Battle Brews Over Big Bucks Landlords

Housing Toll

In 2021, rents rose 10% or more in 90% of the nation’s major markets, Yardi Matrix reports. In some spots, rents rose by more than 20%, the commercial real estate data firm said. Invitation Homes, one of the country’s largest investors in rental houses (as opposed to apartments), says that in its overall footprint, rents in new leases signed in the fourth quarter rose by 17.3%. In places like Phoenix, Tampa and Las Vegas, rents were up over 20% in the period. For 2021 as a whole, new tenants paid 14.4% more. Current tenants paid more, too, just not as much more.

Based in Dallas, Invitation Homes, which claims to own upwards of 80,000 houses, is one of the three outfits called out by Sen. Warren. (The two others are Progress Residential and American Homes 4 Rent.) It is owned in large part by the Rockpoint Group, a private equity investment firm headquartered, ironically, in Boston.

The Massachusetts legislator said she wrote the letters because the companies’ “growing activity in the housing market has resulted in rent hikes and unaffordable homes for first-time buyers.” She asked them to detail information about their business practices to determine whether they have been taking advantage of the housing shortage to boost their earnings while raising housing costs, hiking up fees, and evicting Americans during the pandemic.

Market Strength

“Private equity firms and rich investors have been taking advantage of the housing shortage by purchasing large numbers of houses and raising rents for families, all to pad their bottom line,” she said in a statement. “With record investor activity in the housing market, these firms need to answer for their business practices that shut Americans out of home ownership and strain their pocketbooks with rapidly rising rental costs. We can’t solve the housing affordability crisis, and lower housing costs for consumers, unless we crack down on predatory practices by Wall Street investors.”

During the hearings, Warren said their responses were — how shall we put this? — less than scintillating. Even though I haven’t seen their replies, I don’t think they were enough to assuage the senator, who is generally credited with creating the Consumer Finance Protection Bureau. She characterized them this way: “They all told me not to worry … They each gave me similar defenses — they play a relatively small role” in the rental sector and “by scooping up houses, they make the rental market more accessible.” She called these and other firms like them “vulture investors.”

Vultures or not, institutional investors have their defenders. One is the banking committee’s ranking minority member, Sen. Pat Toomey, R-Pa., who said in his opening statement that “there’s nothing wrong with putting money to work.”

Calling the hearings an effort “to take the heat off the Biden Administration’s failure to curtail inflation,” the long-time legislator said Democrats are “desperate to find someone else to blame” for the president’s “reckless mismanagement of the economy … There’s nothing wrong with people renting homes instead of, or before, becoming homeowners. And there’s also nothing wrong with investors — whether institutions or individuals — putting their own money to work to meet the needs of these renters.”

GSE Help

Toomey was the only Republican lawmaker to participate in the hearings. But Tobias Peter of the conservative American Enterprise Institute and Joel Griffith of the equally conservative Institute for Economic Freedom and Opportunity at The Heritage Foundation also appeared. And here’s where the secondary mortgage market comes in.

All three agreed that Fannie Mae and Freddie Mac’s increased participation in the multifamily sector made it too easy and inexpensive for investors to put their money into rental housing. “This is a simple issue of supply and demand,” Toomey said. “Institutional investors are the ones with the deepest pockets, the ones with the most capital available to invest in building new housing stock.” Their remarks were aimed at all of Fannie and Freddie's multi-family purchases. They do not now support SFRs. At one time, Freddie Mac was involved in a SFR pilot program, but that short-lived initiative ended in 2018. That effort focused on middle-tier and very small investors with properties affordable to tenants who earned 80 percent of the median for the location. The key takeaways from that pilot can be found in a 30-page white paper.

Peter, who is assistant director of research at AEI’s Housing Center, said big money landlords are using the taxpayer guarantees and other advantages offered through GSE funding “to greatly expand their businesses while crowding out private investors … (The GSEs) tout that they are supporting affordable rental housing, but in reality they create government profit-seeking.”

“The housing market is changing and the real culprit is a massive house price boom fueled by federal housing and monetary policies, which is increasingly crowding lower-income Americans out of the housing market,” the AEI economist argued. “Institutional landlords, particularly on the multifamily side, are taking advantage of more liberal credit terms provided by Fannie Mae and Freddie Mac than the private sector, which is a violation of their charters.”

“They use their taxpayer guarantee and other advantages to greatly expand their business, while crowding out multifamily private investors,” he continued. “Since 2014 outstanding multifamily mortgage debt has doubled, with the GSEs accounting for most of the growth.”

