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From the Oakland Hills to the Bubble’s Epicenter
December 11, 2012 5:52 AM   Subscribe

First the Bubble. Then the Short. Now the Long.
Some neighborhoods in Oakland are as devastated as any of the worst hit regions across America — Atlanta, Las Vegas, Phoenix. Now the morphing of the housing bust and foreclosure epidemic into a lucrative multi-billion dollar opportunity for major investors is also uncannily centered upon Oakland and the greater Bay Area, where companies flush with hedge fund cash are buying up homes by the thousands. The entire sweep of the US housing bubble, financial crisis, and foreclosure wave can therefore be told by looking at persons and companies with intimate links to Oakland and the Bay Area. What follows is one account.
posted by the man of twists and turns (41 comments total) 17 users marked this as a favorite

 
In a smaller but similar fashion it is also happening on the gulf coast of Florida
posted by robbyrobs at 6:05 AM on December 11, 2012


"Their business model .. is ... to profit doubly from displaced homeowners who have been turned into renters in search of housing, and the coming rise in home price values that seems set to occur in the next few years."

This makes no sense. Don't they know that the long rate of 15% for capital gains is going to go UP under Obama? If those rates expire, then the regular top rate returns to 20% and I don't see how it makes any sense to invest in anything, ever if you have to pay 5% more in tax.
posted by three blind mice at 6:17 AM on December 11, 2012 [5 favorites]


This is depressing...
posted by JujuB at 6:17 AM on December 11, 2012


Don't they know that the long rate of 15% for capital gains is going to go UP under Obama? If those rates expire, then the regular top rate returns to 20% and I don't see how it makes any sense to invest in anything, ever if you have to pay 5% more in tax.

That's the fallacy exposed, isn't it? Taxes are only one piece of business/investment decisions. If you end of with more than you started, then it was a good decision, regardless.
posted by Benny Andajetz at 6:21 AM on December 11, 2012 [1 favorite]


I hear the bankers are even selling construction bonds on the tenth circle of hell, which of course, because it is being built specifically for them.
posted by seanmpuckett at 6:22 AM on December 11, 2012 [4 favorites]


Ruin the rest of America, but keep your filthy paws off my Bay Area, you damn dirty bankers!!
posted by Mooseli at 6:54 AM on December 11, 2012 [2 favorites]


Like with debt in the UK - Labour ran up a huge debt, aided by the banks, and now the tories use this as a reason for their cuts. So we pay twice - less tax credits/less services + paying the debt and its interest.

Similarly, with PFI - hospitals were built under PFI and then the PFI was sold - mainly to the banks, so when you hear of hospitals laying off staff and closing wards because of the PFI interest and charges it is being paid to the banks, which we bailed out. And now, private companies like Circle Healthcare are running hospitals and are allowed to make a profit, while the taxpayer pays the PFI. And in the end, the NHS will be privitised and the hospital sold off. So we will have paid for the construction and running of a hospital which we never owned and now have to pay to use as it is private. The rich and powerful must be laughing their heads off.

I am surprised their has not been a revolution.
posted by marienbad at 6:59 AM on December 11, 2012 [2 favorites]


It's ironic that this is happening because Goldman Sachs wouldn't have this much money to invest in property if not for the bailout (they received billions of dollars during the unwind of credit default swap contracts purchased from AIG during the 2008 financial crisis, including $12.9 billion from funds provided by the US Federal Reserve). So in a way, our government could be said to have financed this reintroduction to the feudal system, using taxpayer money. This is what happens when we say companies are "too big to fail..."
posted by wolfdreams01 at 7:05 AM on December 11, 2012 [6 favorites]


War profiteers gonna profit. We can only hope that sowers gonna reap, too.
posted by GenjiandProust at 7:10 AM on December 11, 2012


This makes no sense. Don't they know that the long rate of 15% for capital gains is going to go UP under Obama? If those rates expire, then the regular top rate returns to 20% and I don't see how it makes any sense to invest in anything, ever if you have to pay 5% more in tax.

