[Senate Hearing 117-696]
[From the U.S. Government Publishing Office]
S. Hrg. 117-696
HOW INSTITUTIONAL LANDLORDS ARE CHANGING THE HOUSING MARKET
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING HOW WE STRENGTHEN OUR HOMES AND NEIGHBORHOODS WITH
INVESTMENTS AND PROTECTIONS TO MAKE IT EASIER FOR PEOPLE TO FIND SAFE,
DECENT, AND AFFORDABLE HOMES
__________
FEBRUARY 10, 2022
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-881 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
?
C O N T E N T S
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THURSDAY, FEBRUARY 10, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 37
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 38
WITNESSES
R. Michael Waller, Executive Director, Georgia Appleseed Center
for Law and Justice............................................ 6
Prepared statement........................................... 39
Responses to written questions of:
Senator Reed............................................. 83
Aneta Molenda, Tenant............................................ 8
Prepared statement........................................... 43
Responses to written questions of:
Senator Reed............................................. 84
Tobias Peter, Research Fellow and Assistant Director, AEI Housing
Center......................................................... 9
Prepared statement........................................... 45
Joel Griffith, Research Fellow, Institute for Economic Freedom
and Opportunity, Heritage Foundation........................... 11
Prepared statement........................................... 73
Sally Martin, Director of Building and Housing, City of
Cleveland, Ohio................................................ 13
Prepared statement........................................... 77
Responses to written questions of:
Senator Reed............................................. 84
Additional Material Supplied for the Record
Letter submitted by Wesley Edmo, MSW, Indigenous Peoples Advocacy
Director, MHAction............................................. 85
Statement submitted by Private Equity Stakeholder Project........ 87
Statement submitted by Cindy Newman, The Highwood's.............. 93
(iii)
HOW INSTITUTIONAL LANDLORDS ARE CHANGING THE HOUSING MARKET
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THURSDAY, FEBRUARY 10, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
Today's hearing is a hybrid format as many of our hearings
are. Mr. Waller, Mr. Peter, Mr. Griffith are here in person and
sitting here. Thank you for joining us. Ms. Molenda and Ms.
Martin are appearing virtually. Members have the option to
appear either in person or virtually.
Those witnesses joining remotely, once you start speaking,
there will be a slight delay. To minimize background noise,
please click the mute button when you are not speaking until it
is your turn to speak.
And you should all have a box on your screens labeled
``clock'' that will show how much time is remaining. Please try
to respect those times as we ask our Senators on the dais to do
the same. For those of you joining virtually, you will have a
bell ring when you have 30 seconds remaining.
If there is a technology issue, we will move to the next
witness or Senator, whatever we need to do until it is
resolved.
Whenever there is a problem in the economy that is hurting
families and driving prices, there is a pretty good chance you
will find a Wall Street scheme either causing it or taking
advantage of it and making it worse. One of the reasons housing
prices have gotten so out of control is that corporate America
sensed an opportunity. Private equity firms, corporate
landlords, and investors saw a shortage. They saw a captive
market. They bought up properties. They raised rents. They cut
services. They priced out family homebuyers. They forced, all
too often, renters out of their homes.
Our failure to invest into affordable housing has left
these renters with few options. Before the pandemic, nearly one
in four renters was paying more than half their income for
housing. That was before the pandemic. One thing happens in
their lives, one thing goes wrong, and they face immediate
eviction almost, in many cases.
Across the country, we see headlines about the skyrocketing
cost of housing, the squeeze it is putting on our families.
Potential homebuyers looking for a home in the communities
where they grew up or where they work are outbid by out-of-
town, all cash buyers. Rents in communities from Atlanta to
Boise to Cleveland to Denver are growing far out of reach for
families and workers.
While most of us see high rents and a lack of housing
choices as a problem to solve, deep-pocket investors see them
as an opportunity for profit. Investment firms have been
touting rising rents and renters' lack of options to attract
investors. One large landlord proudly advertises under their
``market strategy'' that ``The recent mortgage meltdown has
raised the bar for those who can qualify for a mortgage,
thereby increasing the pool of people who must rent for the
foreseeable future.'' But rather than providing the essential
affordable housing that families need, many of these firms are
just exploiting people.
Tuesday, our Committee held a listening session to hear
directly from renters about what happens when investors put
profits over people's lives. One renter was told when she asked
why her rent suddenly increased by hundreds of dollars, ``We
have to please the investors.'' Think about that. ``We have to
please the investors.''
Renters in apartment buildings, single-family homes,
manufactured housing, from Las Vegas to Great Falls to
Hyattsville, shared their stories. Over and over, no matter
where they lived, no matter what type of home they had, renters
told us how they were overlooked and overcharged by the big
investors that owned their homes. Longtime residents described
double-digit rent increases and new fees for everything from
water and trash to family pets.
One resident of a manufactured home community in Senator
Tester's home State said the increases amounted ``to about an
86 percent increase in the dirt our homes sit on.'' She was in
manufactured housing. Seniors on fixed incomes and working
families cannot afford that.
Renters in Maryland and Nevada and Texas and California had
their homes, they told us repeatedly, flooded with wastewater,
lived with pests and rodents, went long periods without hot
water, without working showers.
In Senator Smith's home State of Minnesota, a working
mother's complaints, repeated complaints, about her home's
flooded basement and dangerous garage went unanswered. The city
itself was forced to step in because of code violations.
Another renter in Senator Van Hollen's State told us that
``The owners think that because we are immigrants we are not
important. For them, they want the money to arrive every month
without doing anything for us. We have this need to live in an
apartment but not live like this.''
No one argues that landlords--whether a teacher renting out
the home her parents raised her in or a professional company,
no one argues that landlords should not be able to make a
living. Of course, rental housing is a business. You provide a
decent place to live but in exchange for collecting people's
hard earned money and rent each month. But if your building is
full of mold and mice and does not have working showers or a
working stove, you are not holding up your end of the deal.
That is not a real business, and families are paying a very
high price for it.
Investors increasingly structure their purchases through
LLCs and real estate investment trusts with different names for
each property or fund. When owners hide behind LLCs, it makes
it impossible to track down the neglected properties they own
and the tenants they force out. This leaves local leaders, like
Ms. Martin, with only two options, let investors continue to
run down neighborhoods and run out residents or use time and
money they do not have to connect with other local leaders to
track down bad owners one by one.
For investors, home and rent increases are distilled down
as returns to shareholders, code violations and eviction
filings simply the cost of doing business. But for Ms. Martin
from Ohio and the residents of Cleveland and South Euclid,
these are their homes; these are their neighborhoods. No one
seems to be tracking their returns.
When Matthew Desmond, the author of the book Evicted, signs
copies of his book, he signs it with the words ``Home = Life.''
Desmond is lucky enough--and I assume everybody in this room
enough--to go home each night to a safe home in a decent
neighborhood with an affordable place and may not think about
it as much, but it is a simple truth. Where we live matters. It
determines so much about our lives and our children's lives.
I look forward to hearing from our witnesses today about
how we strengthen our homes and our neighborhoods with
investments and protections that will make it easier for people
to find safe and decent and affordable homes, how we can give
local leaders, like Ms. Martin and Mr. Waller, the tools they
need to improve the homes of all families in Cleveland, in
Atlanta, in Pittsburgh, and across the country.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman, and welcome to our
witnesses. In October, this Committee held a hearing
criticizing people who invest and even build rental housing.
Looks like that is on the agenda for today's hearing as well.
Maybe part of the reason is a desire to change the subject from
the failing Biden economy.
This morning, we got a new inflation number. Inflation came
in at 7.5 percent, the worst inflation in 40 years. And housing
costs are skyrocketing even faster than the general rate of
inflation. Rents increased around 12 percent last year. Home
prices jumped an astounding 17 percent. And whether you are a
renter or a homebuyer, housing is taking up more and more of
your paycheck, with inflation quickly eroding most of the rest.
Now wages are rising, but inflation is rising faster, and
that means workers are falling further and further behind in
the Biden economy. This is a direct result of the
Administration's massive overspending, and the Administration
is desperate to find someone else to blame.
There is actually nothing wrong with people renting houses
instead of, or before, they become homeowners. And there is
also nothing wrong with investors, whether institutions or
individuals, putting their own money to work to meet the need
of these renters. It is a simple issue of supply and demand.
Institutional investors happen to be the ones with the deepest
pockets, the ones with the most capital available to invest in
building the new housing stock that America needs.
Just imagine how expensive housing stock would be if some
of my colleagues got their wish and most institutional
investors were driven out of the housing market. Instead of
blaming those who actually build housing stock, we should
probably take a look at the role that Democratic policies have
contributed to the high cost of housing.
Housing is expensive and getting more expensive in part
because the Administration has doubled down on 50 years of
failed big Government housing policies. Its illegal eviction
moratorium, for instance, deterred landlords from investing in
new housing stock and almost certainly contributed to rent
increases. Its March 2021 wasteful $1.9 trillion spending bill
included almost $22 billion in rental assistance even though
$25 billion in rental assistance Congress provided the year
before was not even close to being spent. And this reckless tax
and spend Build Back Better plan seeks yet another $35 billion
in rental and downpayment subsidies that will further increase
the demand and push up prices in housing. The Administration
has also broken from decades of bipartisan efforts to reform
the failed GSE model that now subsidizes the purchases of even
million-dollar homes, and it has pushed the GSEs to take on
more loans to risky borrowers.
Today, we will hear from two witnesses, Tobias Peter and
Joel Griffith, about the negative effects that these failed
policies have had. They will testify to the role of monetary
policy in contributing to rapid house price inflation, and they
will testify to the increase in risky mortgage lending at the
GSEs. Their testimony will make it clear that we need a
different direction.
To improve housing affordability for all Americans, whether
renters or owners, we should pursue reforms that leverage the
power of free enterprise to increase housing supply and make
markets more competitive. To that end, we need to scale back
the role of Government and increase the role of private
capital. We need to phaseout demand-side subsidies that just
drive increases in housing prices and rents. And we need to end
the failed GSE model that fosters excessive risk taking and
risks more taxpayer bailouts. We also need to end the GSE
conservatorship that confers on the Government far-reaching
powers to replace market forces with executive fiat.
The state of the housing market affirms the urgency of the
reform. The housing market is cyclical. It is really a question
of when, not if, there will be a housing downturn, and the
housing finance system is not prepared.
The system is still dominated by the very same GSEs that
did so much to cause the 2008 financial crisis. The $7 trillion
behemoths actually have an even bigger market share today than
they had before the crisis, and they certainly remain too big
to fail. And just as before the financial crisis, these flaws
in the system continue to encourage excessive risk taking and
risk future taxpayer bailouts. They undermine market forces and
threaten financial stabilities. And they do very little to make
housing more affordable.
So 50 years, 50 years, and many hundreds of billions of
dollars in Federal housing assistance have been spent, and they
have had no meaningful impact on home ownership rates. It was
64 percent in 1970. It was 65 percent in 2021.
Now last month, the Chairman reiterated the housing finance
reform principles that he had released in 2019. I would observe
that his principles significantly overlap with the reform
principles that I have released. I look forward to continuing
to work with the Chairman to see if we can get to a consensus
on how to move forward on this really important issue.
And I hope the Administration will finally engage on this
reform. Treasury has still not met its obligation to deliver
its reform plan to Congress. It is now 4 months overdue.
So instead of shifting blame for the reckless mismanagement
of the economy, the Administration should be looking for
opportunities for bipartisan legislation, like housing finance
reform, that relies more on free enterprise and less on
Government to make housing affordable for all Americans,
whether they own or rent.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey. And I am
hopeful, too. I think you will probably agree with this. The
first step to GSE reform is that we move as quickly as we can
to confirm the nominee to FHFA, Sandra Thompson, and then I am
hopeful the Administration--and expect the Administration to
engage in this, but we can talk more about that.
Let me introduce the five witnesses. Michael Waller is the
Executive Director of Georgia Appleseed, which is dedicated to
providing strong, nurturing schools and a healthy home for all
of Georgia's children. He served previously as an attorney with
the FTC, as a staff attorney with Atlanta Legal Aid, and as an
attorney at WilmerHale.
Welcome, Mr. Waller.
Aneta Molenda, who is here remotely, is a New York City
tenant in a building owned by a private equity firm. She has
been organizing with her neighbors in respond to her landlord's
actions.
Ms. Molenda, welcome.
Tobias Peter is a research fellow and assistant director at
the American Enterprise Institute Housing Center. He previously
served as a director of research with the Housing Center.
Welcome, Mr. Peter.
Joel Griffith, who was in committee yesterday, actually a
subcommittee yesterday, is a research fellow at the Institute
for Economic Freedom and Opportunity at the Heritage
Foundation.
As a native of Ohio, welcome, Mr. Griffith.
Sally Martin is the Director of Building and Housing for
the city of Cleveland. She joined Mayor Bibb, the new mayor's
cabinet, just this week. So earlier this month, she served as
the Housing Manager and Director of Housing for the city of
South Euclid, a Cleveland southeast side suburb, where she had
worked since 2008. She served on the executive committee of the
Vacant and Abandoned Property Action Council in Cleveland.
We will now hear from the witnesses. Mr. Waller, start with
you. Welcome.
STATEMENT OF R. MICHAEL WALLER, EXECUTIVE DIRECTOR, GEORGIA
APPLESEED CENTER FOR LAW AND JUSTICE
Mr. Waller. Thank you, Chairman Brown, Ranking Member
Toomey, and other Members of the Committee. My name is Michael
Waller. I serve as the Executive Director of the Georgia
Appleseed Center for Law and Justice.
Georgia Appleseed is a nonpartisan, nonprofit law center.
We are dedicated to advancing justice and equity for all of
Georgia's children through law and policy reform, community
engagement, and legal representation of children. We focus our
efforts on removing barriers and injustices that are faced by
Black and Brown children, children experiencing poverty, LGBTQ+
children, children with disabilities, and children in foster
care. And Georgia Appleseed believes that justice requires that
every child has access to strong, nurturing schools and a
stable, healthy home.
This morning, I will provide information on the impact of
institutional landlords on the lives of low-income Georgians,
and I am going to begin by sharing a story, the story of April.
She lives in Albany, Georgia, in an apartment complex owned by
an out-of-State institutional investor.