Rising Returns

Peter also warned the funding situation may become worse before it gets better. The Federal Housing Finance Agency, Fannie and Freddie’s government conservator for more than a dozen years now, recently made policy changes that increases GSE competition with the private sector, he said. Moreover, the GSEs affordable housing goals may be increased, he added. Even the Federal Housing Administration is considering changes that will increase its competition with the GSEs. This, he said, “does not bode well.”

Claiming that institutional owners of rental properties were being “scapegoated” for increased housing costs and rental prices, Griffith of the Heritage Foundation pointed out that they own a scant 0.2% of all the country’s single-family rentals and just 1% of all rentals. “Not in a single state do institutional investors own more than 1 in 100 of all available housing in the state,” he testified.

Griffith maintained that the primary drivers of rising prices nationally are government subsidies, the Federal Reserve, and local building regulations. Specifically, he said, Fannie and Freddie “continue to dominate the mortgage market.” And the Fed has driven down mortgage interest rates and fueled a rise in housing costs by purchasing $1.2 trillion of Fannie-Freddie securities.

But neither Toomey nor the two think-tank witnesses addressed the complaints of tenants, of which there were many, or those of legislators on the Democratic side of the aisle. Those voices maintained that “deep pocket” investors were buying up rental properties of all ilk, raising rents while making few improvements, failing to maintain their properties and evicting long-time tenants because they couldn’t pay higher rents, sometimes for reasons beyond their control.

“Unlike Mom and Pop landlords, they have little empathy” for their residents, Sally Martin, director of building And housing for city of Cleveland, testified. “Rents go up, sometimes by 50% or more, and maintenance goes down.” Added Michael Waller, executive director of the Georgia Appleseed Center for Law and Justice: Residents who choose to move rather than pay higher rents often are “hit with termination fees, sometimes three times their rent.”

Another frequent complaint is the lack of transparency in finding the true owner of a rental property. Often, owners stand behind limited liability corporations and/or property management companies. “We see this all the time,” Brooklyn, N.Y., tenant Aneta Molenda told the committee. “It’s very convoluted trying to investigate who owns what.” Cleveland’s Martin agreed. “It’s almost impossible to track them down,” she said of owners. “They hide.”

Fee Simple

Waller said his group has found fees charged by profit-seeking institutional landlords in Georgia go far beyond late fees. The charges include one-time activity fees, pest control fees, utility service fees, a renter’s insurance fee/penalty, valet trash fees, package locker fees, common area electric fees, amenity fees, property management fees, month-to-month penalties, upfront first and last months’ rent, safety deposits equal to one month rent, pet deposits, application fees, and early termination fees triple the amount of a month’s rent.”

Noting that his state’s laws are notoriously landlord friendly, he also testified that corporate landlords “often abuse the eviction system and safety laws to a greater degree than other landlords.” And saying big-gun owners favor eviction because “they are so quick,” tenants have little or no time to obtain legal advice or rental assistance. “Profit-mongering at the expense of family and community well-being is not ‘investment in affordable housing’,” Waller told the committee.

And all that was just the second day of hearings. The first day was a listening session, after which Chairman Brown characterized their comments on the Senate floor. “Their stories all make it clear the real harm the Wall Street business model does to workers’ lives,” he said.

“It’s an increasing problem in every region, from big cities to rural towns. Deep-pocketed investors come into a community they have no connection to, buy up homes, raise rents, cut services and don’t deliver on any of their promises. These out-of-town — maybe even out-of-country — investors are raising rents by 50%, issuing eviction notices, and leaving toxic mold and pest infestations to grow worse, all to pad their own bottom lines.”

The Ohio Democrat vowed that his committee would stop listening to Wall Street and start listening to people — like the Minneapolis working mother who told the panel her persistent complaints about her home’s flooded basement and dangerous garage went unanswered until the city stepped in because of code violations.

Or the Montana woman who lives in a manufactured home community where she rents her lot from a private equity firm that “cut back on all amenities” but still raised rents and added fees for water and sewer and trash removal. In all, the changes amounted to an 86% increase in rents.

Or the Maryland man who lives in a building where the hallways are falling in, the wood floor is buckling, there’s no heat or air conditioning, and cockroaches and mice abound. “They don’t want to fix anything, including the stove and the refrigerator and the heater,” he said.

Editor's note: this story was updated on May 3, 2022 to reflect that Freddie Mac is no longer involved in in a single family rental (SFR) program.