Thanks for the derail from the second post.

I am surprised their has not been a revolution.

Between The Voice and American Idol who was the time?
posted by Talez at 7:10 AM on December 11, 2012


One of the companies mentioned in that article is Waypoint. At no point in that article do they mention that Waypoint's business model isn't renting - it's rent-to-own. Yes, they're going to make money, but a path to ownership exists for their tenants - at least ostensibly.

The devil will, of course, be in the details. How feasible is that path, for example? Does it exist only in theory? How many of their tenants actually convert from tenant to owner? Etc.
posted by NoRelationToLea at 7:15 AM on December 11, 2012


the the the boom!
posted by pmbuko at 7:17 AM on December 11, 2012


there's a lot of faux-horror at how the sausage gets made here, i mean, the original American Dream TM basically amounts to individual investors, without much resources, betting "long" on a single asset, their house. And, if you see what many Americans do to their houses through deferred investment and shoddy repair, the system turns many low-income home-owners into their own slum-lords.

so, from a certain perspective, there are reasons why having lots of renters isn't actually a view into some Marxist apocalypse, see: Europe. The difference is that European countries generally have a robust set of regulations and subsidies for the rental market. I don't see the author here making a political argument for real consumer regulation of the housing market (which would likely make these sorts of hedge-fund scams unworkable) and their folk-marxism is too naive to really get at the structural problems.

This makes no sense. Don't they know that the long rate of 15% for capital gains is going to go UP under Obama? If those rates expire, then the regular top rate returns to 20% and I don't see how it makes any sense to invest in anything, ever if you have to pay 5% more in tax.

is there a misplaced sarcasm tag somewhere? it's so hard to tell these days with americans...
posted by ennui.bz at 7:21 AM on December 11, 2012 [1 favorite]


Its not really any sort of scam. Its simply a bet that the price they pay for the foreclosed homes + the cost of the financing (i.e. the mortgage) + the cost of maintaining them (admittedly to a lower standard than most homeowners would have) will be less than the rent they can earn on them by enough that their end investors (most of whom are going to be large institutions and endowments) can earn a reasonably inflation protected return on equity of something like the high single digits I would guess. This isn't really a situation where actual homeowners are getting crowded out by these guys. Someone with an FHA loan has a pretty similar cost on their mortgage and does not require a return on their equity - so they can pay more for a foreclosure than can one of these big institutions. The people who get crowded out by this are smaller scale landlords and speculators who lack economies of scale on the maintenance side and probably have higher financing costs.

I'd be far far far more leery of rent-to-own schemes - usually they have above market embedded interest rates in the transactions to make up for the fact that clients show up with no capital for a downpayment.

One of the things we should have learned from the housing bubble is that homeownership rate in and of itself is not something we should be trying to increase. There is a segment of the population that is not financially in position to own a home, and this isn't a bad thing or a good thing - its just a thing. Germany has a much lower homeownership rate than the US with many of those apartments being owned by gigantic property companies - many of which were spun off from huge industrial conglomerates and utilities in the 80's and 90's into the hands of private equity. To ennui.bz's point - this of course requires a much more robust set of regulations, but empirically we know that these strategies can still work with that sort of regulation. Blackstone and Fortress are two of the biggest investors in German residential rental property, and Blackstone is being extremely aggressive in its move into residential assets in post-bubble markets.
posted by JPD at 7:45 AM on December 11, 2012


ETA: Also remember that some of the iconic multi-unit urban developments of the post war middle class were constructed by life insurers looking for long-term inflation protected places to put their money.

MetLife built complexes in NYC, Washington DC, and SF
posted by JPD at 7:47 AM on December 11, 2012 [1 favorite]


This isn't really a situation where actual homeowners are getting crowded out by these guys.

Would-be homeowners kind of are. This surely drives up prices.

That's the fallacy exposed, isn't it?

