Stealth Investors Target City’s Foreclosed Homes
Somebody wants to buy all of Milwaukee’s foreclosed homes. Should we be glad -- or worried?
Santa Claus is coming to Milwaukee, it seems. Some unnamed company or group of investors wants to buy up all the foreclosed homes owned by the city. That sounds wonderful, given that these vacant homes breed crime and blight neighborhoods and are not easily turned into stable residences.
The city’s new benefactors “want to do something at a significant scale up to maybe 1,000 units or so,” according to Cory Nettles, the state’s former Commerce Secretary and founder of Generation Growth Capital. He was quoted in a Milwaukee Journal Sentinel story by Don Walker.
The news stunned Ald. Bob Bauman. He notes the city currently has 1,295 foreclosed properties, but some of these are former office buildings or businesses and some 300 of all the properties are slated for demolition. In short, it would appear this investor or investors would be buying up every foreclosed home owned by the city. “It was very ambitious,” said Patrick Curley, the mayor’s chief of staff, in describing Nettle’s presentation.
So who are these guys? Nettles wouldn’t say. He did say his company would not be involved in the project, but presumably Nettles, who is a lawyer, was acting as their representative.
Nettles had one meeting to discuss this idea with Mayor Tom Barrett and Curley. “He presented a very broad, conceptual overview,” says Curley. “Our advice was ‘put some meat on the bones’ so we have something to react to and vet thoroughly.”
Who has the ability to buy up a city’s entire portfolio of foreclosed homes? On the one hand, Walker’s story suggests some kind of “local group” would be formed. But according to Bauman, Nettles told him “he represents some investors who buy tax foreclosed properties” and “he was going down to Atlanta to find out more.”
But the company is a piker next to Blackstone, the world’s largest private-equity firm, which “has spent more than $4 billion on 24,000 rental properties in the last year (as of April 2013) making it the largest buyer in the U.S.,” Bloomberg reports. The company “is leading investors in transforming an industry that historically was a mom and pop business — which Goldman Sachs Group Inc. estimates is worth $2.8 trillion… The firm last month expanded a credit line from Deutsche Bank AG to $2.1 billion for acquiring properties.” Blackstone has “hired more than 10,000 plumbers, leasing agents and lawyers” to help run the business, as another story by Bloomberg reported. ”
Blackstone, by the way, maintains one of its offices in Atlanta. In one month in that city, buyers for Blackstone, Colony Capital and American Homes 4 Rent bought almost one in three of all properties sold. “Robert Gilstrap, an Atlanta-area property investor for 21 years, said he’s shocked by the cash being thrown around,” Bloomberg reported.“It’s like Monopoly money,” he said. “You can’t compete.”
How can Blackstone make money on these deals? Its tremendous market power enables it to secure very low interest rates for loans to finance its purchases. But it is also spreading the risk in the same way that investment bankers previously packaged, sliced and sold home loans in a process known as securitization, a process that led to wholesale mortgage defaults and the financial meltdown now known as the Great Recession.
“The creation of a rental home bond has triggered concern that Wall Street is re-inventing the same tactics that crippled the financial system five years ago,” Bloomberg reported. “Economists at the Federal Reserve already are flagging the potential for danger. While financing for rental homes is still in its infancy, the growth needs to be monitored for signs it could damage financial markets, Raven Molloy and Rebecca Zarutskie said in a report this month.”
Blackstone is a publicly-traded company “with a list of institutional owners that reads like a who’s who of companies recently implicated in lawsuits over the mortgage crisis, including Morgan Stanley, Citigroup, Deutsche Bank, UBS, Bank of America, Goldman Sachs, and of course JP Morgan Chase, which just settled a lawsuit with the Department of Justice over its risky and often illegal mortgage practices, agreeing to pay an unprecedented $13 billion fine,” as Mother Jones reported.
In other words, some of the same companies who helped cause the foreclosure crisis would benefit from buying homes that crashed in value and renting them to many of the people who lost their homes and now need a place to stay.
The impact of the mortgage crisis fell hardest on minorities, helping wipe out 53 percent of African American wealth and 66 percent of Hispanic wealth, as a study by the Pew Research Center found. “Plummeting house values were the principal cause of the recent erosion in household wealth… with Hispanics hit hardest by the meltdown in the housing market,” the study noted. This population is likely to be among those targeted by the new mega-rental firms.
Is there any upside to the rise of this new industry? “By pouring money into properties that would have otherwise been left vacant, firms including Blackstone and Colony say they’re improving communities, and helping families rent quality houses in neighborhoods with good public schools,” Bloomberg reports.
But the publication cautioned that “There is a potential for investors to keep driving up property prices and set the stage for another housing bust. More immediately, there’s limited evidence available showing distant owners can fix broken plumbing and keep the homes in good repair.” Bloomberg also reported that Blackstone and other corporate investors were turning away low-income tenants on government assistance. Blackstone, however, said this was a mistake that wouldn’t be repeated.
Blackstone’s rental home business is called “Invitation Homes,” and a company spokesperson told me it currently owns no homes in Milwaukee. Given the size of Blackstone’s operation, Milwaukee’s stock of 1,000 or so foreclosed homes may be too small for it. But the company has also began to make deals with landlords to help finance their purchase of rental properties. Blackstone has been raising hundreds of millions of dollars through the sale of rental home bonds. It proposed to give one landlord a loan to buy 450 rental properties the company had bought in South Florida, according to Bloomberg.
“Lending to smaller landlords opens up the potential for millions of rental homes to be financed and then packaged into bonds,” Bloomberg reports. “The market for the securities may grow to $920 billion over the next six years, according to Keefe Bruyette & Woods.”
That sounds like the kind of opportunity that might appeal to Nettles and the unnamed investors he represents. So there might be cause for Bauman to suggest the city consider any proposed deal very carefully.
“This needs to be out in the open,” the alderman declares. “This could be a good deal. But it could also be a very bad deal.”