And this morning, I am going to use the term
``institutional landlord'' and ``institutional investor''
somewhat interchangeably, and what I am referring to is a
corporate owner that is usually out of State, owns multiple
properties, is primarily in the business of investing money,
not managing rental homes, and has little to no direct contact
with the communities where the properties are located.
So Georgia Appleseed and our other community partners have
identified a common business model among some institutional
investors in low-income housing, and it goes something like
this. The investor comes into the community, purchases the
property. They quickly drive up rents. They impose novel and
unwarranted fees. They refuse to provide upkeep and basic
maintenance. They abuse our eviction systems, and they hide
from accountability. These institutional investors concentrate
these practices in Black and Brown communities and low-income
communities, and so they are perpetuating historic injustices
there.
Now April is a single mom to a teenage daughter, and she is
also the primary caretaker for her mother who has multiple
sclerosis and needs a wheelchair. April rents her home, like
most Albany residents and millions of other Georgians. Well,
soon after she moved in, sewage began regularly coming up
through the bathroom drains and also pooling in the yard
outside where the children played. Bees came out of her HVAC
vents. Mold grew on the walls. Shooting and criminal activity
were common in the complex. In fact, after one of these events,
there were bullet holes in her windows. Other residents had
very similar problems and complaints.
Neither the property management firm, who was her direct
contact with the landlord, nor the out-of-State landlord would
make the needed repairs. The local housing code enforcement
office and other local government offices and officials claimed
that they were powerless to force the absentee landlord to make
the property safe for habitation.
So April contacted SOWEGA Rising, which is a local
nonprofit. Together they began to work to organize their
neighbors, talk to their neighbors, and also contact the media.
In response, the landlord sent a letter threatening the
residents with eviction, and this threat worked. The residents
ceased their campaign for better living conditions. April's
landlord recently gave her 30 days to get out, and she feels
like she does not have anywhere to go because in Albany, like
many places, there are very few affordable places to live for
someone in a wheelchair.
So residents across Georgia suffer similar injustices every
single day. But here is what we at Georgia Appleseed and our
partner organizations have found, and this is listed in more
detail in my written testimony. In Georgia, institutional
investors are particularly known for instituting aggressive,
year-on-year rent increases and novel fees.
And here are some examples of these fees: one-time activity
fees, pest control fees, utility service fees, a renter's
insurance fee, valet trash fees, package locker fees, common
area electric fees, early termination fees that can be three
times a month's rent. I can go on and on with these fees. These
are just a few.
Institutional landlords increase their profits and reduce
costs by refusing to perform needed repairs, just basic
maintenance, security or needed health and safety measures, and
this leaves tenants living in miserable living conditions.
Miserable. And it is often virtually impossible to hold these
landlords accountable. Out-of-State shell companies hide the
owners, and tenant advocates and Governments simply cannot
identify them.
Institutional landlords are well positioned to abuse
Georgia's eviction and housing safety laws and ordinances.
Eviction costs are very low. Court procedures favor landlord
attorneys and maximize the efficient disposition of evictions,
not the preservation of tenancies and healthy homes. In
addition, our local housing safety enforcement is chronically
underresourced. Moreover, Georgia law prohibits local
communities from registering and inspecting properties without
probable cause.
So I will conclude by saying we have found that this is
profit mongering at the expense of families and communities. It
is not investment in affordable housing. This unsafe, unstable
housing exacts real long-term and devastating costs on the
physical and mental health of children and families and
threatens their educational achievement and employment
potential. It increases criminal justice involvement and
reduces overall community wealth and well-being.
Chairman Brown, Ranking Member Toomey, other Members of the
Committee, thank you again for the opportunity to share my
experience and the experience of fellow Georgians with you
today. I look forward to answering any questions.
Chairman Brown. Mr. Waller, thank you.
Ms. Molenda is recognized for 5 minutes. She is remote from
New York.
Ms. Molenda, welcome.
STATEMENT OF ANETA MOLENDA, TENANT
Ms. Molenda. Chairman Brown and Members of the Committee,
thank you for the opportunity to testify before you today.
My name is Aneta Molenda, and I am a New York tenant in a
building owned by private equity and a member of the Greenbrook
Tenants Coalition.
I have lived in Brooklyn, New York, for 6 years. I moved
into my current apartment last winter in the middle of the
pandemic. I signed a 1-year lease for just over $2,500 a month.
It was pricey for an apartment measuring just over 400 square
feet but not out of the ordinary for Brooklyn.
In just a few months, my building was bought by a private
equity firm called Greenbrook Partners through a joint venture
with the Carlyle Group, the third largest private equity firm
in the world. When my lease expired in November, my new
landlord told me they needed to reevaluate my rent based on the
market bouncing back. They suggested nearly a 50 percent
increase from what I had been paying. That is right; that is a
5-0, 50 percent increase, which would put my rent at about
$3,800 per month. There was no way I could afford it. This was
all happening when Omicron was surging.
I tried to negotiate. I sent them listings of other
apartments in the neighborhood, some even on my block, to show
that the increase was unreasonable for what was available in
the area. Eventually, they were willing to come down on the
rent, but when they sent me the lease renewal there was a
section that gave the landlord the right to terminate my lease
at any point and double my rent with only 30 days' notice. It
was clear they wanted me out.
I have continued to pay my rent on time every month, but
the landlord has stopped cashing my checks. I suspect they are
getting ready to start eviction proceedings against me. The
eviction moratorium in New York ended just last month. My sense
of security is gone.
This is not an isolated incident. In talking to my
neighbors and tenants in other buildings by the same landlord,
we noticed similar patterns: massive rent increases, evictions,
hazardous violations, and harassment. The confusing ownership
structure makes it hard for tenants to know who truly owns
their buildings.
My neighborhood of Bedford Stuyvesant is considered to have
one of the highest concentrations of Black residents in the
United States according to census data. In New York City,
eviction rates in zip codes in which a majority of residents
are people of color are three times as high as the rates in zip
codes that are predominantly White. I am not surprised that
these predatory firms are targeting predominantly Black and
Brown neighborhoods. Many of these companies go to pensions for
capital to expand their portfolios, in some cases, pricing out
union members and the retirees that they are acting on behalf
of.
Greenbrook Partners and the Carlyle Group are just two of
the many predatory real estate firms that are fundamentally
changing housing across the country. These companies treat
housing as an investment vehicle rather than a shelter. But
this is my home, and it serves the purpose of keeping me safe,
warm, and out of the elements. This is a basic human right.
Institutional landlords want us to believe that private
equity is a tiny player in housing. It is just not true.
According to the Financial Times, private equity has had its
busiest month in the last 6 months in the last 40 years, and
the industry shows no signs of stopping its expansion into our
homes. In just 2 years, my landlord purchased at least 137
properties in Brooklyn, all during the pandemic. These firms
promise their investors returns while obscuring the devastating
consequences on everyday people and their families. They buy up
homes all across the country that would have otherwise been
affordable.
As our communities face the trauma and grief from mourning
loved ones, losing jobs, following guidelines to stay home to
mitigate the spread of the virus, these predatory firms made it
impossible to feel any sense of safety in our homes. We saw our
communities come together to support each other. Meanwhile,
Wall Street took the opportunity to rake in unfathomable
profits.
This tangled web of high finance is incredibly difficult to
navigate for tenants like myself. The ruthless business model
is entirely reliant on disaster capitalism and systemic
displacement of working-class people. A basic human right to
housing is being exploited. As a tenant directly impacted by
these predatory practices, I am asking that you consider
establishing comprehensive, nationwide tenant protections like
rent control, prohibition on excessive fines and fees, just
cause evictions, and a tenant right to counsel.
The housing market is rapidly consolidating. As the largest
landlords, builders, and investors increasingly partner with
one another, our neighbors all across the U.S. will continue to
feel the consequences. But I can promise we will continue to
grow a strong tenants' movement to demand a more just housing
system.
Senators, you have a choice to make. You can either allow
institutional landlords to use our homes as investment vehicles
in an effort to generate endless profit or support housing as a
human right. Thank you.
Chairman Brown. Thank you very much, Ms. Molenda.
Mr. Peter is recognized for 5 minutes. He is in the room.
Thank you, Mr. Peter, for joining us.
STATEMENT OF TOBIAS PETER, RESEARCH FELLOW AND ASSISTANT
DIRECTOR, AEI HOUSING CENTER
Mr. Peter. Chairman Brown and Ranking Member Toomey and
distinguished Members of the Committee, thank you for the
opportunity to testify today.
The housing market is changing, and the real culprit is the
massive house price boom fueled by Federal housing and monetary
policies which is increasingly crowding out low-income
Americans out of the housing market. Institutional landlords,
particularly on the multifamily side, are taking advantage of
more liberal credit terms provided by Fannie Mae and Freddie
Mac, the GSEs, than the private sector, which is in violation
of their charters. They use the taxpayer guarantee and other
advantages to greatly expand their businesses while crowding
out multifamily private investors. Since 2014, outstanding
multifamily mortgage debt has doubled with the GSEs accounting
for most of the growth. At the same time, they tout that they
are supporting affordable rental housing, but in reality they
have created Government profit seeking.
The current single-family housing boom, which began in 2012
was entirely foreseeable and was noted by the AEI Housing
Center beginning in 2013. Since then, the housing market has
been marked by too much demand chasing too little supply. Yet,
the policy response was to boost demand even more. Federal
housing agencies have loosened underwriting, and the Fed has
pursued multiple rounds of quantitative easing, continuing even
when the housing market was already appreciating over 10
percent per year. In 2021, home price gains were at 16 percent
and in 2022 are expected to come in at around 12 percent, a
third year of breakneck growth.
As a result, home ownership has gotten further out of reach
for many lower-income, minority Americans. Consider that since
2012 wages have grown 40 percent, but the entry-level home
prices have increased over 100 percent. This out-of-control
price spiral means increased competition for fewer and fewer
affordable homes. Potential entry-level buyers are increasingly
pushed to the sidelines as they cannot compete with more deep
pocketed individuals who experience the same competition only
higher up the price spectrum.
This is creating knock-off effects for people downstream.
Left unable to buy a home, people remain in the rental pool,
helping to drive up rents, which are now increasing at 12
percent nationwide. Many who cannot afford these rent hikes
will be pushed into homelessness.
If that were not enough, inflation is now running at 7.5
percent. A Gallup survey from last month finds 49 percent of
Americans saying rising prices have caused hardship for their
family. Lower-income Americans are suffering the most. Two
thirds of U.S. adults with an annual household income of less
than $40,000 say they have experienced hardship, with 20
percent describing it as severe.
Inflation is a regressive tax, and getting by, not to
mention building savings to buy a home, is becoming increasing
difficult. Thus, these misguided policies have severely
hamstrung lower-income Americans, in particular, minorities
which severely lag White Americans in home ownership and
intergenerational wealth. If they can no longer reach the first
rung of the housing ladder, how will they ever catch up?
The solutions are straightforward. First and foremost, we
need more supply. However, Federal mandates are not the answer.
Zoning and land use policies are fundamentally a State and
local issue and should be addressed at those levels. We are
already seeing promise across the country, even in California
where the legislature has recently passed laws which could
meaningfully encourage new construction activity.
At the same time, demand boosters have shown
counterproductive. The Fed has belatedly realized that it needs
to tighten the monetary spigot, but its policies have already
done a lot of damage, and they will continue to harm lower
income Americans in the form of higher home prices, inflation,
and rents.
The signals from Federal agencies and regulators are less
than encouraging. Rather than shrinking the Government's
footprint and reducing risk, Fannie Mae is again increasing its
share of risk-layered loans, where one risky loan product
feature is layered on top to ultimately create a very risky
loan.
More could be in store. FHFA recently made policy changes
that increased GSE competition with the private sector and will
lead to greater risk layering. The GSE affordable housing goals
may also be increased, and other policies are being discussed.
The FHA is also considering changes that will increase its
competition with the GSEs, which does not bode well.
Equally worrisome are increases to the GSEs' appraisal
waiver practices, particularly purchase loans. In the past,
human appraisals have successfully alerted lower-income and
minority borrowers when they were overpaying. An appraisal
waiver may simply confirm the negotiated sale price while the
competition between Fannie and Freddie for market share may
create a race to the bottom on standards, not to mention that
these processes can be gamed, which was commonplace with
respect to the GSEs' automated underwriting systems in the
lead-up to the financial crisis.
The compounding effect of these changes will mean less
resiliency for borrowers and neighborhoods, many of which are
lower-income and minority, to withstand an economic stress
event. We have seen this movie before, and we know how it ends.
It should not be allowed to happen again.
Thank you.
Chairman Brown. Thank you, Mr. Peter.
Mr. Griffith, welcome.
STATEMENT OF JOEL GRIFFITH, RESEARCH FELLOW, INSTITUTE FOR
ECONOMIC FREEDOM AND OPPORTUNITY, THE HERITAGE FOUNDATION
Mr. Griffith. Thank you, Chair Brown, Ranking Member
Toomey, and Members of the Committee. My name is Joel Griffith.
I am a research fellow at The Heritage Foundation. The views I
express are my own and should not be construed as representing
any official position of Heritage.
Families are feeling the impact of the steep rise in home
prices and rental costs. Spanning the pandemic era, from
February 2020 through this fall, home prices soared more than
27 percent. Over the past year alone, home prices are up close
to 20 percent. Residential property prices in the United
States, adjusted for inflation, are now just 2 percent below
the all time record levels in 2006.
Home prices are increasing far faster than family income
growth. The home-price-to-median-income ratio is now near the
prior record set in 2005. And despite new record low interest
rates, the mortgage-payment-to-income ratio hit 32.7 percent
this fall, the highest level since 2008.
Imagine this. A return of mortgage rates even close to the
historical average would increase a mortgage payment for a new
borrower by 50 percent even with no additional increase in home
prices.
And of course, renters have not been spared. Median
apartment rental costs have jumped more than 15 percent
nationwide this past year. And numerous cities, not just on the
coast, have experienced rent increases well in excess of 30
percent.
So why are housing prices and rental costs rising faster
than usual? Well, institutional owners of rental properties are
being scapegoated for the rise in home prices and rental costs.
Institutional investors own fewer than 2 in 1,000 of all single
family homes and just 1 in 100 of all rental homes. In fact, in
no single State does an institutional investor, as a whole, own
more than 1 in 100 of all available housing units in the State.
