How the government helps Wall Street landlords convert family homes to rentals
A For Rent sign is posted in Sacramento, Calif. Wall Street Real Estate Investment Trusts (REITs) are gobbling up homes around the country and turning them into rentals. | Rich Pedroncelli / AP

Jan Weir is a professor at the University of Toronto and writes regularly in various publications on issues including shadow banking, political economy, and finance.

A reader from Sacramento wrote this to me last week:

“The homelessness crisis here is worse than I have ever seen it—streets are laden with tent cities, makeshift homes, broken RVs and cars with folks living in them—beyond any current singular solution given the complexity of the attendant attended issues.  The Bay Area and L.A. are the same—of course it is all over…. Mental health for all is stretched in this pandemic and for those on the street beyond. There is an air of humans having ‘lost it’. The neighborhoods are experiencing more violence, theft, and unsafe community experiences.”

But there’s another picture that stands in stark contrast to the tent cities that are sprawling across America like the shantytowns of a poor developing country: Housing prices have risen 24.8% since March 2020. As house prices rise, rents rise. Despite the ever-escalating number of those without the ability to buy or rent, someone, or some group, is able to sweep up all available units. As the average American moves from owner to renter to homeless, who is filling in the gap? Where is this demand coming from?

Part of the answer: The wealthy investor who is buying up average priced single-family homes through equity/hedge funds and trusts.

Where did the millions of foreclosed homes go after 2008?

The new-found corporate interest in single-family houses can be traced back to the government’s failed answer to the near economic meltdown of 2008. Recall that in response to the Great Depression in the 1930s, under Roosevelt, the bailout went only to the homeowners for mortgage relief and not a penny to the banks. By contrast, under the Bush/Obama programs during the Great Recession, the majority of the funds went to the banks and hardly any trickled down to help homeowners.

Obama called his program the Home Affordable Modification Program (HAMP), and it promised to help four to five million homeowners with a $75 billion allocation. But only 887,000 got relief, and some nine million people lost their homes in the next few years.

Francisca Mari, writing in the New York Times, answered the question of who got the foreclosed homes, in her headline: A $60 Billion Housing Grab by Wall Street. After recounting a homeowner’s unpleasant encounter with one of the new mortgagees who evicted him to become his landlord, Strategic Acquisitions, she noted:

“Strategic Acquisitions was but one of several companies in Los Angeles County, and one of dozens in the United States, that hit on the same idea after the financial crisis: load up on foreclosed properties at a discount of 30 to 50 percent and rent them out.

“By 2016, 95 percent of the distressed mortgages on Fannie Mae’s and Freddie Mac’s books were auctioned off to Wall Street investors without any meaningful stipulations. Private-equity firms had acquired more than 200,000 homes in desirable cities and middle-class suburban neighborhoods, creating a tantalizing new asset class: the single-family-rental home. The companies would make money on rising home values while tenants covered the mortgages.”

In 2021, John Burns Real Estate Consulting urged investors to get on the bandwagon of juicy single family rentals. It identified 43 announcements totaling more than $30 billion in capital that was targeting U.S. rental housing that year. The firm went on to say: “and we know of far more than this that is not public info, the real number is much higher.”

Doug Brien, the CEO of Mynd Property Management, told Hanna Ziady of CNN, “Single family as an asset class didn’t just fare well, it shined.” Brien said further that in the first three months of this 2021 nearly a quarter of all homes sold in the United States went to investors. That’s a broad term that covers everything from mega institutions to individuals buying vacation homes, but BlackRock, JPMorgan Chase, and Goldman Sachs were among the big-name buyers.

REITs: Another tool of the wealthy

There are investment vehicles that allow the wealthy to pool their assets as they do in equity/hedge funds, but restrict the money managers to investing only in real estate; they’re called Real Estate Investment Trusts (REITs). In the above quoted article, Mari’s research revealed that a strikingly large source of the funds for some prominent REITs was foreign—and from hidden sources:

“The REITs were funded with money from all over the world. An investment company in Qatar, the Korea Exchange Bank on behalf of the country’s national pension, shell companies in California, the Cayman Islands, and the British Virgin Islands—all contributed to Colony American Homes [a major REIT].”

Mari’s research uncovered an even more disturbing trend: University and government pension funds were investing in REITs that were converting America into a nation of renters: “Columbia University and G.I. Partners (on behalf of the California Public Employees Retirement System) invested $25 million and $250 million in the REIT Waypoint Homes.”

However, there’s actually no way of knowing the true number of foreign investors or even U.S. tax evaders. Mari quotes Christopher Thornburg of Beacon Economics, who says that the big money is in private equity, and the source of those funds cannot be traced. “They are completely subterranean. They’ve got multiple layers of corporations within corporations within holding companies.”

In The Hill, Eileen Appelbaum, executive Director of the Economic Policy Institute, wrote that her investigations revealed, “Wall Street landlords extract the highest rents with the least investment, allow building conditions to deteriorate, then dump the property on the market or abandon it.”

The corruption of Fannie Mae and Freddie Mac

This is also story of how a remedy to help average Americans buy average homes, conceived of by an earlier government with different values in an entirely different age, has become the instrument that today is helping wealthy corporations buy existing homes to turn them into rental units with the cooperation of the government. It’s a change that depended on the voting public being kept unaware of it.

