Private Equity Sabotaging Working Communities

lone-star-foreclosures

the map is a few years old

Madison   Auction off tens of thousands of homes during the housing crisis to private equity companies without rules or wherefores other than to offload the problems, despite knowing that private equity operations only care about their bottom line, what could go wrong? Not surprisingly, it turns out, just about everything, and nowhere is this truer than when the private equity bunch is led by Lone Star and the robber baron of our time, John Grayken, the American-born pirate who renounced his citizenship in order to pay less taxes, and now pretends to live in Ireland.

The New York Times is finally taking a look at the disaster that has followed the government’s policy of cut-and-run on the housing crisis and found the biggest culprits were Lone Star and its servicer, Caliber, Nationstar, also with Texas roots, and of course Blackstone, which has come out of this bottom feeding crisis as the largest private landlord in the country. Private equity firms are money machines and make it clear that if they make more money foreclosing, they won’t hesitate. Most hardly participated in the HAMP, housing modification program, to try to allow families to keep their homes, and because the government turned the whole modification process over to banks and financiers, there was no requirement that they do so.

Neither of course was there any obligation under the Community Reinvestment Act to benefit lower income, racially diverse communities and not discriminate in lending. As the Times reports:

But much of this investment has not benefited poor neighborhoods. Banks are expected, under the Community Reinvestment Act, to help meet the credit needs of low-income neighborhoods in areas they serve. Private equity has no such obligation. The idea is that banks should follow an implicit social contract: In return for government loans and other support, they are expected to serve a community’s needs. Private equity, which unlike the banks does not borrow money from the government, is answerable to its investors. Those investors include some of the nation’s largest pension plans, whose members — teachers and police officers among them — may support improvements to such lower-income areas.

And, that’s putting it mildly.

Private equity makes no bones about any of this either.

 

Lone Star explains to investors one way it profits from delinquent loans. Lone Star’s mortgage subsidiary will lower a borrower’s monthly payment if “the net present value of a modification is greater than the net present value of a foreclosure, loan sale or short sale.” Translation: If foreclosing on a homeowner is the most profitable option, Lone Star is likely to foreclose.

Not surprisingly, the new bosses for the housing market are much like the old bosses, except worse. Paperwork is misplaced or disappears. Homeowners can’t get responses or assistance. Modifications come too late to prevent foreclosures, and the beat goes on.

Pretty simply when you turn over the chicken house to the fox, you don’t just have a problem, you have no chickens, and in this case all of us, especially in low-and-moderate income communities are the chickens, clucking all the way to the slaughter.

Think I’m exaggerating? Here’s a perfect example from the Times on the vicious circle of predatory exploitation that Nationstar is able to practice directly and through its subsidiaries:

The whirl of transactions illustrates how Nationstar can control nearly every stage of the mortgage process, posing potential conflicts of interest as it earns fees along the way. Nationstar collects bills and, when people don’t pay, can foreclose on homes. Nationstar earns fees auctioning those homes through Homesearch. Ads on Homesearch, which is now known online as Xome.com, direct bidders to Greenlight. Nationstar can then collect on the new mortgage, bringing the process full circle.

As banks have pulled out of housing and private equity has swooped in, low and moderate communities are also being starved of needed investment, which also feeds into yet another cycle or deteriorating conditions for our communities. What’s the government doing about all of this? Not much. There’s talk of some new regulations by HUD, but who knows at this point, that may be too little and it’s definitely too late. Some Congressmen are moaning about their folks and foreclosures, but most of this is wishing-and-a-hoping. Looks like we’re headed for the wall again, unless there’s big change in the relationships between Washington and Wall Street, and that’s not looking so good this minute either.

Source: The New York Times

Source: The New York Times

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Community Reinvestment for Non-Bank Financial Institutions

New Orleans   A conundrum becomes a contradiction when we look at regulators concerns about the size and operations of huge, non-bank financial institutions that were such a sizeable factor in triggering the Great Recession and find that they are moving to protect the financial system and ignoring citizen and consumer interests.  

The Treasury Department has announced that it is closer to designating some financial giants as “systemically important,” which is a euphemism for “too big to fail.”   These non-bank entities like AIG, the American International Group, Prudential, and General Electric Credit would at the minimum undergo regular financial review by the government, have higher capital requirements, and be nudged out of riskier investments like some kinds of speculative annuities.

Nothing is being said about housing, and this is where speculation was rampant and devastating on Main Street, regardless of Wall Street. GE Capital for example was a significant housing broker.  I certainly met with their representatives several times persuading them to modify some of their subprime requirements. They have shed much of their mortgage brokerage business, but being classified in this way would not prevent them or the others from re-entering the housing markets or, more importantly, curb their behavior.

There has been recent news that Blackstone, a huge Wall Street investment company, has bought 26,000 houses in 9 states to take advantage of price fluctuations in many markets hammered by foreclosures and the housing recession.  Another Wall Street outfit has budgeted $250 million per month to try to follow Blackstone’s lead.  The beat goes on.

One of the many problems several years ago as nonbanks flooded the housing markets was their exemption from the requirements of the Community Reinvestment Act (CRA, 1978), allowing citizens no protection against discrimination and lending abuses.  Some of the culprits turned themselves into banks in order to benefit from federal bailout funds, forcing them under CRA requirements.  There is no mention in the current Treasury department discussions of nonbank financial institution regulations of requiring CRA protections if these outfits are involved in housing, and there should be.

Blackstone is neither fish nor fowl, but it’s huge in real estate.  They describe themselves as a, “a multinational private equity, investment banking, alternative asset management and financial services corporation based in New York City. As the largest alternative investment firm in the world….”  There are no flower children at any gatherings of this “alternative…financial services corporation,” I’ll guarantee you.   But, when you control 26,000 homes in 9 states and growing, you need to measure up to the protections allowed by the Community Reinvestment Act.  Treasury needs to make sure these protections are in place for the AIG’s and GE Capitals of the world, but all of us need to make sure that any and all of these financial whizbangers that brought down the entire economy, ruined countless lives, and forced millions of families out on the street, are fully regulated and following the requirements of the Community Reinvestment Act.

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