The bottom line is that institutional single-family residence
ownership is not measurable impacting local home price dynamics
on the upside.
Here is the reality. The primary driver of rising prices
nationally are Government subsidies. This is increasing
mortgage borrowing and demand for housing, leading once again
to higher home prices and increased taxpayer risk. Government
sponsored enterprises, namely, Fannie Mae and Freddie Mac,
continue to dominate the mortgage market. Investors who
purchase these GSE bonds and these mortgage-backed securities
know that taxpayers will make good on the promised cash-flows
from the mortgages underlining these Fannie and Freddie MBS
products. This leads to riskier lending because it allows
investors to ignore the true financial risks of the underlying
mortgages and securities.
And of course, we have our own Federal Reserve continuing
to purchase MBSs en masse. Since March 2020, the Federal
Reserve has driven down mortgage interest rates and fueled a
rise in housing costs by purchasing more than $1 trillion worth
of mortgage-backed securities from Fannie Mae and Freddie Mac
and Ginnie Mae. The nearly $3 trillion of these mortgage
products owned by the Federal Reserve is 88 percent higher than
levels of just 2 years ago. This decline in long-term interest
rates has induced and enabled borrowers to take on bigger
loans, and this has fed the rise in prices that is pricing
families out of the marketplace.
Of course, State and local governments bear responsibility
as well. On the local level, stringent zoning regulations,
density limitations, and aggressive environmental regulation
are limiting the supply in housing while increasing the cost of
construction. These local regulations can account for more than
30 percent of the cost of new affordable rental housing
construction.
And rent control is further compounding the problem.
Capping rent increases does nothing to make housing cost less
to build, but it does shrink the future supply by deterring new
construction while incentivizes landlords to spend less money
on upkeep and remodeling. Just talk to any number of residents
of public housing projects across New York City.
So what can be done to address these housing prices? First,
policymakers should consider severing the special status given
to the GSEs. Second, we should raise Fannie Mae and Freddie Mac
mortgage guarantee fees immediately while the GSEs remain in
conservatorship. This would make interest rates on
nongovernment-guaranteed mortgage loans more competitive.
We should eliminate the geographic price differential for
conforming loan limits. Consider that just this past year the
conforming loan limits for Fannie Mae, Freddie Mac increased 18
percent. You can get a loan guaranteed for up to $642,000, and
that is the standard in these high-cost areas. The loan limits
guarantees are approaching $1 million.
And we should also reject eviction moratoria on the State
level and on the Federal level. Initially, that decrease in
cash-flow from an eviction moratorium affects the landlord
only, but landlords will increase rents to mitigate this
heightened risk of future moratoria and to recoup the revenue
that they lost over this past year. Ultimately, eviction
moratoria result in fewer affordable housing units that will be
constructed.
The economy will benefit if Congress will work to make
housing more affordable by gradually removing these Federal
guarantees and subsidies and by eliminating these Federal
mandates. And of course, State and local governments continue
to bear a responsibility to eliminate their own artificial
barriers to housing affordability.
Thank you for the invitation. I look forward to your
questions.
Chairman Brown. Thank you, Mr. Griffith.
Ms. Martin, calling from Cleveland, welcome.
STATEMENT OF SALLY MARTIN, DIRECTOR OF BUILDING AND HOUSING,
CITY OF CLEVELAND, OHIO
Ms. Martin. Good morning, Chairman Brown, Ranking Member
Toomey, and Members of the Committee. My name is Sally Accorti
Martin. For almost 14 years, I served as the Housing Director
for the city of South Euclid, Ohio, an inner ring suburb on the
east side of Cleveland. Currently, I am the Director of
Building and Housing for the city of Cleveland.
One of the aftereffects of the decline in the housing
market has been the dramatic rise of business buyers of single
family homes. The bargain basement prices of the past decade
and a half led to an unprecedented rise in the number of
investors flooding the housing market. Even now, with
rebounding home sale prices, we have not seen that trend
diminish.
Last month, I assisted an elderly resident with a housing
choice voucher who was being evicted from her home of 19 years.
The recent rebound in housing prices has enticed many local
landlords to sell their occupied homes to out-of-State
investors. In this case, as in many others I have seen
recently, the tenant was on a month-to-month lease and the new
landlord chose not to renew her tenancy and provided a 30-day
notice to vacate. The woman was unable to secure other housing
for herself, her sister with dementia, her granddaughter. They
were all evicted from the home, with many of their possessions
and medications left inside.
It is not uncommon for these new landlords to introduce
themselves to their tenants with notices of large rent
increases, making remaining in the home completely unworkable.
In this case, the new landlord was the SFR3 Fund, an LLC from
Mill Valley, California, with the mission statement of
``acquiring, renovating, and renting thousands of single-family
homes.''
Unlike mom-and-pop landlords, large out-of-State investors
typically do not have much empathy for their tenants. Residents
can be a day late in paying rent and face an eviction notice.
In this case, the tenant had never been late on rent, but the
landlord refused to allow her to remain in the home as he
realized that he could get a higher rent from a nonsubsidized
tenant.
For the past couple of years, my office has received many
calls from tenants in similar circumstances. Prospective
homebuyers are finding the market nearly impossible to
navigate. In South Euclid, a community with traditionally
modest home prices, cash offers and bidding wars have become
the norm. Buyers requiring mortgages are unable to compete.
Desperate homebuyers are borrowing from 401(k) funds,
relatives, or even hard money lenders in order to compete with
investors.
For a subsidized tenant, the market realities are sobering.
When I began my position in 2008, South Euclid had
approximately 300 housing choice vouchers in force. When I left
this month, there were less than 200. Those with public
assistance cannot compete with market rate tenants able to pay
the higher rents being charged. South Euclid, unlike many
cities, has taken a proactive approach to protecting tenants by
enacting pay-to-stay legislation and by passing a comprehensive
antidiscrimination ordinance, including source of income
protection.
Even so, we cannot stop many of the predator behaviors we
are seeing in the market. Currently, the majority of the 1,600
or so rental units in South Euclid are owned by out-of-State
and international investors. Even with the higher sale prices,
investors are insatiable in their demand for more and more
houses. Residents are bombarded with postcards, text messages,
and other marketing materials offering to buy their homes for
cash.
South Euclid has passed a number of ordinances designed to
hold rental property owners accountable, including having a
registration and inspection requirement, requiring owners
living outside the area to name a local agent in charge, and
not allowing the registration of rental properties with
delinquent property tax balances. By taking these actions, we
have successfully driven out many predatory landlords from the
community, but it feels like an uphill battle.
Not surprisingly, research conducted by city of Cleveland
data analyst Dr. Tim Kobie shows a dramatic and alarming
increase of business buyers, especially in communities of
color, on Cleveland east side and in the racially diverse
inner-ring suburbs of Cleveland. For Cuyahoga County as a
whole, business buyers nearly tripled from 2004 to 2020. A
white paper on these findings will be published this month by
the Vacant and Abandoned Property Action Council, an ad hoc
group of community development professionals in northeast Ohio
that is chaired by housing researcher Frank Ford of Western
Reserve Land Conservancy.
For several years, Frank Ford has published an annual study
on bank lending by Greater Cleveland neighborhood that has
shown that on the east side of Cleveland only 18 percent of
home purchases are associated with a home purchase loan. The
entire east side of Cleveland, a majority minority area, has
become a cash market dominated by investors.
In order to rectify these issues, the public and private
sectors must collaborate. Middle neighborhoods and low- and
moderate-income areas continue to lose ground in home
ownership, and tenants are subject to increasing rents, making
attaining the dream of home ownership nearly impossible for
many and leading to housing instability on an unprecedented
scale.
Thank you.
Chairman Brown. Thank you very much, Ms. Martin.
I will begin the questions and start with Mr. Waller. On
Tuesday, we heard from tenants whose ceilings had fallen in,
who lived with pests and rodents, who had seen rent go up 50
percent in a single year. A lot of people might ask, why don't
they just move? You gave a good example of a renter in Albany.
You know renters in Georgia who face conditions like this. Do
they have the option to just move?
Mr. Waller. Thank you, Chairman Brown. No. Moving is
difficult for anyone, under any circumstance. In this case,
folks find that they do not have other options. There just
simply are not places to move to that they can afford.
So I have spoken with tenants who live in mobile homes
where their children have fallen through the floor, where there
are mobile homes that do not have electricity, and they are
still paying monthly rent because they have no place to go. On
top of that, there are direct and measurable costs. There are
early termination fees in some cases, sometimes as much as
three times the monthly rent.
You have a child in school. You would have to remove them
from that school. And if your child has a disability, you would
have to transfer their Individualized Education Plan. This is
difficult.
You have to consider your job. You have got a job perhaps,
and you have figured out a way to get there. And moving to a
new place in a new community because you will not necessarily
find another home in your neighborhood is going to produce
additional challenges.
And then there are moving costs, security deposits. It just
goes on and on. They just do not have that option.
Chairman Brown. Thank you.
Ms. Martin, a question for you. And congratulations on
joining the mayor's cabinet. I am a resident of Cleveland, and
I look forward to working with you for that reason and for so
many others.
When you were with the city of South Euclid, you helped
start the Vacant and Abandoned Property Action Council. Why did
you start this council in the first place? How did the council
help you and other local leaders address the problems that you
point out?
Ms. Martin. Well, I should say first off that I did not
start the Vacant and Abandoned Property Action Council. That
actually started in 2005 as a response to a study done by Joe
Schilling out of Virginia Tech called ``Cleveland at the
Crossroads''. So since 2005, this group has been meeting
monthly, pulling together stakeholders from educational
institutions, all different cities, and county government to
discuss a collective response to the issues that were plaguing
neighborhoods with vacant properties. So the research that
continues today through the organization has proven invaluable
to us working on the ground in neighborhoods, to try to address
the challenges we were seeing.
And I am very much looking forward to working with you as
well.
Chairman Brown. Thank you.
Ms. Molenda, you have experience bringing people together
around a common cause in Bedford Stuyvesant and beyond, and you
still face significant challenges finding and communicating
with other tenants in your situation. What were some of the
practices that your landlord engaged in that led residents from
your building and other buildings and across the city to
organize, come together, and advocate for improvements?
Ms. Molenda. Thank you for the question. You know, when you
lose your home, you lose so many important things in your life,
from stability, community, neighbors, friends, you know,
potentially a job change, school change for your children.
And our organizing really started with the 30-unit
apartment in Park Slope, where Greenbrook bought the building
and immediately sent notices to vacate to the tenants there
with 90 days' notice. Many of those tenants left, and very few
stayed and fought back. When we started to do research around
who this landlord was, we realized that, you know, first, they
bought a dozen buildings. Then it was 40. Then it was 100. Last
I checked it was 138 buildings.
And I think what really stood out here is that Greenbrook
has particularly egregious practices, in particular around
evictions and the massive rent hikes that many of us were
experiencing for the very first time ever. And that is what
really pushed me over the edge, when I got my 50 percent
increase, to start to connect with other neighbors and start
asking questions.
And I do have experience in the labor movement, and so I
knew that bringing people together and starting conversations
and building power would create space for us to start asking
questions like, is this legal, and what can we do about this?
Chairman Brown. Thank you, Ms. Molenda.
Ms. Martin, back to you. We heard from the panel that only
1 percent of homes in this country, or rental homes, are owned
by institutional investors, but we also know that trends in the
last few years, that 30 percent of purchases are institutional
investors, which tells you where we are going to end up. How do
these investors affect the communities and the cities when they
buy up homes?
Ms. Martin. What I have seen in my practice as being in
charge of code enforcement is that maintenance tends to go
down, rents tend to go up, and tenants become displaced. Many
tenants with month-to-month rents are just receiving huge
increases, in some cases 50 percent more per month, and they
cannot sustain it. So we see fewer opportunities for those with
housing choice vouchers to find housing as well. So as I
described in my testimony, we lost a large proportion of
residents who have housing choice vouchers. So it is
detrimental, especially to lower- and moderate-income
residents. They are having very little luck finding houses to
purchase or finding houses to rent.
Chairman Brown. Thank you.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman.
Mr. Peter, we have discussed how much rents have increased.
I think it was something like 12 percent across the country
last year alone. Some of this hearing seems to be an attempt to
blame institutional landlords for these, but it has been
pointed out by Mr. Griffith what a very, very small percentage
institutional owners own in the housing market.
But it is also important, I think, to note that rent has
gone up a lot; housing prices have gone up even more. Right? I
think as of November year-over-year prices according to FHFA
are up about 17 percent nationally, much higher in some
markets, lower in others, but 17 percent.
And so I guess my question is I would tend to expect that
renting a house, which is, let us face it, that is a substitute
for owning house, that they are going to move together. So let
me ask you, Mr. Peter, over the medium term, let us say, should
we expect housing prices and rental rates to generally move
roughly together and in the same direction?
Mr. Peter. Yes, Ranking Member Toomey, you are absolutely
correct. Over the medium term, we would expect to see home
prices and rents to move in lock-step. And for the same--for
the reason that you pointed out, those are indeed substitutes.
However, over the short term, there can be discrepancies
that arise, and those discrepancies can arise because there are
many investors, landlords, and mom-and-pop shops who generally
only tend to raise rents when there is a turnover.
Senator Toomey. Right.
Mr. Peter. And there is generally about a lag of about a
year between rents and home prices. So we are going to see a
lot more rent raises in the future.
Senator Toomey. Right. So there is a sticky element because
people are not locked in, in a given lease.
So you know, there is a very old economic truism that the
solution for higher prices is higher prices. And of course,
what is meant by that is that when people see the opportunity
to make more money because the price of something has gone up
it brings new entrants into the market, they create more
supply, that tends to reduce the prices, and thereby you have a
solution.
So we have also heard that a lot of folks have no place to
move, which sounds like a supply problem, and high prices
normally call for an increase in supply. So could you talk a
little bit about why we are not seeing a huge surge in supply
in the face of these rising prices, and specifically, are local
governments partly to blame for this?
Mr. Peter. Yes, absolutely. I mean, there is a common
saying that, demand responds quickly, supply responds slowly.
And in particular on the housing front, the reason why supply
responds so slowly is because we have artificially limited what
and where we can build. And this comes down to the mistaken
notion by elites that they can produce better outcomes than the
market.