Fannie Mae, the Federal National Mortgage Association, arose out of the Roosevelt government’s New Deal response to the Great Depression to assist average Americans buy average homes. For our purposes, we can think of an average home as in the $480,000 area today.

Buyers with otherwise very good credit, but only a 5% down payment (now possibly 3%), could get a mortgage loan from a bank. Fannie Mae would buy those mortgages, taking them off the bank’s books and thus assuming the risk of nonpayment. Fanny would assemble a number of these mortgages, say a billion dollars’ worth, as a mortgage-backed security, then sell that on to investors (creating the “purchase and sell” model of financialization).

Carrie Newson watches television in the dining area inside her home at the Dutch Village apartments, July 30, 2019, in Baltimore. Newson complained to management about mice and mold in her home but the issues were never fixed. The apartment complex is owned by Jared Kushner, son-in-law of former President Donald Trump. | Julio Cortez / AP

Fannie historically only bought mortgages from the large banks, so in 1970 the government established Freddie Mac (Federal Home Loan Mortgage Corporation) to buy from smaller banks and Savings and Loans, and similarly packaged them for sale.

If you read Fannie’s and Freddie’s charters (here and here), and public descriptions about them, you would think buying up modest single family home mortgages was all they do. But each has an unnoticed side business: helping landlords buy apartment buildings by purchasing those mortgage loans from the banks and reselling them. Freddie recently rebranded this expanding division as OPtiGo.

These usually unnoticed ventures got some notice in the early days of the Trump administration. As Heather Vogel, writing in ProPublica, commented, despite a history of losing property investments and substantial tenant complaints, Freddie assisted Trump advisor and son-in-law Jared Kushner’s family business to acquire 18 large apartment buildings with loans totaling $849 million. It was probably the largest purchase and resale bond issue that Freddie Mac had ever done.

But there was a lot more than the bad odor from the connections between the Kushners and the White House. The terms of the loan were of the highest risk: ten years, interest-only.

There is little doubt that the only reason lenders would give those kinds of terms to the Kushner family was that the banks knew that Freddie was buying the mortgages. If the Kushner corporations default, the taxpayers—all of you, dear readers—would be there to make the lenders whole. And at the end of ten years, while it was unlikely that the Kushner corporations could pay off that debt, they could refinance with the continued assistance of Freddie Mac.

Mortgage giants. | AP

In all probability, this is a lifetime guarantee, as the terms will be renewed each decade safely out of public scrutiny.

As bad as the Kushner family deal seems as an example of helping wealthy families acquire more apartment buildings in their asset inventories, Fannie did something worse recently. At least the Kushner deals related to existing apartment buildings. Fannie has now started to assist equity/hedge funds to acquire average-sized well-located single-family homes to convert them to rental units.

Apparently untroubled by the super-rich of the world scooping up American homes to convert to rentals through REITs, Mari notes that Fannie Mae guaranteed a $1 billion, 10-year fixed-rate loan to Invitation Homes REIT in 2017. This trust is owned by Blackrock, the world’s largest hedge fund, with $10 trillion of assets under management.

The solution

These REITs and equity/hedge funds are searching, with huge pools of capital, for opportunities to snatch up average-priced homes in the best locations to convert to rentals. Owning a home is the essential foundation of what’s long been called “the American dream.” And homes are the best way for the working and middle classes to pass something on to the next generation. The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter ($5,400).

One solution: Absolutely and completely prohibit future corporate or group ownership of single-family homes in any form: REIT, equity, hedge fund, or whatever.

Some readers will feel alarmed; their stomachs may tighten as if they have committed a sin against capitalism by merely reading such a heresy suggesting that the superior classes do not have the right to prey unrestrained on the underclasses.

The founding principle of capitalism is often said to be the survival of the fittest, which is the law of the jungle. Wolves take down the weakest in a herd so that the surviving strongest will pass on their stronger DNA. In the jungle, there is no justice.

Only humans can provide fairness, turning a dangerous jungle into a peaceful garden by wise restraints. In civilization, we protect our weak. If a person has a broken leg, we don’t leave them to the wolves, we take care of them until they are ready to become a productive member of our society again. That gives us a strength that a herd of animals does not have.

As we sometimes have to cull wolves when they get too strong, we have to cull corporations when they become too predatory.

Currently, the conventional wisdom is that America is more divided than it has ever been since the Civil War. The media is full of columnists warning of a descent into violence. A root cause of this dissatisfaction is financial insecurity; and one of the highest expense items on any budget is mortgage or rent. As these leave little for other needs, people get angry.

When the ultra-high-net-worth set met at Davos, Switzerland this year to discuss the state of the economy, some of that elite group alerted the others to the fact that the wealth gap has gone too far and civil unrest is imminent. “It’s taxes or pitchforks,” they warned their fellow billionaires.

Indeed, we are at a tipping point: jungle or garden.


Jan D. Weir
Jan D. Weir

Jan D. Weir is a lawyer and professor of business law at the University of Toronto. He is the co-author of "The Essential Concepts of Canadian Business Law" and researches how the super-rich have been using unrecognized methods for the upward transfer of wealth since the 1980s in the tax, corporate, and banking areas.