Nearly eight years after the start of the global financial crisis, hedge funds and private equity firms have found yet another way to make big profits: distressed housing assets. Often, the very same corporate actors that precipitated the housing crash in the first place are buying and selling off delinquent mortgages and vacant houses that are a product of the crash. Together, these Wall Street entities have raised over $20 billion to buy the notes for as many as 200,000 homes in the United States.1 The newly consolidated single-family rental market is a lucrative business. A 2014 study estimated that the four largest holders of these assets have seen as much as a 23 percent rate of return on the properties they purchased in the last three years.2
Meanwhile, low-income communities of color across the country have suffered. Millions of Americans lost all the equity in their homes or experienced the hardship of foreclosure during the housing crisis and have not recovered from losing their greatest source of wealth. During the financial crisis, the median net worth for African Americans fell 53 percent; for Latinos, it was a 66 percent decrease. In contrast, median net worth for whites fell only 16 percent. While white families have experienced a rebound in wealth since the crisis, African-American and Latino families have not.3
Between 2006 and 2015, rates of homeownership have fallen while the number of single-family homes that are currently occupied by renters instead of homeowners has skyrocketed, up 31 percent to nearly 15 million renters in 2013.4 In the aftermath of the financial crisis, Wall Street’s investment in single-family homes has burgeoned, often crowding out prospective homeowners. For instance, in April 2015, one-quarter of all home sales were to cash-carrying investors;5 in July 2013, cash-on-hand investors bought roughly 55 percent of the homes sold in Las Vegas, Nevada;6 and, in Richmond, California, between 2009 and 2012, about half of all home sales went to investors.7
Major government and government-backed entities are fueling Wall Street’s increased control or ownership of single-family homes. Both the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, are auctioning off, often at a discount, tens of thousands of Non-Performing Loans that they want to get off their books. The vast majority of these loans have gone to hedge funds and private equity firms, and in many cases the properties then end up in their hands. Although Fannie Mae and Freddie Mac have been unwilling to offer principal reduction to struggling homeowners, they often offer steep discounts when they sell these mortgages to Wall Street speculators.
An initial examination of four of the largest purchasers of HUD and FHFA loans has unearthed an array of disturbing business practices, ranging from those that clearly run counter to the goals of homeownership preservation and neighborhood stability to those that break laws, deceive homeowners, and harm taxpayers more generally.
The troubling record of these four large buyers raises serious questions about the HUD and FHFA Non-Performing Loan sale programs–and argues for a very different approach. These institutions have an opportunity to sell their portfolios of distressed mortgages to purchasers that put the interests of occupants and neighborhoods first, instead of selling them to speculators.
Community Development Financial Institutions (CDFIs) have developed programs to buy very delinquent mortgages and offer a “restart” for struggling homeowners, by reducing principal down to current market value and otherwise modifying the loan. When these non-profits are not able to return homeowners back to good standing or they acquire vacant properties, CDFIs have a housing disposition plan based on the affordable housing needs of the communities.
In this paper, we review the track record, to date, of the HUD and FHFA single-family loan sale programs. We, then, explore the troubling record of four of the top buyers of these loans, who are benefitting from the way these loan sales are currently conducted.
We recommend that both HUD and FHFA take immediate action to prevent the on-going sale of distressed housing assets to companies that have misled and cheated taxpayers and companies whose practices are harmful to homeowners, tenants and communities. Specifically, HUD and FHFA should:
1) Establish much higher standards and criteria for the kind of companies that are
eligible to purchase delinquent mortgages.
2) Prioritize companies that have a clearly defined program to offer permanent modifications with principal reduction and to create affordable housing with
Additionally, FHFA should themselves immediately begin to offer principal reduction in their own modification process.