And so they have used zoning. They have used environmental
review processes. They have urban growth boundaries in some
instances. They have used rent control in some cities, to
really slow down what the market has been doing. And this has
resulted in this massive housing shortage and massive
unaffordability that we have been seeing, and this is very much
more pronounced in these high, high regulation States.
Senator Toomey. Right. Let me go to Mr. Griffith for a
quick thought here. So the GSEs clearly led us into the 2008
financial crisis through excessive risk taking. Congress
established FHFA to be a tough regulator, to make sure that
never happened again.
But rather than being the cop on the beat, it seems the
Biden administration's intent is to turn FHFA into a co
conspirator with the GSEs. And what we are seeing is all kinds
of policies that undermine, I think seem to undermine, the
GSEs' financial condition, whether it is reductions in GSEs'
capital requirements, lowering g-fees, suspended restrictions
on risk layering, and on and on.
Here is my question for you. Does it ever feel like they
could be setting up for repeating the mistakes that led us into
the 2008 financial crisis?
Mr. Griffith. Thank you, Ranking Member Toomey. Well,
regardless of whether or not the current state of the housing
market completely mimics what happened in 2006, with the
collapse of home prices of 30 and 40 percent across the
country, even if that does not happen, the pain that the GSEs
are inflicting on the American families, it is undeniable. And
by that, I am referencing the home prices that are at all-time
record levels right now. Whether those prices collapse or
whether they stay elevated, American families are severely
impacted. And the only way to have a way out of this without an
even more prolonged period of sharp contraction would be to
gradually remove their footprint, to allow prices to gradually
return to something that is more affordable.
Senator Toomey. Thank you.
Chairman Brown. Thank you, Senator Toomey.
Joining us from his office is Senator Menendez, and after
Senator Menendez I believe will be Senator Tester, so if you
can line up that way.
Senator Menendez from New Jersey.
Senator Menendez. Thank you, Mr. Chairman. You know, there
is a massive racial home ownership gap in this country, which
is a serious problem because owning a home is a key to building
intergenerational wealth and reduce racial wealth inequality
overall. According to the Census Bureau data, the White home
ownership rate is about 74.4 percent compared to about 43.1
percent for African Americans and 48.4 percent for Hispanics.
So, Ms. Martin and Mr. Waller, what are some of the
barriers to minority home ownership, and how do large
commercial landlords mitigate or exacerbate those obstacles?
Ms. Martin. Yes. Hello. I could respond to that. What we
have discovered in northeastern Ohio through the analysis done
by Frank Ford of Western Reserve Land Conservancy, who is the
Chair of VAPAC, is that lending disparities are very real, and
we are finding that majority minority neighborhoods do not have
equal access to credit. So essentially, we still see redlining
going on in those neighborhoods.
We also see very disturbing trends where Black borrowers,
even high-income Black borrowers, are having less of an
opportunity of getting mortgage capital than even moderate
income White borrowers. So Frank's research is very startling
in that.
It is very clear, as stated, you know, in some of our low
mod areas there is almost no opportunity for home ownership as
it has become a completely investor-dominated market. There are
essentially few to no mortgages being written in some parts of
our community.
Mr. Waller. And if I could add, Senator, these practices
and these types of landlords are often concentrated in low
income and Black and Brown communities. The effect is that they
are extracting wealth from these communities. And to buy a home
you need wealth. You need to buildup money to pay for your
downpayment, also have a stable income.
And so these practices, because they put so much pressure
on the families that live in these homes, that are renting
these homes, they are often feeling like they are in a constant
state of fiscal emergency. And it is very difficult under those
situations to have the kind of stability that lends itself to
the purchase of a home. Thank you.
Senator Menendez. Well, thank you. Well, I am concerned,
the fact that institutional investors in real estate are
potentially squeezing minority first-time homebuyers out of the
market. According to the National Association of Hispanic Real
Estate Professionals, one of the critical barriers Latino
homebuyers face is that Latinos are overwhelmingly concentrated
in areas of the country with acute housing shortages. So what
can we do to ensure that first-time minority homebuyers have a
fair chance at competing with deep-pocketed institutional
investors?
Ms. Martin. I think first and foremost we need to make
mortgage capital available. I think we need to provide some
backstops to keep the investor behavior curbed in some of these
areas where they are just essentially raiding neighborhoods.
Mr. Waller. And I would add that, you know, it is a
multifaceted problem. So there is a lot of different solutions
that need to be employed. So I think some, you know, direct
spending to State and local governments, mission-driven
nonprofits, to help actually increase supply, which is not
increasing. It is not increasing fast enough. There simply is
not enough affordable housing in Georgia.
Also, local governments need better information about these
types of investors and institutions in order to make decisions
at the local level to help increase supply.
Senator Menendez. OK. Now as more and more housing is
bought up by institutional investors, I am concerned about the
lack of transparency this is creating in real estate ownership.
Imagine a scenario when an unoccupied house needs maintenance
or the neighbors cannot notify the owner because the house is
owned by an anonymous LLC.
Ms. Molenda, how does the difficulty to determine and
communicate with the true owner of a property negatively impact
neighborhoods? I am thinking about the 2019 Harvard study of
rental properties in Milwaukee that found that properties
bought by LLCs became more likely over time to receive code
violations, fall into disrepair, particularly in high-poverty
neighborhoods. In other words, corporate ownership can degrade
the quality of housing, and that could have negative impacts
not only for the tenants of those properties but for the
surrounding neighborhood.
Ms. Molenda. That is exactly right, Senator. We see this
all the time around--you know, the paperwork that I got when my
building was owned lists a different name than what I was told
I should be sending my rental checks to. It is a very
convoluted system of trying to investigate for folks like
tenants, right, who do not have the skills and the research
time and capacity to investigate this kind of really tangled
web of who is in a relationship with whom.
And the violations that you mentioned, I mean, these have
included dangerous, unpermitted work and careless construction.
We have had--you know, one of my neighbors in a different
building had to get sent to the hospital for asthma from
unmanaged dust and debris from construction that was
unpermitted that was happening. And the entire Greenbrook
portfolio, according to the New York City Department of
Housing, Preservation, and Development, has received just over
3,000 total violations across their portfolio of just, you
know, 130 plus buildings.
Senator Menendez. That is pretty amazing. Thank you, Mr.
Chairman.
Chairman Brown. Thank you, Senator Menendez.
Senator Tester from Montana is recognized from his office.
Senator Tester. Yeah, thank you, Mr. Chairman and Ranking
Member, for having this hearing. You know, we all have--all the
Senators on this--in this group have offices all around our
States. And I have heard with previous representatives that
institutional investors are 1, 2, maybe 3 percent. The
interesting thing is, you are right, that is pretty small, the
overall buy.
But I will also tell you--and I do not think I am alone in
this--damn near every call I get that is a problem with housing
is with institutional investors. And the points that are made
by the people who are in these homes, who cannot move easily,
are: These folks see an opportunity to take advantage of us,
and they are, and it is wiping us out.
And so it is not about blaming institutional investors. It
is about getting people to do the right thing and have a little
bit of compassion, just a little bit of compassion for your
common man.
But, yeah, housing has been an issue. Montana struggled
with a lack of housing before the pandemic. And you know, folks
want to move to Montana. I do not blame them. It is the
greatest State in the Union. A little biased on that, but it is
the truth. But the fact is, is that the pandemic has made these
challenges more difficult.
So this is a question for you, Ms. Martin. During your time
in South Euclid following the last economic crisis, you all
worked to preserve local involvement in control of affordable
housing so that it did not get monopolized by big out-of-State
investors. What did you learn from that experience?
Ms. Martin. What I have learned as a code enforcement
official is it is almost impossible to track down these
investors. So as you said, they hide. Many of them are not
registered with our Secretary of State. It is very hard to
untangle who is responsible. We have gone to the lengths of
actually questioning tenants about who they are paying their
rent to because we could not service on anyone.
And as you might be aware, most code violations are
criminal offenses. So for us to prosecute that, we have to
perfect service on whoever the owner is, which can be very,
very difficult.
So again, you know, in Cleveland through our collaboration,
by working together through the Vacant and Abandoned Property
Action Council, we have helped make that a little bit of an
easier process, but there are no legal safeguards that allow
transparency in that way for cities to see who is really behind
it. So for us to try to get control of dilapidated properties--
you will find a property with no heat, a property where the
water has been cut off--it makes it very, very difficult. And
also, the environment of code enforcement having declining
resources, so fewer code enforcement people in the nation,
makes it even harder still.
Senator Tester. You know, it is interesting. In Montana,
the state of the population is just over a million people. We
have some mobile home parks that have been bought by
institutional investors, and we have had some other properties
bought by institutional investors. And the kind of complaints
that are brought forth and called into my office, with pictures
I might add, are unbelievable. I mean, the Billings properties,
for example, sent us pictures of what the water looked like
coming out of their taps, and I guarantee if you drank it you
were going to be sick because it was not clear. It was not even
close to clear. It was primarily brown.
And a mobile home park in Great Falls talked about the fact
that over the time since the institutional investor bought this
property they did nothing but jack the rent and add fee after
fee after fee, making it impossible for folks to be able to
live there. And as has already been pointed out, it is not like
folks can just pop up and move somewhere else. It is their
home, number one. And number two, a lot of these folks do not
have the resources to be able to move at the drop of a hat.
Mr. Waller, we have seen success in Montana from
manufactured housing communities converting to resident-owned
cooperatives. Hopefully, you know about these ROCs. Are there
other opportunities to improve communities by giving options
like the first right of refusal or providing programs so the
properties can stay affordable and stay in local hands?
Mr. Waller. Thank you for the question. Yes, I think in
general providing options to homeowners, or potential
homeowners, or tenants and families that live in rental homes
is exactly the right way to go. And that is part of the issue
we are talking about today, that folks do not have choices. So
our State laws in Georgia are not set up to support tenant
choice. In fact, it is quite the opposite. So those kinds of
programs, I think, would have a beneficial effect.
Senator Tester. Appreciate that. Once again, thank you, Mr.
Chairman and Ranking Member, for having the hearing. Appreciate
all the participants.
Chairman Brown. Thank you, Senator Tester.
Senator Van Hollen from Maryland is recognized.
Senator Van Hollen. Thank you, Mr. Chairman and Ranking
Member Toomey. Thank all of you for your testimony here today.
A few days ago, we heard testimony from a number of
individuals who were impacted by absentee owners who were not
taking care of the apartments that were owned. One of them was
Juan Cuellar. He is a tenant at the Bedford and Victoria
Station Apartment Buildings in Langley Park, Maryland. It is
owned by an out-of-State, publically traded company. This
community is about 84 percent Latino. Many recent immigrants
often do not know their rights, and there is a huge sort of
information disparity.
Mr. Waller, this issue of information asymmetry obviously
puts this kind of tenants at a disadvantage. Do you have
thoughts on how we can address this so that those tenants can
have a better ability to navigate these systems and protect
their rights?
Mr. Waller. Thank you, Senator. Information is really
important. So there are some basic low-hanging fruit that court
systems and local governments could do, like providing things
in languages that people can read and also providing navigators
so people understand the law and what their rights are.
But I would say that even so, even with knowledge, in many
cases tenants simply cannot exercise their rights even when
they know what they are because there is a lack of legal
representation for low-income tenants. In fact, it is virtually
nonexistent despite the heroic efforts of our legal services
attorneys across the country.
And so local communities and States need to think about the
benefits that they would receive if they would provide legal
support to tenants. These are very complex litigation. I mean,
a legal--a landlord in an eviction case may move really
quickly, as quickly as 3 weeks in Georgia, but it is a very
complex proceeding and tenants simply do not have a chance.
Senator Van Hollen. So we also have an issue where, you
know, tenants are engaged in making complaints and they often
go unheard and neglected and problems buildup. Sometimes it is
pest infestation. Sometimes it can be deadly situations. We had
back in 2016 in Silver Spring, Maryland, which is not too far
from the Langley Park area I just described, an explosion that
demolished 2 buildings and took 7 lives, injured 30 people,
displaced 100.
And there was an investigation that determined there were
lots of problems and missing things that had happened here.
There was finally a settlement that was not disclosed. But the
NTSB did look into it, the National Transportation Safety
Board, and they concluded that a number of tenants in the
building had reported smelling gas in the lead-up to this
deadly explosion and that those reports went unheeded. Nobody
reported the smell of gas to the gas company, and as a result,
7 people died and 30 were injured.
Can you talk, and others, just in my remaining time about
how we can change the systems and incentives in a way to
prevent that kind of deadly tragedy? This was again a building
primarily populated by recent immigrants, and people were just
not listening to their complaints.
Mr. Waller. That is an extraordinarily tragic event, and
those kinds of tragedies do happen in Georgia as well. One of
the challenges that we face is that there is lack of investment
in the enforcement of local housing safety laws, and so the
housing code enforcement staff is often chronically
underresourced. In some places like Georgia, in fact, their
power or their authority to actually inspect homes is limited
by State law.
So in Georgia, it is unlawful for a community to inspect a
property at all or even have a rental registry without probable
cause. So they cannot go in and inspect unless there is someone
there to invite them in. And so if the landlord does not do
that or tenants are afraid to reach out, then the property will
simply just not be inspected.
So looking at those kinds of laws and the resources that we
provide these communities and the role that Federal Government
might have in terms of oversight when it, you know, supports
investments by out-of-State investors I think is really
important.
Senator Van Hollen. I appreciate that. Thank you.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Smith from Minnesota is recognized from her office.
Senator Smith. Thank you, Mr. Chair and Ranking Member
Toomey, and thanks to all of our panelists today.
So I start from the place that if you do not have a safe,
decent, affordable place to live nothing else in your life
works, not your job, not your education, not your health,
nothing. And as Molenda said so well, when you lose your home,
you lose more than just that; you lose your community. And that
is why this hearing is so important.
Seems to me, Mr. Chair, our system is failing way too many
people who are being victimized by these big corporate and
institutional private equity landlords. And on Tuesday, as you
said, we heard some stories about what this really means in the
lives of people, including Rachel, who is a single mother in
north Minneapolis, who had to sign her lease as she was leaving
an abusive relationship. And Rachel shared her own experience
with this institutional landlord: flooded basement with an
unsafe electrical hazard in it, a garage torn down because it
was unsafe, and other significant problems. And she told us how
it was impossible, nearly impossible, to get anyone to pay
attention to what she needed to have happen.
