just her salary as a city dispatcher.
Frantic calls and e-mails to the company went unreturned. Barbee says she was accustomed to getting an operator when she called Invitation Homes, one of several large investors that seized an opportunity to profit in the aftermath of the housing crash. Backed by private equity cash, these investors took advantage of fire-sale prices to scoop up hundreds of thousands of foreclosed homes nationwide and convert them into rental properties. The new investors-turned-landlords often looked little like the mom-and-pop operators who have typically managed single-family rentals, tenants found.
“There was no opportunity to just go talk to someone and negotiate,” Barbee tells The Intercept.
She’s one of hundreds of thousands of Americans who—whether they know it or not—are now renting from Wall Street. A new report by three housing and consumer rights groups claims that her experience is a typical one, and that Wall Street’s new rental empire is characterized by aggressive rent hikes, fee gouging, and high rates of eviction. These practices, according to the report, are propping up a new asset class known as “single-family rental securities,” akin to mortgage securities but backed instead by the rent checks of tenants like Barbee.
Since their debut in 2013, rent-backed securities have ballooned into a nearly $20 billion market that won a first-of-its-kind taxpayer backing from Fannie Mae in January 2017. Last month, Freddie Mac announced its own single-family rental financing deal. These developments augur continued growth of the controversial industry, and many affordable housing and consumer advocates are calling for additional regulations.
“This important report highlights the way Wall Street landlords have driven up rental prices and provided terrible living conditions—particularly in low-income and minority communities,” Sen. Elizabeth Warren, D-Mass., told The Intercept. “We need to do much more to provide clean, safe, and affordable housing for working families—and we can start by taking control away from Wall Street and returning it our communities.”
Wall Street’s turn as landlord coincides with historic lows of U.S. homeownership. In 2011, analysts at Morgan Stanley proclaimed that the nation was undergoing a transition from an “ownership society” to a “rentership society.”
This transition has occurred, in large part, thanks to Wall Street’s own efforts. The addition of 7 million single-family rental homes since 2005 has “almost a one-to-one relationship with the number of families who lost their homes to foreclosure,” says Julia Gordon, executive vice president of the National Community Stabilization Trust, or NCST.
Early on, observers like Gordon raised concerns that Wall Street’s “rentership society” could crowd out would-be homebuyers and put tenants and recovering neighborhoods at risk.
The report released this week by Americans for Financial Reform, ACCE Institute, and Public Advocates contends that these fears have come to pass.
Drawing on investor communications and more than 100 tenant interviews in Los Angeles County, the report’s authors examined the business practices of nine Wall Street firms that now manage more than 200,000 single-family homes in 13 states. This number remains a fraction of the total rental inventory in the United States. But the report suggests that by concentrating their activities in a small number of geographic areas—often those with few tenant protections—single-family landlords have been able to exert outsized influence.
Invitation Homes, which merged with Starwood Waypoint Homes in November 2017 to create the nation’s largest single-family landlord, did not respond to a list of questions from The Intercept. But the company said in a statement that its rents are “dramatically lower on a per square foot basis than apartments in our markets.”
“Invitation Homes has invested more than $2 billion, an average of approximately $22,000 per house, in renovations to its properties—many of which were previously sitting vacant and dragging down property values for surrounding families,” said the company. “Those investments not only benefit residents by providing high-quality homes near good schools and good jobs, but also played a critical role in stabilizing local housing markets, and spurring local economic growth and job creation.”
Several previous studies have provided evidence that Wall Street landlords are putting pressure on local housing markets. In Sacramento County, Calif., local news station KCRA reported last year that Invitation Homes is the largest private landlord, behind only the city itself. Zillow rental data shows that in 2014, rent in single-family homes in Sacramento was increasing up to 50 percent faster than in multifamily apartments, before the latter caught up. Now, Sacramento is undergoing an affordable housing crunch, which local housing advocates believe Invitation Homes may have exacerbated by charging above-market rents, allowing other landlords to follow suit.
Meanwhile, in December 2016, the Federal Reserve Bank of Atlanta published the first comprehensive study of eviction rates among the new single-family landlords. In Fulton County, Georgia, the study concluded, large firms with Wall Street backing were up to 19 percent more likely to issue eviction notices than smaller firms. In 2015, Starwood Waypoint Homes (then named Colony Starwood) filed for eviction against more than one third of its renters in the county.
“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,” Elora Raymond, the lead author of the Atlanta Fed study, told Bloomberg in January 2017. “Instead, it seems like they’re contributing to housing instability in Atlanta, and possibly other places.”
The report released this week argues that aggressive rent increases and evictions are not incidental—instead, they have been key to Wall Street’s revival of a risky financial instrument.
When Blackstone pioneered the first rent-backed bond in 2013, the market for private-label mortgage-backed securities was still (for good reason) stagnant, and many investors were skeptical. Boosters of the new rent-backed bonds sought to quell concerns—and analogies to the still-recent financial meltdown—by assuring potential investors that tenants represented a much more reliable income stream. Foreclosing on a family, given the wide range of protections available to homeowners, can be a drawn out affair. Booting a family from an apartment is a much simpler process.
These assumptions are also baked into the models utilized by several ratings agencies that granted AAA scores to the first Blackstone securitization. (Two agencies, Standard & Poor’s and Fitch, refused to rate the bonds because the infancy of the single-family rental market made it impossible to rely on the historical data that agencies would typically rely on.)
Indeed, the ease with which Wall Street can dispense with a renter is core to the success of the investment. In lieu of historical data, ratings reports for single-family rental securitizations cite factors such as companies’ “timely removal of tenants” as a key factor shoring up the value of the bonds.
