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Investor Class Already Looking for Handouts to Purchase GSE-Owned Properties

Marcy Wheeler has some important thoughts about the government’s proposal to convert GSE-owned properties into rental units, and the potential for abuse on the part of a new generation of slumlords.

Call me crazy, but it seems the only reason such a program would be lucrative would be because it allowed one investor to corner significant chunks of the housing or rental market in a given city or neighborhood. Which, it would seem to me, would make for really abusive landlords: people with no competitive need to keep up their properties, with market dominance sufficient to raise rents beyond what the economy really supported, and enough pull at city hall to avoid accountability for doing these things […]

The language purportedly protecting against TBTF slumlords is flaccid. It lists “address[ing] property repair and rehabilitation needs” as one of six objectives (after, it must be said, “reduc[ing] REO portfolios … in a cost-effective manner” and “reduc[ing] average loan loss severities.” It requires private partners take on “most or all day to day management and operations, including property maintenance and rehabilitation, rental property management, marketing for sale.” And it only requires proposed plans to address, “steps taken to ensure that the properties are well maintained and managed during the period” as item 7, after already emphasizing, as item 2, “a focus on maximizing returns.” Nowhere does it require these hypothetical landlords to charge reasonable rates for rents.

In other words, while this plan may include lip service to the upkeep of these properties, nowhere does it limit what kind of price gouging these TBTF landlords could engage in (indeed, it places more emphasis on financial return than on societal return).

I think it would be really hard for a property management company to corner a rental market. They can certainly have a big stake, but cornering it would involve a huge amount of properties, far more than Fannie and Freddie have sitting as REOs. What’s more, even the most corrupt city halls can actually cite slumlords; just look at Los Angeles, where Deutsche Bank has faced those accusations.

This is definitely worth being concerned about, however, because clearly Treasury will be more focused on getting these properties off the real estate market than ensuring good landlords. That isn’t Treasury’s core competency, of course, so we will have to rely on local officials to make sure that renters aren’t being run over in these properties.

I’m more worried about this Morgan Stanley analysis of how this would work. They’re already asking for handouts.

The collapse of the U.S. residential real estate market triggered the recession in 2007 and has stifled an economic recovery, according to the study. Incentives such as tax breaks and eased lending terms are needed to encourage more investors to purchase repossessed homes, repair them and rent the properties at affordable rates to people who can’t afford to buy a house, analysts led by Oliver Chang wrote.

“What’s important to do is help clear the backlog as quickly as possible with as little detriment to home prices as possible,” Chang, head of housing strategy in Morgan Stanley’s research division, said in a telephone interview. “The goal here isn’t to help investors. The goal is to provide quality, affordable housing.”

If the goal isn’t to help investors, why are we giving tax breaks and eased lending terms? The investors will get the houses at fire sale prices, and at those rates they will be profitable. This just looks like another excuse to give the rentier class a handout. The subsidy is implicit in the transaction; there’s no need whatsoever to pile onto that.

If we’re providing money to anyone in an effort to fix the housing crisis, that money should be going to borrowers, who through no fault of their own were sucked into a predatory market and find themselves with no leverage to get out of it. Making Fannie and Freddie a loan modifier and refinancer is much more attractive of a policy than this REO-to-rental-unit idea, especially if the investors are already looking for inducements.

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David Dayen

David Dayen