Now Rachel is not alone. In the city of Minneapolis, we
have found dozens of violations of city ordinances in homes
owned by this large landlord. By one estimate, 58 percent of
homes have code violations. In nearby Columbia Heights, the
problems were so bad that the City revoked the landlord's
rental license.
Now Rachel's rental is owned by a firm called Pretium, a
large private equity fund which acquired this portfolio last
year. Pretium tells me that they are committed to fixing these
problems and they are going to do away with some of these
onerous lease terms. And they need to meet their commitments to
me, and I am going to make sure that there is accountability
here.
But in the meantime, this speaks of course to a larger
problem that we have in our nation. We are seeing increased
corporate consolidation in a lot of sectors of our economy, in
food, and we are seeing it driving up food prices, heating
prices, and now rent prices. And this is happening because this
big out-of-State firms, out-of-town firms, driven by Wall
Street expectations, are buying homes by the thousand, with the
single minded goal of driving up profits and turning these
properties into cash cows.
Now I went to business school, and I know what ``cash cow''
means. It means that you maximize cash spin-off while you
minimize investment and maintenance. And we know who wins and
loses in this deal when it comes to tenants.
So I want to ask a question along this topic to Mr. Waller
and also to Ms. Martin. You both have been involved in the
housing sector for a lot of years. Can you help us understand a
little bit how these big institutional investors are turning
these properties into cash cows and what impact that has on
tenants? For example, what do you see in terms of the different
experiences between tenants who are tenants of this big out-of-
State, cash cow investors versus local landlords? What do you
see as some of the differences?
Ms. Martin. What I have seen in my work is that these
landlords tend to not have a lot of empathy for tenants. So
things will break in the house. Things will start to--the
basement will flood, for instance. The tenant will need a
plumbing repair. It will not be done, or it will take months
and months for the tenant to get relief.
So again, this speaks to the need for code enforcement as
being a critical tool, and code prosecution, but again, it is
very hard to find them. They typically employ local property
managers that are very hard to pin down, and they hide behind
the corporate veil, making it very, very difficult.
But they do milk the properties, as you stated. That is
what is going on. They buy them for the lowest possible price.
They try to put nothing into them and milk them for all the
rent they can get.
Senator Smith. And let me just ask, following up on this,
Mr. Waller, large institutional investors in housing, do you
think that that has a downward trend on rents or do you think
it has an upward trend on rents? What is your----
Mr. Waller. What we have observed in Georgia is that these
institutional landlords are well known for driving up rents,
the cost of rent, in fact, year-on and year-on. But it is not
just the rents. I also think it is important to note that there
are fee schemes that are imposed that, you know, we have not
seen and we do not see with other types of landlords. These are
very creative fees that can cost tenants a tremendous amount of
money.
There is one example. An Atlanta Legal Aid Society lawyer
reported that her client had--her lease payment was 1,300, I
think, and 73 dollars under the lease. But when--with the
accumulated fees, it was $2,157 per month. That is a 60 percent
increase. And so you can imagine what kind of--what that does
to tenants over time.
Senator Smith. This is the kind of predatory behavior that
I think is so damaging to a housing market that is already
struggling because we have a shortage of supply, as we all
acknowledge. So thank you, Mr. Chair, for this hearing, and I
look forward to our continued work on this issue.
Chairman Brown. Thank you, Senator Smith.
Senator Toomey has one question he wants to ask, and then I
will turn to Senator Warnock, remote.
Senator Toomey.
Senator Toomey. Yeah, thanks, Mr. Chairman.
Mr. Peter, in your written testimony, you speak about the
extraordinary growth in the GSEs' footprint in the multifamily
market. You also state that many of the institutional
landlords, including many that have been subject to criticism
this morning, have actually been funded by the GSEs. So here is
my question. Does the GSEs' role in subsidizing multifamily
loans really do much to increase affordable housing or even the
supply of rental units?
Mr. Peter. Senator Toomey, that is a great question, and
the answer is precious little. And the way it works I have
documented in my written testimony on page four. As you pointed
out, there has been this massive increase in multifamily
mortgage debts guaranteed by Fannie and Freddie.
However, when an investor comes in, they find a property
where renters are already making below 80 percent of AMI, Area
Median Income, and then the GSE requires that the tenants in
this building continue to earn incomes below 80 percent AMI. So
due to the liberal GSE lending terms, the buyer or the investor
is able to load the property with a lot of debt. And as long as
the buyer can then make some renovations or not and typically
tends to then raise rents. But as long as the occupants are
just still generally earning incomes below of 80 percent of
Area Median Income, Freddie then gets to tout that they
preserving success in maintaining affordable rental units while
the owner can brag about financial returns.
So as long as there is--so this is--I think you need to
follow the bouncing ball here. So long as the system is all
underwritten by Fannie and Freddie, I think we need to get to
the root causes of this problem. The root causes are really the
financing which is done by the Government, which is then
raising these rents on these low-income rental units. And I
think that is something that we should have a close look at
because if it is underwritten by the Government it is creating
also distortions in the marketplace, which should not happen.
Chairman Brown. Thank you, Mr. Peter.
Senator Warnock is next, and then he will be followed by
Senator Cortez Masto. Both are calling from their office.
Senator Warnock from Georgia.
Senator Warnock. Thank you so very much, Chairman Brown. We
are in the middle of a housing crisis, and this is true
obviously all across the country, but it is especially true in
Georgia. We are certainly feeling it all across my State, where
constituents are facing difficulties finding affordable
housing, in the Atlanta area and all across the State.
In this time of difficulty, some corporate landlords have
been aggressively issuing eviction notices. Between January and
April of 2021, in the middle of a pandemic, Pretium Partners
and its subsidiaries filed 155 evictions in DeKalb County
alone. Ventron Management has filed for eviction against the
tenants of Brooks Crossing Apartments a total of 427 times
since April of 2020.
I am happy to see Mr. Waller here, a fellow Georgian who
has been on the front lines of this problem in helping these
families who are facing eviction. When we think about housing,
you are talking about health care also. People are more likely
to be able to maintain a health care regimen. Kids will be
better able to study. We are talking about education and a
whole range of issues. Stability in housing is dignity.
Mr. Waller, based on your experience working directly with
communities, are these companies targeting evictions to
specific areas, or is this just, you know, part of the
marketplace?
Mr. Waller. Thank you, Senator. It is a pleasure to see
you. So, yes, they are targeting. Their activity, we observe,
is concentrated in communities of color and low-income
communities. And as a result, although there might be a smaller
or, you know, larger part of the marketplace, in those
communities, the threat of this type of institutional landlord
is very real.
And it causes additional destabilization. Again, it
extracts wealth from these communities, reduces their ability
to improve their circumstances or find new places for their
children to live. It also reduces the ability of communities to
support the education of kids and support the employment
potential of their families.
Senator Warnock. Well, you describe well the impact of all
this. But what is motivating these companies to file so many
eviction notices during a public health crisis?
Mr. Waller. The eviction system in Georgia is set up to
support the needs of landlords, and so when you look at why
landlords use evictions it is not necessarily to remove a
tenant. Eviction in Georgia is a very inexpensive process for a
landlord. It can be very quick. And landlords have attorneys
that are at their disposal, of course, but also the way the
courts are set up it is very inexpensive to use a landlord
attorney.
And so they use eviction filings not just to push people
out and bring new people in. They also use them to threaten,
intimidate, and coerce tenants into paying often unlawful fees
as well as paying up-rent when tenants complain about miserable
living conditions.
And I should point out that tenants have zero leverage in
Georgia. Regardless of the conditions of the home, the tenant
is still obligated to pay, and so if they do not pay they can
be evicted. And so landlords know this, and they use it to
their advantage.
Senator Warnock. Right. And you talked already about the
effects of this on families. Can you talk a little bit more
specifically about the impact of this on children?
Mr. Waller. Yes, sir. That is very near and dear to my
heart, of course, at Georgia Appleseed. And the impact is
really profound and cannot be overstated. So first of all,
these evictions and threatens--you know, the threat of
eviction, eviction filings has a tremendous psychological
effect on the parents and puts them in sort of state--feel like
they are in a state of constant emergency. So there is a lot of
stress associated with that.
But involuntary moves caused by eviction have measurable,
well-studied, and negative impacts on children. And there is
learning loss every time there is a move. There are behavior
challenges that appear after several moves.
These impacts also affect their classmates. There is
something called ``school mobility,'' which has been measured a
great deal. And the more school mobility that a school
experiences, in other words, the more children move in and out
of the classroom during the year, the worse the effect on their
classmates as well as on teacher morale and teacher retention.
So the communities end up paying the costs and not--you know,
when the landlords act in this way.
Senator Warnock. So all of us have a reason to want to curb
the activities of these bad actors. We all have something at
stake here, whether it impacts us directly or not. Think about
Dr. King saying, whatever affects one directly affects all
indirectly.
And so I have introduced legislation to make downpayments
more affordable for first-time, first-generation homebuyers and
support affordable housing construction and transparency on
restrictions for building new homes. But at the same time, we
have got to do something to address these bad actors,
particularly in the middle of a pandemic.
Thank you so much.
Chairman Brown. Thank you, Senator Warnock.
Senator Cortez Masto from Nevada is calling from her
office.
Senator Cortez Masto. Thank you. Thank you, Mr. Chairman,
and thank you to the panelists. This is a great conversation
and so appreciate you being here.
Ms. Martin, let me start with you. In your written
testimony, you noted that cities that want to take a proactive
approach to code enforcement have a difficult time ensuring
their compliance. So let me ask you, Ms. Martin and Mr. Waller,
if you have any thoughts on strategies to improve municipal
efforts and what we can do here at a Federal level to support
those local government efforts.
Ms. Martin. Thank you for asking the question. Code
enforcement departments universally are stressed. It is very
hard to find applicants. It is very hard to afford to have
adequate staffing at the code enforcement level. And as you can
see from the testimony today, it is imperative. It is the way
we protect the life, health, and safety of these tenants. So
any assistance that local governments could have to augment and
support code enforcement as a function would be very helpful,
for sure, and also certainly anything we can do to help
increase the transparency of these investors so they can be
held accountable for their behavior.
Senator Cortez Masto. Right. And so I am curious if you
have any thoughts, what we can do at a Federal level. And this
is--I think many of us have the same challenges. We understand
a lot of this enforcement is at the local level, where it
should be, and there are challenges at the local level for
municipalities and counties. Is there some thought at a Federal
level, what we can do at a Federal level to support them?
Ms. Martin. Perhaps creating some sort of regulatory
environment where they have to be more transparent in the
reporting of what they own and what the addresses are of the
properties. They tend to be hidden in individual LLCs. We also
find, you know, many of them are not paying their property
taxes until--you know, they are very delinquent. So, milking
properties. So anything where information and data can be
collected and shared would be helpful.
Senator Cortez Masto. And you touched on it. This, to me,
is my biggest challenge right now is the data. There is a lack
of it. There is a lack of accurate information. It is not
easily transparent, I think for many of us, to even understand
who the true property owners are. And to me, I think that is
the first step here moving forward, if we are even looking
Federal legislation, is to capture that data.
And I do not know of anybody who really has accurate data.
I am still putting it together in the State of Nevada.
And so how do we ensure that we have the most up-to-date
information to really address the tenants' needs and address
the issues and help our local municipalities? I am curious, Mr.
Waller, any thoughts on that?
Mr. Waller. Yes, Senator. Thank you for the question. I
would underline Ms. Martin's testimony and also say, you know,
there may be some basic corporate accountability measures that
could be helpful. So, requiring investors in this kind of
situation to identify an ultimate owner, some kind that could
be held accountable when there are violations of the law and
costs pushed on the communities in this way, that would be
really helpful.
I think also thinking about housing code enforcement and
housing safety enforcement as part of the necessary--a
necessary part of the tapestry of Government supervision and
encouragement of investment in affordable housing and so
perhaps even direct grants to housing code enforcement offices.
I think the conditions are often forgotten.
And historically, one way that we have had some idea of
what was going on in homes and had some Federal investment in
improving the conditions of homes was by funding voucher
programs and funding local housing authorities so they could
provide inspections of these properties because in a State like
Georgia that is the only regime in which there are inspections.
Again, it is unlawful for Georgia for local communities to
have, for example, an annual registry or inspection of rental
properties.
Thank you.
Senator Cortez Masto. Thank you. I appreciate that. One
final question, at Tuesday's listening session, which was a
great conversation, really so informative, there was a Nevadan
there by the name of Kathleen Hernandez, and she discussed her
horrible experience with renting a property with malfunctioning
sewage pipes. And one thing she and other witnesses mentioned
was being charged hundreds of dollars for service calls to
address malfunctioning sewage pipes.
And so, Ms. Martin, my question to you is: What can local
governments do to prevent these additional fees for basic
landlord services? I mean, what else can we be doing to address
this, the concerns that we see here with these fees adding up
and really not achieving a correction or a cure for the
ultimate problem when they are called out?
Ms. Martin. I have seen many unconscionable leases that
tenants have signed in their desperate--desperation to obtain
housing. So one of the things that is an effort in Cuyahoga
County is right to counsel so that tenants have a right to
legal help. The Legal Aid Society is doing tremendous work
locally, and there is some funding that has come through
Cuyahoga County and also from the city of Cleveland that
ensures that, but that is not widespread.
And one of our agencies--and I am sure this is true
throughout the country--it was called the Cleveland Tenants
Organization. They were there to help with questions like that.
Is this legal that they are putting all this on me? So in some
cases, I was seeing the landlord put the burden of paying
property taxes onto the tenant and things that just are simply
in conflict with Ohio landlord-tenant law, yet it was going on.
So I think educating tenants and providing some means to fund
organizations that do that will be very, very helpful.
Senator Cortez Masto. Thank you. I know--Ms. Molenda, I see
you nodding your head. You would agree with that, I would
assume.
Ms. Molenda. Absolutely. And I think, you know, just the
lease terms that I have seen from Greenbrook and Carlyle have
just been awful. And having rented many, many apartments in New
York City and elsewhere, I have just never seen these kinds of
lease terms, where they are really building in things like, you
know, if you have a pet, you forfeit your entire security
deposit even though I have already lived in my apartment and
have a pet. And so they are just writing in all of these really
ridiculous terms into the leases that a lot of folks are
signing.
