As the housing market shows initial signs of recovery, Wall Street has developed a new way to profit. As Laura Gottesdiener reports, Wall Street hedge funds and other private equity firms have been accumulating hundreds of thousands of foreclosed homes—houses that homes were only foreclosed in the first place because of conditions perpetuated by these hedge funds. For example, Blackstone Group, a major hedge fund company, has been buying homes at bargain prices many from people forced out of their homes by the foreclosure crisis.
In one move, Blackstone bought 1,400 houses in Atlanta in a single day; and, across the country, it now owns over 40,000 homes. As Gottesdiener writes, “Few outside the finance industry have heard of Blackstone. Yet today, it’s the largest owner of single-family rental homes in the nation.” (Blackstone also owns part or all of the Hilton Hotel chain, Southern Cross Healthcare, Houghton Mifflin publishing house, the Weather Channel, Sea World, the arts and crafts chain Michael’s, Orangina, and dozens of other companies.)
Blackstone and similar companies are now renting out the houses they purchased–often to the homes’ original owners–and bundling rental payments into bonds to be sold to investors. In November 2013, Gottesdiener reports, Blackstone released history’s first rated bond backed by securitized rental payments. Investors “tripped over themselves in a rush to get it,” and Blackstone’s competitors announced that they would also develop similar securities.
This is extremely dangerous to those renting from Blackstone. If a single home-rental bond blows up, thousands of families could be evicted, whether or not they ever missed a single rental payment. “We could well end up in that situation where you get a lot of people getting evicted… not because the tenants have fallen behind but because the landlords have fallen behind,” says Dean Baker, an economist with the Center for Economic and Policy Research.
Will Blackstone prove to be a good property manager? As recent history suggests, when left unchecked, hedge fund marketers’ financial products result in outcomes that leave people without their homes and the economy on the brink of collapse.
Source: Laura Gottesdiener, “The Empire Strikes Back: How Wall Street Has Turned Housing Into a Dangerous Get-Rich-Quick Scheme – Again,” TomDispatch, November 26, 2013, http://www.tomdispatch.com/blog/175777/.
Student Researcher: Dustin Arbuckle (Sonoma State University)
Faculty Evaluator: Peter Phillips (Sonoma State University)