I assume that was a joke.

wealthy investors are seizing ownership of single family homes to obtain the gains in equity previously promised to many first time home buyer

...

there's a lot of faux-horror at how the sausage gets made here

Sure, this is capitalism 101. Wealth can afford to bet long. Doesn't mean it's not EVIL.
posted by mrgrimm at 7:55 AM on December 11, 2012 [1 favorite]


Would-be homeowners kind of are. This surely drives up prices.

They aren't the marginal buyer, an actual homeowner is. If the institutions pay too much then the homeowners should rent. If the homeowners bid up prices to a point where the homeowners are neutral between renting and buying then the institutions can't make money.

wealthy investors are seizing ownership of single family homes to obtain the gains in equity previously promised to many first time home buyer


People don't realize that long term return on residential property pre-bubble and collapse was basically 0% real with illiquidity. Looked at on a standalone basis, purely from an economic perspective, buying residential real estate is a bad investment.
posted by JPD at 8:17 AM on December 11, 2012


Wealth can afford to bet long.

We have government subsidized 30 year fixed rate mortgages. That is a pretty long bet.
posted by JPD at 8:18 AM on December 11, 2012 [2 favorites]


Welcome to Pottersville.
posted by ob1quixote at 9:20 AM on December 11, 2012


From the article:

The more people who found their debts impossible to pay, and were forced out onto the street, the higher would be Goldman Sachs and Paulson & Co.’s profits.

Is there a simple explanation of how this math works out? I can see that "betting against the economy" is what you do when you sell off your investments, since then you avoid losing money when the economy tanks. But how, in this case, can someone else's foreclosure actually increase your profits, as opposed to just letting you say "told you so" as you congratulate yourself on getting rid of that investment before it went bad?
posted by TreeRooster at 9:41 AM on December 11, 2012


because you are through a whole bunch machinations short their mortgage - economically not legally.

I have 100
Owner - I give him 100 in collateral, he gives me your mortgage. I sell that mortgage to someone else for 100. You pay your mortgage. The check goes to the guy I sold it to, but I also have to send a check to the guy I borrowed it from for the same amount. Next month you don't pay your mortgage. I ask the guy I sold it to if he would be happy to sell it to me today for 80. He does. I now have 20. I give your mortgage back to the guy I borrowed it from, he gives me back my hundred. I now have 100+ 20-the mortgage payment I had to make.

That's not how it works in real life - its both much more complicated and much simpler mechanically.
posted by JPD at 10:11 AM on December 11, 2012 [3 favorites]


I am surprised their has not been a revolution.

Ummm.... there was some frustration being expressed. Where all that energy went is another story.
posted by Pirate-Bartender-Zombie-Monkey at 10:33 AM on December 11, 2012


The bottom line here is that we are living in a "transaction economy", where everything is measured in terms of a double-bottom-line accounting standard that is pathetically bereft of including social costs as a line item. What continues to be the case is that these kinds of analysis don't 'take into account those social costs, which, in an of themselves, are real costs. In fact, social costs are *real* costs; have a multiplier effect that ripples through the transaction economy as they impact that economy.

Example: You have to rent your home in a a relatively expensive region (e.g. San Francisco). Investors are buying up homes in droves, and will take whatever the market will bear, for rent. It rents are high, incomes have to keep pace. For incomes to keep pace, companies have to cut corners in areas like R&D, health benefits, day care facilities, etc. etc. When costs to essential revenue growth variables (like R&D) are cut, it gives competitors in other states and nations (especially the latter) a leg up. Over time, employment and other kinds of social infrastructure become challenged. Result? Race to the bottom. This isn't a thorough example, but you get the idea.

Another thing: getting whatever the market will bear kills socioeconomic diversity. Families are leaving San Francisco in droves; they can't afford to live there. I have seen that city go from a really interesting place to a small version of New York City's Upper East and West Side, respectively. There's lots of cultural diversity, sure - but socioeconomic diversity is dying - making San Francisco a less dynamic urban enclave than it otherwise would have been.