Senator Cortez Masto. Thank you.
Mr. Chairman, I know I went over my time. Thank you so
much. Thank you to the panelists again.
Chairman Brown. Thank you, Senator Cortez Masto.
Senator Warren from Massachusetts is recognized.
Senator Warren. Thank you, Mr. Chairman. So last year,
while families were struggling to make ends meet during a
pandemic, vulture investors saw a big opportunity. Private
equity firms and other Wall Street investors were busy scooping
homes in communities across the country even in the middle of a
historic housing shortage.
So I recently wrote a letter to a few of the largest
investors to get answers about their activities in the housing
market, and they all told me not to worry. They gave similar
defenses to what was going on. Part one, they told me that
institutional investors play a relatively small role in the
housing market, and part two, they said that by buying homes to
convert rentals they were increasing the rental supply and
making rental housing more accessible for those who prefer to
rent. So I want to see if we can just explore those two
defenses from the industry.
Mr. Waller, I would like to start with you. Institutional
investors are telling us that they are just a small player in
the housing market. You work closely with families across the
State of Georgia. Is that what you are seeing on the ground?
Mr. Waller. The role of institutional investors is growing
and growing quickly. So you know, if you look at some of the
research that is available just, I guess, in the last third
quarter of last year, I think they were responsible for about
40 percent of single-family home purchases in the Atlanta area.
Senator Warren. Forty percent?
Mr. Waller. And in the five-county region, corporate
landlords were responsible for, I think, 76 percent of the
eviction filings in the end of last year.
Senator Warren. Wow. So, thank you. You know, we have
reached the point where nationwide more than one in every four
single-family homes in America is purchased by investors, and
that is a huge increase. And the vast majority of investor
purchases, more than 75 percent, were made in cash, which is
really hard for a family to compete with.
So if investors are buying up more and more homes, and new
construction is not keeping up, who gets the short end of the
stick? And I think the answer is pretty clear. Families that
dream of buying their first home. When investor home purchases
skyrocketed last year, the share of purchases by first-time
homebuyers, most of whom cannot compete with those all-cash
offers, fell to its lowest level since the crash of 2008.
So, Ms. Martin, let me ask you. You have spent 14 years
leading South Euclid's housing department. Families are being
priced out of home ownership across the country, forcing many
of them to rent even if they would have preferred to buy. Are
big investors at least making it easier for families to access
affordable rental housing the way that they claim they are?
Ms. Martin. Absolutely not. In my experience, that is not
what is happening at all. I think what we are seeing on the
ground is more scarcity. We are seeing more of a concentration
of poverty as the tenants are forced to find substandard
housing in areas that they did not want to live in because the
opportunities in areas that they would like to live in are so
scarce. These units are getting locked up and locked out of
most--most of the people, you know, who are seeking housing
just do not have a shot at it.
Senator Warren. Well, thank you, Ms. Martin, and thank you,
Mr. Waller. Appreciate your information on this.
You know, institutional investors like to say that they are
helping out renters and potential homebuyers across the
country, but that is just the story they want to tell while
they just keep raking in the profits. With mountains of cash on
hand and access to exclusive listing, these Wall Street firms
are buying up already scarce homes from right under American
families. And then they jack up rents and exacerbate the
inflation that is straining family pocketbooks.
So think about what this means. Big investors are blocking
the main path that families have traditionally had to build
wealth and financial security, that is, buy a home. They are
also standing in the way of opportunities to narrow the racial
home ownership gap and the racial wealth gap that are a blight
on our country.
So there is a lot we need to do to fix the housing crisis,
and we should start with building more housing, just as Build
Back Better would do. But we also need to loosen the grip that
Wall Street investors have on our housing market. This would
help level the playing field so that every family in America
has an opportunity to pursue the dream of owning a home.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Ossoff from Georgia is recognized.
Senator Ossoff. Thank you, Mr. Chairman. And I want to
particularly welcome Mr. Waller from Georgia. Thanks for making
the trip. Thanks for your testimony. Thanks for all the work
you do in the community.
I want to ask a question of you, Mr. Waller, and I would
also like to hear from Mr. Peter on this. Why is it that
institutional investors, private equity firms are so much more
liquid now or have so much more capital at their disposal to
allocate toward investments such as buying up housing stock? Do
you agree that is a fair characterization of shifts in market
dynamics? Thank you.
Why don't we begin with you, Mr. Waller.
Mr. Waller. At Georgia Appleseed, we are focused primarily
on sort of the tenant experience and protecting the tenant. So
I do not have the kind of research I think that Mr. Peter could
provide.
What I can say is that what we are seeing is that there is
a lot of money available for these investments, but what we do
not see when these investments are made are, you know, the
construction of new properties, or buying a property and
investing in the property and upgrading the property, the kinds
of things that you think about when you think about community
investment. Instead, this is the purchase of a property, the
extraction of as much money from it as possible, then often in
the end a derelict building where nothing else can be done.
There are stories in the newspapers, in the AJC, or in Atlanta,
just yesterday about properties just like this, that are
essentially left to communities to pay for. So these investors
come in, buy the properties, and then push those costs onto the
community and onto the families living there.
Senator Ossoff. Thank you.
Mr. Peter, your perspective, please.
Mr. Peter. Thank you, Senator. If you refer to the chart in
page four of my written testimony, you see that multifamily
mortgage debt outstanding has grown exponentially, and this is
because of the Federal Government, particularly the GSEs,
Fannie Mae and Freddie Mac. And so just in 2014, there were
$400 billion outstanding, and now this is--by the most recent
quarter that we have, Q3 2021, this has grown to $900 billion.
And the reason why this is happening because the GSEs are
offering more liberal credit terms than the private sector, and
hence, they are able to crowd out the private sector from this
business. And this is making it attractive for private equity
firms to come into the market and take advantage of these
liberal terms that they otherwise would not get from the
private sector. So I think the solution, if you look at it, is
to shrink the GSE footprint in this market but also on the
single family side if you want to solve this problem that you
have identified.
Senator Ossoff. Thanks for that input.
Mr. Waller, how does the tenant experience vary typically
between a tenant occupying a home or an apartment owned by an
institutional investor, such as a private equity firm, and a
tenant who is in a home or apartment that is owned and run by
someone in the community?
Mr. Waller. Thank you, Senator. So the way I tend to think
about this is, you know, the farther that the landlord moves
from the community and the family the more landlord sees the
arrangement as a purely business arrangement. And so from the
out-of-State institutional landlords' perspective, there are
units that need to be filled, they are fungible, and there are
customers that fill them.
From the tenants' perspective, this is a home. It is very
expensive to move into the home and acquire the home. It is
very expensive to leave. And so the farther apart--the owner is
from the tenant and the owner is from the community, the worse
it gets for the tenant.
And so what we see is that the landlords that are out-of-
State institutional landlords, it is difficult to hold them
accountable when there are problems. The tenant has no one to
speak to. The community has no one to speak to except perhaps a
property management firm which will come and go. They will
change often. And so as a result, they are subject to
increasing and novel types of abuses that we have not seen
before.
Senator Ossoff. Thank you, Mr. Waller.
I want to come back to you, Mr. Peter, and reflect on some
of the comments Mr. Waller made on the different approach the
institutional investors will take toward property management
and their incentives are different. Much has been written about
how over the last 50 years the incentives in the financial
services sector, among institutional investors and fund
managers, have shifted toward short-term returns. That is how
compensation is structured and rewarded. There has been a
shift, many have argued, from a long-term approach to capital
allocation to one focused only on the next month, the next
quarter, maybe the next year.
Do you agree with that? Do you think that dynamic prevails
in our economy? Do you think that impacts how institutional
investors might manage the housing stock that they are buying?
Mr. Peter. Yeah, I mean, I think ultimately it comes down
to market power. And currently, we have this massive shortage
of housing and rental units that is making it easy for
landlords, be they large investors, be they mom-and-pops, but
also on the single-family, to drive up home prices.
And as long as this is being financed by the GSEs, these
institutional investors are working within the system, which is
allowing them, afforded by the GSEs, to take on more debt, load
up profit off the system that the GSEs provide. So I think you
want to look at the role of the GSEs and shrink those down,
yeah.
And, yeah, I mean, it is all working within the system
because if you can raise rents, which is allowed by the terms
that the GSEs can lend, you increase the cap rate which then
allows you to extract even more equity, which is underwritten
by the GSEs. So it is kind of a circle.
Senator Ossoff. Thank you, Mr. Peter.
And finally, Mr. Waller--and feel free if you want to take
some time on this and contemplate and get us something for the
record. I do not want to put you on the spot, but if you have
any suggestions for Congress as we consider housing policy, of
what we can do to increase supply. Right? To reduce barriers to
increase supply and to incentivize investment in supply and
growth of housing stock. We have shortages across the country,
driving up rents, driving up prices.
If you have anything you want to offer now and then we
would also welcome anything for the record. That is my final
question. Thank you.
Mr. Waller. Thank you. And we would be happy to offer
something for the record later, but I can say that, you know,
thinking about the fact that there just simply are not enough
homes for folks to move into. So I had mentioned April earlier,
who simply cannot find another home in Albany, Georgia, where
she can live with her mother who is in a wheelchair. There
needs to be additional housing. The system we have now is not
providing it. So I do think that there is a role for direct
spending to State and local governments and mission-driven
nonprofits to invest in the development of affordable housing.
I think that would be a big help.
I also want to again underscore something that has been
said a couple times, accountability and information. Local
governments need information to make good policy, and right now
we have very little information about how these landlords
operate, who they are. And so measures to increase that would
be very helpful.
Senator Ossoff. Thank you, Mr. Waller.
Chairman Brown. Thank you, Senator Ossoff.
The Senator from Arizona is recognized, Senator Sinema,
from her office.
Senator Sinema. Thank you, Mr. Chairman, and thank you to
the witnesses for being here today. The rapidly changing costs
in Arizona's housing market have been a major concern of mine
for a number of years. Now more than ever, middle-income and
fixed-housing Arizonans are struggling to afford housing.
Recently, an out-of-State investor purchased an apartment
in Tucson that was originally affordable housing for seniors,
but after purchasing the building the investor doubled the rent
for residents, forcing many of these seniors to seek
increasingly difficult to find housing options. According to
the Arizona Daily Star, Tucson's newspaper, the investor
described his method as rehab; kick the tenants out and raise
the rents. He describes the outcome he seeks as, quote, forced
appreciation, where he tries to raise rents on Arizonans faster
than market forces would normally permit.
So let us think about that for a minute. Arizona has an
affordable housing shortage and some of the fastest rising
rents in the country, and somehow even that is not enough for
this investor.
So my first question is for all of the panelists, and I
would invite you to feel free to respond or not respond. Would
anyone like to defend how this investor talks about Arizona
seniors and, quote, kicking them out of their homes?
[No audible response.]
Senator Sinema. Right. I did not think so.
So my next question is: Does anyone testifying today feel
like these actions and these words respect our seniors and the
most vulnerable members of our communities?
[No audible response.]
Senator Sinema. Good. We have common ground. Arizonans know
we have an obligation to take care of and respect our seniors.
Our seniors have worked hard, and they deserve to enjoy their
golden years with dignity in the company of friends and loved
ones.
But many Arizona seniors live on fixed incomes and cannot
afford excessive rent increases. In Arizona, there is also an
affordable housing shortage for everyone, not just for seniors.
So when out-of-State investors target Arizona seniors and kick
them out of their homes, they are not left with a lot of great
options, and some do not have any options at all.
So, Ms. Martin, I want to thank you for being here. In your
city, have you seen instances where seniors being priced out of
their existing homes by practices I just described in Tucson
have contributed to homelessness among seniors?
Ms. Martin. Unfortunately, I have, Senator. The seniors in
our community are some of the most vulnerable residents, and
they have the most difficulty. In fact, the example that I
provided in my testimony of the woman who was evicted from her
home, she was a subsidized tenant who had a housing choice
voucher. She is a senior. Her sister is a senior who had
dementia. And they were evicted from their home even though
they had never missed a rent payment. So I think, you know, we
need to take note of the impact this is having on seniors and
on disabled residents, which is, in my experience, very
commonplace.
Senator Sinema. I have heard from AARP in Arizona and
affordable housing advocates about a disturbing rise in senior
homelessness in Arizona. It is something I previously discussed
in the Aging Committee and, of course, have talked about here
in the Banking Committee.
Now, Ms. Martin, losing your home no matter who you are is
a life altering event, but I believe that losing your home as a
senior on a fixed income is uniquely challenging in this
housing market. So my question is: Do you agree, and if so, can
you share a few reasons why it is uniquely challenging for
seniors?
Ms. Martin. Typically, seniors are not employed. So they
have no income other than what they are receiving in Social
Security or small pensions. So they typically cannot afford
market rate rents.
And units in affordable buildings such as, you know, our
low-income housing tax credit project building designed for
seniors, in Cleveland at least, there is a long waiting list,
at least a year, maybe more. So in the example I provided in my
testimony, the woman had put her sister with dementia in a
house with another family member and her grandchild, and she
was living in her car. And it is winter in Cleveland.
So I think it is very real, what is going on, and it is
absolutely tragic. And, no, they cannot easily find other
housing.
Senator Sinema. Yeah, thank you.
Mr. Chair, I want to thank you for holding this hearing
today. I want to continue working with my colleagues in a
bipartisan way to protect our seniors and to expand access to
true affordable housing in Arizona and across the country.
Thank you. I yield back.
Chairman Brown. Thank you, Senator Sinema.
Senator Reed is recognized from Rhode Island.
Senator Reed. Thank you, Mr. Chairman. We are in the midst
of an affordable housing crisis that is exacerbated, in my
view, by the behavior of these institutional investors. But one
aspect of this affordable housing crisis is the lack of supply
of homes.
And, Ms. Martin, how do local zoning rules and not in my
backyard mentalities contribute to this phenomenon of limited
housing or affordable housing?
Ms. Martin. I have seen that in my experience, especially
with low-income housing tax credit projects. There typically
can be a lack of understanding of what that would mean for a
neighborhood and sort of a not in my backyard mentality does
come to bear with that.
