Lords and Peasants 2.0

November 30, 2013 in Montana

by lizard

Reporting on the frenzied crowds of consumers always seems to come off as a bit smug and condescending. This year, the new outrage is over the companies opening on Thanksgiving day, especially Walmart (there were around 1,500 protests yesterday against Walmart’s corporate model, organized by OUR Walmart).

Too often, the critics are not the participants, and those who can afford to wait out the crowds are the ones who sit instead comfortably in front of the television horrified at the stories of violence coming from the unwashed masses.

The class divide becomes even more evident when you look at the companies that decided NOT to open on Thanksgiving, stores like Costco and Nordstrom.

If you want a little peek into the perspective of poverty, I recommend reading Linda Tirado’s piece, titled This is Why Poor People’s Bad Decisions Make Perfect Sense. Here’s an excerpt:

Rest is a luxury for the rich. I get up at 6AM, go to school (I have a full course load, but I only have to go to two in-person classes) then work, then I get the kids, then I pick up my husband, then I have half an hour to change and go to Job 2. I get home from that at around 12:30AM, then I have the rest of my classes and work to tend to. I’m in bed by 3. This isn’t every day, I have two days off a week from each of my obligations. I use that time to clean the house and soothe Mr. Martini and see the kids for longer than an hour and catch up on schoolwork. Those nights I’m in bed by midnight, but if I go to bed too early I won’t be able to stay up the other nights because I’ll fuck my pattern up, and I drive an hour home from Job 2 so I can’t afford to be sleepy. I never get a day off from work unless I am fairly sick. It doesn’t leave you much room to think about what you are doing, only to attend to the next thing and the next. Planning isn’t in the mix.

While the poor are kept from gratuitous moments of rest, the next housing scam is taking shape, and it’s a real doozy.

I finally got around to reading the Mother Jones piece, How Wall Street Has Turned Housing Into a Dangerous Get-Rich-Quick Scheme—Again and here’s my initial thoughts: are you fucking kidding me?!?

Basically, all you greed-blind investors, if you loved mortgage-back securities, then you’ll love these new tranches of securitized rent. Here’s the intro:

Over the last year and a half, Wall Street hedge funds and private equity firms have quietly amassed an unprecedented rental empire, snapping up Queen Anne Victorians in Atlanta, brick-faced bungalows in Chicago, Spanish revivals in Phoenix. In total, these deep-pocketed investors have bought more than 200,000 cheap, mostly foreclosed houses in cities hardest hit by the economic meltdown.

Wall Street’s foreclosure crisis, which began in late 2007 and forced more than 10 million people from their homes, has created a paradoxical problem. Millions of evicted Americans need a safe place to live, even as millions of vacant, bank-owned houses are blighting neighborhoods and spurring a rise in crime. Lucky for us, Wall Street has devised a solution: It’s going to rent these foreclosed houses back to us. In the process, it’s devised a new form of securitization that could cause this whole plan to blow up—again.

The piece then focuses on the biggest player in this new playground of greed, a private equity firm, the Blackstone Group.

Few outside the finance industry have heard of Blackstone. Yet today, it’s the largest owner of single-family rental homes in the nation—and of a whole lot of other things, too. It owns part or all of the Hilton Hotel chain, Southern Cross Healthcare, Houghton Mifflin publishing house, the Weather Channel, Sea World, the arts and crafts chain Michael’s, Orangina, and dozens of other companies.

Blackstone manages more than $210 billion in assets, according to its 2012 Securities and Exchange Commission annual filing. It’s also a public company with a list of institutional owners that reads like a who’s who of companies recently implicated in lawsuits over the mortgage crisis, including Morgan Stanley, Citigroup, Deutsche Bank, UBS, Bank of America, Goldman Sachs, and of course JP Morgan Chase, which just settled a lawsuit with the Department of Justice over its risky and often illegal mortgage practices, agreeing to pay an unprecedented $13 billion fine.

In other words, if Blackstone makes money by capitalizing on the housing crisis, all these other Wall Street banks—generally regarded as the main culprits in creating the conditions that led to the foreclosure crisis in the first place—make money too.

And why not? Who is going to stop this madness before it blows up again? There is no disincentive for these bastards, so they’re back at the trough, snout-deep in the spoils.

It’s tempting to want to take a page from these unaccountable lords presiding over their little fiefdoms, and put a few of their heads on spears as a warning to others to stop doing evil, greedy shit like this, but violence isn’t the answer. Besides, they can direct the police state against hippie squatters in Zucotti Park, and across the country, so scratch that disincentive.

It is important to understand what these monsters are doing, though, and how more people may be put on the street because of their short-sighted recklessness. Here’s more on what securitizing rent may produce:

Depending on whom you ask, the idea of bundling rental payments and selling them off to investors is either a natural evolution of the finance industry or a fire-breathing chimera.

“This is a new frontier,” comments Ted Weinstein, a consultant in the real-estate-owned homes industry for 30 years. “It’s something I never really would have dreamt of.”

However, to anyone who went through the 2008 mortgage-backed-security crisis, this new territory will sound strangely familiar.

“It’s just like a residential mortgage-backed security,” said one hedge-fund investor whose company does business with Blackstone. When asked why the public should expect these securities to be safe, given the fact that risky mortgage-backed securities caused the 2008 collapse, he responded, “Trust me.”

For Blackstone, at least, the logic is simple. The company wants money upfront to purchase more cheap, foreclosed homes before prices rise. So it’s joined forces with JP Morgan, Credit Suisse, and Deutsche Bank to bundle the rental payments of 3,207 single-family houses and sell this bond to investors with mortgages on the underlying houses offered as collateral. This is, of course, just a test case for what could become a whole new industry of rental-backed securities.

Many major Wall Street banks are involved in the deal, according to a copy of the private pitch documents Blackstone sent to potential investors on October 31st, which was reviewed by TomDispatch. Deutsche Bank, JP Morgan, and Credit Suisse are helping market the bond. Wells Fargo is the certificate administrator. Midland Loan Services, a subsidiary of PNC Bank, is the loan servicer. (By the way, Deutsche Bank, JP Morgan Chase, Wells Fargo, and PNC Bank are all members of another clique: the list of banks foreclosing on the most families in 2013.)

According to interviews with economists, industry insiders, and housing activists, people are more or less holding their collective breath, hoping that what looks like a duck, swims like a duck, and quacks like a duck won’t crash the economy the same way the last flock of ducks did.

“You kind of just hope they know what they’re doing,” says Dean Baker, an economist with the Center for Economic and Policy Research. “That they have provisions for turnover and vacancies. But have they done that? Have they taken the appropriate care? I certainly wouldn’t count on it.” The cash flow analysis in the documents sent to investors assumes that 95% of these homes will be rented at all times, at an average monthly rent of $1,312. It’s an occupancy rate that real estate professionals describe as ambitious.

There’s one significant way, however, in which this kind of security differs from its mortgage-backed counterpart. When banks repossess mortgaged homes as collateral, there is at least the assumption (often incorrect due to botched or falsified paperwork from the banks) that the homeowner has, indeed, defaulted on her mortgage. In this case, however, if a single home-rental bond blows up, thousands of families could be evicted, whether or not they ever missed a single rental payment.

“We could well end up in that situation where you get a lot of people getting evicted… not because the tenants have fallen behind but because the landlords have fallen behind,” says Baker.

The back and forth in the last thread about crony capitalism and socialism needs to be expanded to include a term we’ve used here before—neo-feudalism.

So as the media keeps the spectacle focused on the behavior of peasants and Walmartians, remember, the lords are once again moving in for the kill.