How does America evolve from a transactional to a relational society? I think that's the challenge. Ironically, for the first time in decades, Americans are structurally challenged - i.e. we don't have an inherent advantage over other nations, one that enables is to simple "bounce back". I'm hopeful that there is enough spunk left in American culture to force the kinds of social innovation necessary to make the necessary shifts. Time will tell.
posted by Vibrissae at 10:34 AM on December 11, 2012 [6 favorites]


Thanks JPD. Talk about sleight of hand! I think I follow some of it. But how do you get your entire $100 back when the poor guy you sold to only gets $80? I think you are saying there are several ways to unload a mortgage. The original owner of the mortgage (Countrywide) lends you the mortgage so that you collect payments from the homeowner and then you and countrywide split the interest (countrywide gets the principal). (There must be an incentive for countrywide to do this, maybe they don't want to manage the collections.) But the poor guy you sold it to pays a flat fee now hoping to collect all the interest later. So it turns out that he made a bad purchase, but also that you were smart not to make the same kind of winner-take-all deal with Countrywide--they get left with the bad mortgage in the end.
posted by TreeRooster at 10:35 AM on December 11, 2012



So basically these guys all read Faulkner, and decided Flem Snopes was the hero...
posted by TreeRooster at 10:44 AM on December 11, 2012 [1 favorite]


No its simpler then that. Countrywide still earns the same economics of owning the mortgage + a small fee I pay them for letting me borrow the mortgage from them. The other guy who buys the the mortgage from me actually owns the mortgage and gets the payments. The both think they own the mortgage, but countrywide actually owns an obligation from me to pay them what the mortgage would pay them. I get my hundred back because I gave it to countrywide as part of the deal for them loaning me the mortgage. But I don't owe countrywide a mortgage worth 100, I just owe countrywide the mortgage I borrowed from them. They don't care what price I paid for it.

In real life you don't need to give countrywide 100, you can give them much less. For some reason I thought that just made the logic easier to follow.
posted by JPD at 10:52 AM on December 11, 2012


Ok, so that fee counts against your profit, but only a little.

So...you rent the land, make like it holds buried treasure, sell it to a sucker, buy it back cheaply when he realizes it's worthless, and then re-collect your renter's deposit!
posted by TreeRooster at 11:21 AM on December 11, 2012


So what if you just want to buy income property, make it a decent place to live, rent it to good tenants, treat those tenants well so that they stay and you make enough money over time to get another building, and repeat the process until you have a collection of well-managed buildings, generally happy long-term tenants and a solid retirement income?

I'm asking, because that's my 25-year plan, but I kind of don't want to be a dick.
posted by davejay at 12:43 PM on December 11, 2012


You are a sucker who could have done the same thing with better investments that required less hassle?
posted by JPD at 12:53 PM on December 11, 2012


So what if you just want to buy income property, make it a decent place to live, rent it to good tenants, treat those tenants well so that they stay and you make enough money over time to get another building, and repeat the process until you have a collection of well-managed buildings, generally happy long-term tenants and a solid retirement income?

You are a sucker who could have done the same thing with better investments that required less hassle?

Come on. Who else is going to manage housing for people? The problem is that it's not really a 25 year investment, it's a small business with a relatively low margin but a product, housing, which is never going to go out of fashion. If you think about it as a small business, have a real handle on your costs, you join the legion of small landowners who own a couple of buildings and have a relatively secure income. Just don't expect to make wall street money on your "investment." It really helps to be in the building trades, so you know exactly what it's going to take to maintain your buildings.

Its not really any sort of scam. Its simply a bet that the price they pay for the foreclosed homes + the cost of the financing (i.e. the mortgage) + the cost of maintaining them (admittedly to a lower standard than most homeowners would have) will be less than the rent they can earn on them by enough that their end investors (most of whom are going to be large institutions and endowments) can earn a reasonably inflation protected return on equity of something like the high single digits I would guess.

a bunch of illiquid assets with complex warehousing requirements owned by callow hedge-fund dudes used to pushing numbers around on a computer screen: what could go wrong? I don't see how this ends up being much different than your usual penny-ante real-estate play, except Wall Street MagicTM on the underlying securities and a lot of doubts as to whether they have any commitment to managing the properties. This dude, Josh Birnbaum, has no idea what the actual "cost of maintaining the houses" actually is. He's betting that it doesn't matter and that someone else is going to bear the frictional costs (i.e. vacant buildings -> crime/fires, etc.) if he has to dump the assets. That makes it pretty run-of-the-mill real estate speculation and the results are rarely pretty.