In Cleveland and Cuyahoga County, we are taking a very hard
look at our zoning codes now. In fact, our First Suburbs
Consortium has been working with our County Planning Commission
to see if we can increase density and do things that would help
allow for accessory dwelling units, for instance, where, you
know, we can create more affordable housing opportunities. So
that is a project that we are currently working on. So I agree
with you that it is a true problem.
Senator Reed. Thank you.
And, Mr. Waller, from your perspective, this issue of
zoning reform or at least reevaluation, do you have any
comments?
Mr. Waller. It is a conversation that is also going on in
Georgia, particularly in the larger urban areas, where part of
the reason for affordable housing, or the lack of affordable
housing is the property to build it on. The conversation is
going on, and we could provide more information about that
afterwards. You know, in the rural areas, that is not as much
of an issue of course.
Senator Reed. Thank you. This question is probably in the
purview of the Finance Committee, but I am curious
particularly, Mr. Waller, from your experience. Are there
unique tax advantages to these institutional investors that
give them even more incentive to buy property and to operate
the way they do?
Mr. Waller. I would be happy to provide more information
about that after the hearing. I will say that it is to me. It
does seem strange. There must be lots of different types of
incentives because this is not a type of investment that we
were seeing a lot of in the recent past. So the idea that you
would build--you would buy, borrow a lot of money or invest a
lot of money in an older building with low-income tenants
paying low rent, that that would be seen as a lucrative
investment seems strange to me. And so I am sure there are some
issues there that we could provide more information for.
Senator Reed. And it was, I think, listening to your
comments to Senator Warren about the eviction rate that it
seems to me a business plan, not just a coincidence. Is that
your view?
Mr. Waller. That is exactly what we are seeing. And the
institutional landlords are better positioned than other types
of landlords to take advantage of the eviction system and to--
you know, like I said, it is very inexpensive and easy in
Georgia, particularly if you have lots of properties where you
can run all of your evictions through a single attorney.
So the way that these court hearings go is that the
landlord attorney will sit at the front of the court at the
plaintiff's table and all of the tenants, hundreds of them,
will sit behind that attorney and that attorney will handle
many, if not all, of those cases some days. And so it is very
efficient, very quick, very cheap for these institutional
landlords.
Senator Reed. Well, thank you. Again, this is an area where
we have to look much more closely in terms of the behavior of
these institutional investors. I share some of the sentiments,
obviously, with Senator Sinema that the beneficiaries of this
are far away.
The people who bear the burden are, many times, seniors,
poor, immigrants, et cetera. And that is one factor. And then
the other factor is, as we discussed, we have to get much more
housing built that is affordable and accessible also to all
Americans.
So thank you very much. Keep up the good work, ladies and
gentlemen.
Thank you.
Chairman Brown. Thank you, Senator Reed.
Thank you all for testifying today.
It is obvious from our hearings, from reporting by
journalists in our communities, and from the firsthand
testimony of renters earlier this week and today that private
investors and landlords exploit our housing shortage and lack
of renter protections to exact greater and greater profits for
themselves. They often do it while hiding behind opaque LLCs
and ownership structures.
They add fee after fee, as our Georgia representative
pointed out. They ignore maintenance. They exploit loopholes
and tenant protections. They drive out longtime tenants. They
think they can make a bigger buck from somewhere else. I was
particularly taken by our witness from Bedford Stuyvesant,
where she had owned a dog all this time and then they can write
into the new contract with a new purchase or penalties for
that.
We heard the same tired arguments we always hear from
corporate defenders; let the market sort it out. If you people
listen to the words of renters from this week, from Minnesota
and Nevada and Montana, you would know the market is not in
fact sorting it out.
We also heard a lot about inflation today. If we are
serious about bringing down inflation, not just using it as a
political talking point, let us bring down housing costs. It is
the biggest item in most families' budgets. Prices have been
going up for years.
We have a plan to reduce housing costs for more families by
increasing the supply of safe, decent housing, and also help
State and local governments remove barriers in places like
South Euclid and Cleveland to increase the supply of housing,
something we have heard bipartisan support from witnesses over
several hearings. And if my colleagues really want to bring
down housing prices, I hope they will join us to get that
legislation passed. I look forward to working with colleagues
to help increase access to safe, affordable housing through
these policies.
I thank the witnesses again.
Senators who wish to submit questions for the record, those
questions are due 1 week from today, Thursday, February 17th.
To the witnesses, you then have 45 days to respond to any
questions. Thank you again for that.
With that, the hearing is adjourned. Thank you.
[Whereupon, at 11:53 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Whenever there's a problem in the economy that's hurting families
and driving up prices, there's a pretty good chance you'll find a Wall
Street scheme either causing it, or taking advantage of it and making
it worse.
One of the reasons housing prices have gotten so out of control, is
that corporate America sensed an opportunity.
Private equity firms and corporate landlords and investors saw a
shortage, and they saw a captive market. They bought up properties,
they raised rents, they cut services, they priced out family
homebuyers, and they forced renters out of their homes.
Our failure to invest in new, affordable housing has left these
renters with few options.
Before the pandemic, nearly one-in-four renters was paying more
than half their income for housing.
All across the country, we see headlines about the skyrocketing
cost of housing, and the squeeze it's putting on our families.
Potential homebuyers looking for a home in the communities where
they grew up or where they work are outbid by out-of-town, all-cash
buyers.
Rents in communities from Atlanta to Boise to Columbus to Denver
are growing far out of reach for families and workers.
While most of us see high rents and a lack of housing choices as a
problem to solve, deep pocketed investors see an opportunity for
profit.
Investment firms have been touting rising rents and renters' lack
of options to attract investors.
One large landlord proudly advertises under their, quote, ``market
strategy'' that the ``recent mortgage meltdown has raised the bar for
those who can qualify for a mortgage, thereby increasing the pool of
people who must rent for the foreseeable future.''
But rather than providing the essential affordable housing that
families need, many of these firms are just exploiting people.
On Tuesday, our Committee held a listening session to hear directly
from renters about what happens when investors put profits over
people's lives.
As one renter was told when she asked why her rent suddenly
increased by hundreds of dollars, ``we have to please the investors.''
Think about that, ``we have to please the investors.''
Renters in apartment buildings and single-family homes and
manufactured housing, from Las Vegas to Great Falls to Hyattsville,
shared their stories.
Over and over, no matter where they lived, no matter what type of
home they had, renters told us how they were overlooked and overcharged
by the big investors that owned their homes.
Long-time residents described double-digit rent increases and new
fees for everything from water and trash to family pets.
One resident of a manufactured home community in Senator Tester's
home State said the increases amounted to ``about an 86 percent
increase for the dirt our homes sit on.''
Seniors on fixed incomes and working families can't afford that.
Renters in Nevada and Maryland and Texas and California had their
homes repeatedly flooded with wastewater, lived with pests and rodents,
and went long periods without working showers or hot water.
In Senator Smith's home State of Minnesota, a working mother's
continual complaints about her home's flooded basement and dangerous
garage went unanswered, and the city itself was forced to step in
because of code violations.
Another renter in Senator Van Hollen's home State of Maryland told
us that ``[t]he owners think that because we are immigrants, we are not
important. For them, they want the money to arrive every month without
doing anything for us. We have the need to live in an apartment, but
not live like this.''
No one is arguing that landlords--whether a teacher renting out the
home her parents raised her in, or a professional company--shouldn't be
able to make a living.
Of course rental housing is a business: You provide a decent place
to live, in exchange for collecting people's hard-earned money in rent
each month.
But if your building is full of mold and mice and doesn't have
working heat or a working stove, you're not holding up your end of the
deal.
That's not a real business. And families are paying a very high
price for it.
Investors increasingly structure their purchases through LLCs and
real estate investment trusts, with different names for each property
or fund.
And when owners hide behind LLCs, it makes it impossible to track
down all the neglected properties they own and all the tenants they
force out.
This leaves local leaders like Ms. Martin with only two options--
let investors continue to run down neighborhoods and run out residents,
or use time and money they don't have to connect with other local
leaders to track down bad owners one-by-one.
For investors, homes and rent increases are distilled down as
returns to shareholders. Code violations and eviction filings are the
cost of doing business.
But for Ms. Martin and the residents of Cleveland and South Euclid,
these are their homes. These are their neighborhoods. And no one seems
to be tracking their returns.
When Matthew Desmond, the author of the book Evicted signs copies
of the book, he signs it with the words ``Home = Life''.
Those of us who are lucky enough to go home each night to a safe
home we can afford may not think about it much, but it's a simple
truth.
Where we live matters. It determines so much about our lives, and
our children's lives.
I look forward to hearing from our witnesses today about how we can
strengthen our homes and our neighborhoods with investments and
protections that will make it easier for people to find safe, decent,
affordable homes, and how we can give local leaders like Ms. Martin and
Mr. Waller the tools they need to improve the homes of all families in
Cleveland and Atlanta and across the country.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman. And welcome to our witnesses.
In October, this Committee held a hearing criticizing people who
invest in--and even build--rental housing. It looks like that's again
the plan for today's hearing. And why is that?
This morning inflation came in at 7.5 percent, the fastest pace in
nearly 40 years.
Housing costs are skyrocketing even faster. Rents increased around
12 percent in 2021. Home prices jumped an astounding 17 percent.
Whether you're a renter or a homebuyer, housing is taking up more
and more of your paycheck, with inflation quickly eroding the rest.
Wages are rising, but inflation is increasing faster. And that means
workers are falling farther and farther behind.
This is a direct result of the Administration's massive
overspending. The Administration is desperate for someone else to
blame. But 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.
This is a simple issue of supply and demand. Institutional
investors are the ones with the deepest pockets, the ones with the most
capital available to invest in building new housing stock. Just imagine
how expensive housing would be if some Democrats got their wish and
most institutional investors were driven out of the housing market.
Instead of blaming those who actually build housing stock,
Democrats should take a look at their own role in creating this
disaster. Housing is expensive and getting more expensive in part
because this Administration has doubled down on 50 years of failed big
Government housing policies.
Its illegal eviction moratorium deterred landlords from investing
in new housing stock and likely contributed to rent increases. Its
March 2021 wasteful $1.9 trillion spending bill included almost $22
billion in rental assistance even though $25 billion in rental
assistance Congress provided in 2020 was not close to spent. Its
reckless tax-and-spend Build Back Better plan seeks another $35 billion
in rental and downpayment subsidies that would further increase the
demand for housing.
It has broken from decades of bipartisan efforts to reform the
failed GSE model that now subsidizes the purchase of even $1 million
homes. It has pushed the GSEs to take on more loans to risky borrowers.
Today, we will hear from two witnesses--Tobias Peter and Joel
Griffith--about the negative effects of these failed policies. They
will testify to the role of monetary policy in contributing to rapid
house price inflation. They will testify to the increase in risky
mortgage lending at the GSEs. Their testimony also will make clear that
we need a different direction.
To improve housing affordability for all Americans--whether renters
or owners--we should pursue reforms that leverage the power of free
enterprise to increase housing supply and make markets more
competitive. To that end, we need to scale back the role of Government
and increase the role of private capital.
We need to phase-out demand-side subsidies that just drive
increases in house prices and rents. We need to end the failed GSE
model that fosters excessive risk taking and risks taxpayer bailouts.
And we need to end the GSE conservatorships that confer on the
Government far-reaching power to replace market forces with executive
fiat.
The state of the housing market affirms the urgency of reform. The
housing market is cyclical. It's a question of when--not if--there will
be a housing downturn.
The housing finance system is not prepared. The system is still
dominated by the very same GSEs that did so much to cause the crisis.
The $7 trillion behemoths actually have an even larger market share
than they had before the crisis, and they still remain ``too big to
fail.''
Just as before the financial crisis, these flaws in the system
continue to encourage excessive risk taking, risk future taxpayer
bailouts, undermine market forces, and threaten financial stability.
They also do little to make housing more affordable. Fifty years and
many hundreds of billions of dollars in Federal housing assistance have
had no meaningful impact on home ownership rates--64 percent in 1970
compared to 65 percent in 2021.
Last month, the Chairman reiterated the housing finance reform
principles that he had released in 2019. His principles overlap
considerably with the reform principles I've released. I look forward
to continuing to work with the Chairman to develop consensus on this
critical issue.
Meanwhile, I hope the Administration will finally engage on reform.
Treasury has still not met its obligation to deliver a reform plan to
Congress--it's now 4 months overdue.
Instead of shifting blame for its reckless mismanagement of the
economy, the Administration should look to opportunities for bipartisan
legislation--like housing finance reform--that relies on free
enterprise--not Government--to make housing affordable for all
Americans, whether they own or rent.
______
PREPARED STATEMENT OF R. MICHAEL WALLER
Executive Director, Georgia Appleseed Center for Law and Justice
February 10, 2022
Good morning Chairman Brown, Ranking Member Toomey, and other
Members of the Committee. My name is Michael Waller, and I serve as
Executive Director of Georgia Appleseed Center for Law and Justice.
Georgia Appleseed is a nonpartisan, nonprofit law center that advances
justice and equity for all Georgia's children through law and policy
reform, community engagement, and legal representation of children in
foster care. We focus our efforts on removing barriers to justice
experienced by Black and Brown children, children experiencing poverty,
LGBTQ+ children, children with disabilities, and children in foster
care. Our three priority areas of work are (1) keeping kids in class
and out of the juvenile justice system by dismantling the school to
prison pipeline; (2) increasing children's access to needed behavioral
and academic supports; and (3) ensuring that low-income families have
stable, healthy housing. Georgia Appleseed believes justice requires
that every child has access to strong, nurturing schools and a healthy
home.
This morning, I will provide information on the impact of
institutional landlords on the lives of low-income Georgia families and
the housing market. Georgia Appleseed listens closely to the
communities we serve and our community partners. I've come to
Washington and this hearing today to amplify their voices and bring
their stories to you. I will also relate some of the research and
findings of Georgia universities and other institutions working to end
Georgia's low-income housing crisis.
I will begin by sharing the story of April, who lives in Albany,
GA, in an apartment complex owned by an out-of-State institutional
investor. April's struggles are the direct result of callous and
abusive business practices that are common to some institutional
landlords and place profit over the well-being of families. In this
testimony, I will use the terms institutional landlord and
institutional investor somewhat interchangeably--both meaning a
corporate owner that is usually out-of-State, often owns multiple
properties, is generally in the business of investing money (not
managing rental homes), and with little-to-no direct contact with the
communities where the properties are located and the families living in
those properties.