From a community perspective, the very factors that make rent-backed securities a stable asset class (from the perspective of the ratings agencies) could well require destabilizing neighborhoods and wreaking havoc on tenants’ lives. Among the agencies’ rationale for AAA ratings is a more rapid “liquidation scenario” than in a typical mortgage-backed security—meaning that, in a worst-case scenario, renter-occupied homes can be sold off by the thousands in order to repay bondholders, without the hassle of drawn-out court proceedings with individual borrowers.
“To gain investor confidence,” say the report’s authors, “single-family rental companies promise to set competitive market rates for rent and to aggressively pursue evictions.”
Shareholders demand constant growth that outpaces inflation, which means renters need to pay more and more year after year. In a 2017 filing with the SEC cited in the report, Starwood Waypoint laid out plans to accelerate annual rent increases in a newly acquired portfolio of thousands of homes nationwide. Whereas rents for new tenants had gone up by 1.9 percent each year under the old owner, Starwood Waypoint suggested this could be increased to meet its corporate average of 6.2 percent.
The companies also reported maximizing profits through what the report terms “fee gouging” and shifting maintenance costs onto tenants. In addition to producing a series of DIY maintenance videos, covering topics such as “how to fix outlets that don’t work,” Invitation Homes began charging “pet rent”— a special monthly fee on top of both pet deposits and regular, human rent. In a 2017 earnings call with investors, Invitation Homes reported that pet rents accounted for $1.5 million in additional corporate income.
Tenants profiled in the report also alleged that they had been threatened with eviction after reporting maintenance issues. One renter claimed that just five days after filing a complaint over a sewage leak caused by broken pipes, he received a 60-day notice to vacate from Starwood Waypoint.
“We’re seeing that these landlords are more accountable to their fellow Wall Street investors than to their tenants, or to the communities where they own property,” Amy Schur, campaign director for Alliance of Californians for Community Empowerment, or ACCE, told The Intercept. “This is taking the idea of housing as an investable asset class to a whole new level.”
In just four years, single-family rental companies have initiated more than 30 securitizations backed by at least 100,000 homes, helping to resuscitate the market for private-label securities. Meanwhile, in February 2017, Invitation Homes spun out its business into the third-largest public offering of last year, raising $1.5 billion.
Given the success of the market, some observers expressed dismay when Blackstone revealed in January that Fannie Mae was backing its next single-family rental securitization, to the tune of $1 billion.
In a letter to the Federal Housing Finance Agency, which has oversight over Fannie Mae, National Association of Realtors President William E. Brown charged that instead of fulfilling its mission to serve average home buyers, “Fannie Mae is actively financing large institutions to compete with them.”
These concerns were exacerbated by research by the Urban Institute showing that for families earning less than the area median income, the Invitation Homes properties were less affordable than the multifamily apartments Fannie Mae typically finances.
Last month, Freddie Mac announced its own plans to invest roughly $1 billion in the single-family rental market. Instead of directly backing loans to operators like Invitation Homes, the agency is working with CoreVest, a Wall Street-backed firm that says it lends to mid-size single-family rental operators. Freddie also says that the deal will promote affordable housing rather than jeopardizing it, with 94 percent of the underlying properties affordable to families earning less than the area median income.
The NCST’s Gordon says she’s encouraged by the initial affordability numbers of Freddie’s deal, but wonders whether the rents will still be affordable in five years, given single-family landlords’ reputation for hiking rents rapidly.
A spokesperson for Freddie Mac told The Intercept that while confidentiality requirements prohibit the agency from sharing the names of landlords who received the underlying loans, “We would not provide financing to someone with a history, reputation or the explicit intent to rapidly raise rents or displace tenants.” The spokesperson also said that Freddie Mac verified that the borrowers are in good standing with federal guidelines and toured a representative group of properties.
Asked about plans to monitor ongoing affordability, a spokesperson for CoreVest told The Intercept that “the affordability index is a Freddie Mac construct and is not monitored by CoreVest.”
Gordon suggests that both Fannie and Freddie should implement firm affordability standards and explicit tenant protections for all future single-family rental deals—and proceed with caution, lest the mistakes of the financial crisis repeat themselves. “If they’re going to be involved in this arena, they need to be responsible about this,” she says. “[Taxpayers] are still backing them.”
But for the moment, renters are left to fend for themselves. In California, where many Wall Street landlords report especially steep rent increases, tenants lack even the local protections afforded to apartment-dwellers. Current state law exempts single-family homes from local rent regulations such as those in Los Angeles, which would have otherwise prohibited the 35 percent increase to Renita Barbee’s rent.
Barbee managed to win a small victory in November when, with the help of ACCE, she and a group of other tenants rallied at Blackstone’s L.A. headquarters to demand a rent freeze. Soon after, the company called Barbee and told her that the initial increase was a mistake—and that she could remain in the house for another six months, at the current rent, due to her recent tragedy.
Barbee and ACCE are both encouraged by Invitation Homes’s apparent susceptibility to pressure. The company’s investor communications even flag “negative publicity” from housing and consumer rights organizations as a potential threat to its bottom line.
Even so, Barbee didn’t want to end up in the same situation in another six months. She and her family moved into a house further outside the city that was recently vacated by a friend’s elderly mother. They’re paying just $1,800 a month.
While this new situation is a relief, Barbee says she’s still dismayed by where she’s ended up. After losing her own home to foreclosure more than a decade ago, she thought she’d be able to buy again by now.
“Nothing is affordable, so I’ve come to the conclusion everyone’s not going to be a homeowner,” she says. “But not even to be able to rent in the place you grew up in? It breaks my heart.”