The point of serious consumer regulation of housing is to make speculating on housing unprofitable while leaving enough room for being able to manage housing properties as a business. There is just no economic benefit to speculating on housing. If individuals fool themselves into thinking they are investing, that's fine... but when it turns into these money making schemes it can wreak social havoc.
posted by ennui.bz at 1:22 PM on December 11, 2012 [1 favorite]


The result is that ownership of Oakland’s housing stock in Black and Latino neighborhoods, and thousands of homes in parts of the Bay Area, especially the East Bay suburbs, are quickly being transferred from local residents to absentee landlords. It is nothing less than a vast transfer of wealth and power.

Look, I get it, the whole housing situation in the US is awful, but I think it's a bit disingenuous to put it that way. If someone buys a home they can't afford with money they don't have, and that home is later bought by a hedge fund after it goes into foreclosure, whom is that transferring wealth and power away from? The people who never really had it in the first place?
posted by Afroblanco at 2:35 PM on December 11, 2012


If someone buys a home they can't afford with money they don't have, and that home is later bought by a hedge fund after it goes into foreclosure, whom is that transferring wealth and power away from? The people who never really had it in the first place?

It's a transfer of wealth and power because as I mentioned in my point above, a large part of the reason Goldman Sachs has the resources to make this kind of speculation is because of the bailout. So essentially, we the taxpayers paid for Goldman Sachs to buy other people's homes and rent them out to the people who used to own them. They are using our own money to take away our property. (By "we," I mean "we the taxpayers" - I personally am not directly affected by this, although this kind of situation bothers me because I don't like my tax dollars being spent to hurt my fellow citizens except in very limited cases.)

Furthermore, if this real-estate speculation goes poorly for Goldman-Sachs, whom do you think is going to bear the brunt of the financial disaster? Do you think the government is going to let Goldman Sachs bear the weight of their bad choices and go bankrupt? That's laughable. History has already demonstrated that there will instead be a bailout, and we will again be left holding the short end of the stick.
posted by wolfdreams01 at 2:59 PM on December 11, 2012 [3 favorites]


Come on. Who else is going to manage housing for people? The problem is that it's not really a 25 year investment, it's a small business with a relatively low margin but a product, housing, which is never going to go out of fashion. If you think about it as a small business, have a real handle on your costs, you join the legion of small landowners who own a couple of buildings and have a relatively secure income. Just don't expect to make wall street money on your "investment." It really helps to be in the building trades, so you know exactly what it's going to take to maintain your buildings.

Sure, but that doesn't change the calculus for his investment. If you want to invest money for your retirement, and you don't have a view on on the discount/premium to fair value (and assuming you don't btw is the right way to answer that question) then owning residential real estate as an investment in the long term has been a terrible decision. Its actually like a case study in behavioral finance - how people perpetually assume a too high rate of return for housing.

a bunch of illiquid assets with complex warehousing requirements owned by callow hedge-fund dudes used to pushing numbers around on a computer screen: what could go wrong? I don't see how this ends up being much different than your usual penny-ante real-estate play, except Wall Street MagicTM on the underlying securities and a lot of doubts as to whether they have any commitment to managing the properties. This dude, Josh Birnbaum, has no idea what the actual "cost of maintaining the houses" actually is. He's betting that it doesn't matter and that someone else is going to bear the frictional costs (i.e. vacant buildings -> crime/fires, etc.) if he has to dump the assets. That makes it pretty run-of-the-mill real estate speculation and the results are rarely pretty.
How do you think these guys are doing these deals? All the HF guys are doing is providing capital. They hire third parties to run the actual real estate part of the deal. They also hire third parties to do the acquisition. Real Estate private equity has been around forever.

The point of serious consumer regulation of housing is to make speculating on housing unprofitable while leaving enough room for being able to manage housing properties as a business. There is just no economic benefit to speculating on housing. This is like a weird definition. If what these guys are doing is speculating then all rental housing owners are by definition speculating.
posted by JPD at 3:01 PM on December 11, 2012


They are using our own money to take away our property.

Still not buying it. Who are they actually taking property away from? The people who didn't have money to pay for it?

Presumably someone owned those homes before the owners who got foreclosed on, right? Well, the original owners got paid when they sold their houses, didn't they? Then some people who couldn't afford them got time-bomb mortgages, couldn't make their payments, and got foreclosed on.

Yes, absentee landlords suck. And no, nobody's happy about the bailouts. But this is not "a vast transfer of wealth and power". Nobody made the original owners sell their houses, and if they'd held onto their houses, they'd still have all the wealth and power they had to begin with.
posted by Afroblanco at 3:12 PM on December 11, 2012


You can't see how rich corporations buying housing stock with taxpayer money, hence reducing the available housing stock, pushing up prices, and ending up owning tens of millions of pounds of property on the cheap is wealth transfer? Who owns the houses at the end? The rich or the poor?
posted by marienbad at 3:25 PM on December 11, 2012 [3 favorites]


Who owned them in the first place? Individual owners who presumably cashed out when the going was good.

Who was displaced? People who couldn't afford the houses they bought.

Now, if you want to talk about affordable housing and the lack thereof in the Bay area, you have my full agreement. But honestly, I see no conspiracy here.
posted by Afroblanco at 4:05 PM on December 11, 2012


This makes no sense. Don't they know that the long rate of 15% for capital gains is going to go UP under Obama? If those rates expire, then the regular top rate returns to 20% and I don't see how it makes any sense to invest in anything, ever if you have to pay 5% more in tax.

Stop the press! It's almost as if higher tax rates won't, in every single case, actually disincentivize our illustrious job creators and cause them to stop working so hard creating jobs so I can work for money and eat!

Quickly! Someone please tell the Chicago School, the Heritage Foundation, the Cato Institute and conservative America in general before I read another article about how slightly higher taxes will result in a further decrease to my already low standard of living!
posted by jnnla at 4:11 PM on December 11, 2012


JPD - I'm actually curious as to what investments you're thinking of. Real estate doesn't necessarily provide great real rates of return in terms of appreciation, true - but that's not the point. The point is the leverage and the fact that someone else (a renter) is paying for you to eventually (hopefully) own the asset outright. It's not a return on your money - it's a return on other people's money.

That is, if you're doing it right. Being on the wrong side of the leverage or rent vs. mortgage equation and things can obviously go south very quickly.
posted by NoRelationToLea at 5:17 PM on December 11, 2012


your last sentence is the answer to your question. Leverage isn't a source of value beyond its tax benefits. The few times you get on the wrong side of that equation will eat up all of the return you've earned previously.

Almost anything is a better investment than residential real estate.
posted by JPD at 5:28 PM on December 11, 2012


It's perhaps worth pointing out that many of the bankers wouldn't have the money to spend on this shit if the government hadn't bailed them out of their previous fucking-the-little-guy episodes.
posted by seanmpuckett at 6:01 PM on December 11, 2012 [1 favorite]


But honestly, I see no conspiracy here.

You're the only one who is talking about a conspiracy. Nobody else mentioned it, and it wasn't brought up in the article. Nobody is asserting illegality either.

It's all perfectly legal and, because of weird incentive structures and a "sick system," happens via many small decisions made. It's a series of decisions made by people acting in their own self-interest with inadequate information.

I know I have a tendency to systematize/synthesize, probably more than is appropriate, but there doesn't have to be a bad guy in every scenario where there are negative outcomes. People can make decisions in a "sick system" and these decisions will add up to negative effects, becuase the system is broken.

Or to put it demotivator style: "None of us is as dumb as all of us."
posted by the man of twists and turns at 10:36 PM on December 11, 2012


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