April's story highlights the harmful business practices of these
institutional landlords and the impact on children, families, and
communities. Georgia Appleseed and other community partners have
identified a common business model among institutional investors in
low-income housing--Institutional investors purchase properties;
quickly drive up rents; impose unwarranted fees; refuse to provide
upkeep or repairs; abuse eviction systems to coerce tenants; and hide
from accountability. These practices do long-lasting harm to families
and communities. Institutional investors concentrate these practices in
Black and Brown communities and low-income communities, perpetuating
historic and system injustices.
April is a single mom to a teenage daughter and the primary
caretaker for her mother, who has multiple sclerosis and needs a
wheelchair. April rents their home, like most Albany residents and
millions of other Georgians. When April signed her lease, every
indication suggested that the handicapped accessible apartment was
affordable, safe, and a healthy place to live. She was thrilled. Like
many tenants, April's interaction with property owners was through a
third-party management firm. An out-of-State company owned the
apartments, a common occurrence across Georgia. In recent years,
investors, like the LLC who owns April's complex, buy large swaths of
property, including single-family rental properties, often in low-
income neighborhoods. In a recent study by the Planning + Property Lab
at Georgia Tech, researchers found that by summer 2021, large corporate
investor purchases in Gwinnett and Dekalb Counties (two of Georgia's
most populous) covered 53 percent of single-family rentals, and 17
percent of single-family home sales. These purchases were concentrated
in non-White areas. \1\
---------------------------------------------------------------------------
\1\ Raymond, Elora, ``Large Corporate Investors Purchase Thousands
of Atlanta Single-Family Homes During the Pandemic''. ATLS, Emory
Center for Digital Scholarship, 1/28/2022, https://
www.atlantastudies.org/2022/01/28/large-corporate-investors-purchase-
thousands-ofatlanta-single-family-homes-during-the-pandemic/.
---------------------------------------------------------------------------
Soon after April moved in, serious health and safety problems
appeared. Sewage regularly came out of the bathroom drains as well as
from the ground outside, pooling in the yard. Bees came out of April's
HVAC vents, and mold grew on the walls. Shootings and criminal activity
occurred at the complex. One shooting left bullet holes in April's
windows.
Neither the property management firm nor owners made the needed
repairs after April requested them. April complained to the local
housing code enforcement office and local government. But these
agencies claimed that they were powerless to force the landlord to
address the housing conditions and make the property safe.
April also sought the support of SOWEGA Rising, a local nonprofit.
SOWEGA Rising and April spoke with around 50 residents, most of whom
reported similar problems with their rented homes, including a child
whose congenital heart condition was exacerbated by mold infestation
and others who suffered from acute respiratory conditions. April's
landlords continued to charge her rent and added hundreds of dollars in
late fees. Her daughter experienced mental health issues directly
related to the housing conditions and moved out of the apartment.
April eventually reached out to local media and began organizing
her neighbors to work together. She showed reporters the conditions in
her apartment and told them how it impacted her family. In response,
April's landlord mailed apartment residents a letter threatening
eviction if they persisted in publicizing the complex's treatment of
the families living there. The threat worked and residents ceased their
campaign for better housing conditions. April continues to reside in
her apartment but was recently served a notice that her landlord will
not be renewing her lease. As of this testimony, April and her family
have 30 days to vacate the property. In spite of the dangerous
conditions and mistreatment, April and her family have stayed in the
apartment. She feels that she has nowhere else to go. In Albany, there
are very few affordable rental homes that can accommodate her mother's
wheelchair.
My testimony about April and the information I provide below draws
upon Georgia Appleseed's conversations with tenants across Georgia and
information from our nonprofit organizations that advocate for low-
income families. In addition to SOWEGA Rising, Atlanta Legal Aid
Society, Georgia Legal Services Program, Atlanta Volunteer Lawyers
Foundation, GeorgiaACT, Africa's Children's Fund, and Hearts to Nourish
Hope, among others, have shared information and tenant stories with us.
April's experience is commonplace in Georgia and likely to become more
so as long as institutional investors continue to purchase rental
properties and emphasize short-term profit over family and community
well-being.
Here is what we have found.
Institutional landlords often seek profit through ever-increasing
rents and abusive or predatory fees. In Georgia, large corporate
investors are particularly known for instituting aggressive year-on-
year rent increases, making housing increasingly unaffordable for
families and reducing alternative housing options. A Lending Tree
survey found the average monthly cost of a one-bedroom apartment in
Georgia went up more than 20 percent in 2021. \2\
---------------------------------------------------------------------------
\2\ Cohen, Raime, ``The Cost of Rent Is Skyrocketing in Georgia,
Putting a Squeeze on Tenants''. 12/27/21. www.wmaz.com.
---------------------------------------------------------------------------
These investors also seek to make a profit by increasing tenant
fees, including up-front fees, recurring fees, and hidden fees.
Community partners reported to Georgia Appleseed that tenants must pay
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, and application fees,
and early termination fees triple the amount of a month's rent.
An Atlanta Legal Aid attorney reported an example of a typical fee-
for-profit scheme: my client's ``rent'' is $1,373, according to her
lease. But with all the fees (late charges, month-to-month fees,
eviction fees, amenities, utilities), she was being charged $2,157 per
month (almost 60 percent more!) after falling behind during the
pandemic.
Other Atlanta Legal Aid attorneys report seeing eviction fees
written into the lease that are often four times the cost to file an
eviction, and large daily accruing late fees in violation of Georgia
law.
Institutional landlords increase their profits and reduce costs by
refusing to perform needed repairs, basic maintenance, security, or
needed health and safety measures. Investment firms that own rental
properties can be almost completely unidentifiable to tenants and
community Governments. Out-of-State shell companies make it impossible
to hold owners accountable for repairs (or even the demolition of
abandoned properties). Renting families and communities must cover the
costs to individual health, wealth, and safety (asthma and other
respiratory problems, physical injuries, anxiety, depression, criminal
activity, etc.) as well as the negative community economic,
educational, and public safety impacts.
Tenants across Georgia report illness and injury from substandard
living conditions in homes owned by institutional landlords. For
example, Georgia Appleseed spoke with a mobile home tenant--about his
out-of-State landlord in Carroll County, Georgia. The landlord refused
to repair leaks in the home's roof. The leaks caused the floor to rot,
and the tenant's child fell through the floor, injuring her leg. Even
after the injury, the landlord did not make repairs. Instead, the
landlord moved to evict the family (after 7 years of renting) when the
child's father was laid off from work as the COVID-19 pandemic closed
his workplace. In a mobile home next door, the same landlord refused to
fix electrical problems. That tenant had to get his electricity via an
extension cord from a neighbor's mobile home. In Columbus, Georgia a
malfunctioning air conditioning system caused the death of a man when
temperatures in his room hit one hundred degrees. Local community
leaders spent years trying unsuccessfully to hold the owners (an out-
of-State corporate landlord with properties in several other States)
accountable. In Clayton County, a tenant reported to Africa's
Children's Fund that she was unable to cook food in her home because
the landlord refused to provide an operable stove. These are just a few
of the stories that Georgia's tenant advocates hear every day.
Renting families and communities confront numerous barriers to
holding institutional landlords accountable for housing conditions. One
of the most significant and confounding is that it is often practically
impossible to determine who owns the property. Corporate shells and
multiple layers of corporate ownership make it difficult for tenants to
speak to anyone with authority when there is a problem. Tenant
advocates and communities can find no person or entity to hold
responsible for violations of leases, laws, or ordinances.
A lack of continuity in ownership and transparency also make it
easy for landlords to avoid legal liability. In one case handled by
Atlanta Legal Aid Society, advocates spent 2 years trying to collect a
judgment against the landlord. Though the tenant could not collect the
judgment amount, the landlord continued to collect rent from hundreds
of tenants over the same 2-year period.
Atlanta Legal Aid lawyers and a pro bono attorney representing
multiple tenants challenging illegal and dangerous housing conditions
report a related, and equally confounding problem--corporate ownership
changes quickly and often.
Institutional landlords are well-positioned to abuse Georgia's
eviction and housing safety laws and ordinances. Georgia's housing laws
are notoriously landlord friendly. Evictions are inexpensive in
Georgia. The filing cost for an eviction is typically around 75
dollars.
Georgia's over-burdened eviction courts have court procedures and
practices that prioritize the efficient disposition of evictions
instead of preserving tenancies and homes. In eviction court on any
given day, a single landlord attorney may represent many different
landlords in hundreds of eviction cases, saving attorney fees. If a
tenant successfully files an answer to an eviction action and appears
in court at the appointed time (often having to take off work, find
childcare, arrange transportation, etc.), courts will generally grant
the landlord's attorney a new trial date to present evidence. In most
cases, however, tenants are unable to file correctly an answer to the
lawsuit and they lose their case automatically. Tenants are generally
on their own to litigate their cases and navigate complex landlord-
tenant law. There are relatively few attorneys available for low-income
tenants--they are not provided for tenants by communities or courts.
In terms of housing conditions and safety, the State's housing
safety laws provide spotty protection. Indeed, State laws preempt local
communities from enacting ordinances and programs that would create
registries of rental properties, require inspections, or investigate
housing conditions complaints without independent probable cause. \3\
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\3\ O.C.G.A. 36-74-30 (2010).
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While all landlords benefit from the pro-landlord orientation of
State laws, institutional landlords often abuse the eviction system and
safety laws to a greater degree than other landlords. A 2017 study
published by the Federal Reserve Bank of Atlanta found that corporate
landlords, especially large institutional investors, were far likelier
than other owners to evict their tenants. \4\
---------------------------------------------------------------------------
\4\ Raymond, Elora; Duckworth, Richard; Miller, Benjamin; Lucas,
Michael; Pokharel, Shiraj, ``Corporate Landlords, Institutional
Investors, and Displacement: Eviction Rates in Single Family Rentals''.
FRB Atlanta Community and Economic Development Discussion Paper, 2/22/
2018, Paper No. 2016-4.
---------------------------------------------------------------------------
Other research in Atlanta suggests that such landlords are also
more likely to use threats of eviction and serial court filings as a
routine business practice. \5\ In the final quarter of 2021, corporate
landlords filed 76 percent of all evictions in a five-county sample.
\6\ Landlords (and the property management firms they employ) favor
Georgia evictions because the process is so quick. Evictions can happen
very quickly, in 3 weeks when the tenant files an answer and a the
court holds a hearing. In an eviction proceeding where the tenant fails
to file an Answer within 7 days, the process moves at break-neck speed.
A default Order is granted, and a Writ of Possession is issued
immediately. Tenants and their families have little or no time to find
rent assistance or legal advice.
---------------------------------------------------------------------------
\5\ Immergluck, Dan; Ernsthausen, Jeff; Earl, Stephanie, and
Powell, Allison, ``Evictions, Large Owners, and Serial Filings:
Findings From Atlanta''. Housing Studies, 7/14/2019, pp. 923-924.
\6\ The five Counties studied were Fulton, Gwinnett, DeKalb,
Clayton, and Chatham. Chang, Melissa, ``Record Acquisitions and High
Evictions by Corporate Landlords in 2021 Draw Scrutiny From Congress''.
Private Equity Stakeholder Project, 1/31/2022. www.pestakeholder.org.
---------------------------------------------------------------------------
In terms of the enforcement of local housing safety codes, local
housing code enforcement offices lack capacity and are chronically
understaffed. Even when housing code enforcement officers have capacity
to pursue investigations, local custom and State law tend to favor
institutional landlords. In many areas, housing code enforcement
offices lack the resources to investigate alleged violations if a
tenant is behind on rent, or a landlord has filed an eviction.
Moreover, Georgia law preempts local communities from registering and
inspecting properties and prohibits inspections without probable cause.
\7\
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\7\ O.C.G.A. 36-74-30 (2010) (``[n]o local government is
authorized to perform investigations or inspections of residential
rental property unless there is probable cause . . . in no event may a
local government require the registration of residential rental
property.'')
---------------------------------------------------------------------------
Profit-mongering at the expense of family and community well-being
is not ``investment in affordable housing.'' Families and communities
are left to repair the damage done when these absentee landlords have
extracted as much money as possible from the families and communities.
The impact goes beyond just making families and communities poorer.
Unsafe, unstable housing has long-term and devastating impacts on the
physical and mental health of children and families, threaten
educational achievement and employment potential, increase criminal
justice system involvement, and reduce overall community wealth and
well-being.
Federal policy can support needed reforms that would protect
families from abuses. I applaud this Committee's study of the impact of
institutional landlords on affordable housing availability, their
predatory practices, and the unacceptable housing conditions they are
responsible for. While there are many reforms to Georgia law and policy
that would benefit renting families, we support Federal Government
fiscal and monetary policy reform that discourages abusive investors.
Moreover, local policy makers and advocates could make better
policy decisions if they had more information about institutional
landlords. Federal Government could help by collecting and sharing
information about these investors with the public, States, and local
government. In addition, local tenants and landlords have faced
tremendous financial pressures from economic havoc caused by the COVID-
19 pandemic, and continued support of Emergency Rental Assistance
Program (ERA) efforts in Georgia will help families stay in their homes
and provide local landlords with much needed funds. In particular, we
have found that State and local government need additional (and public)
guidance on best practices from the Department of Treasury,
particularly concerning the types of identification and documents and
attestations that governments should and should not collect from ERA
applicants.
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you again for the opportunity to share the experiences
of my fellow Georgians with you today. I look forward to answering any
questions you might have.
______
PREPARED STATEMENT OF ANETA MOLENDA
Tenant
February 10, 2022
Good morning Chairman and Members of the Committee. I appreciate
the opportunity to speak with you all today. My name is Aneta Molenda
and I'm a New York tenant in a building owned by private equity.
I've lived in Brooklyn, New York, for 6 years. I moved into my
current apartment last winter in the middle of the pandemic. I signed a
1-year lease for $2,550 per month. It was pricey for a small apartment
measuring just over 400 square feet, but not out of the ordinary for
Brooklyn.
In just a few months, my building was bought by a private equity
firm called Greenbrook Partners through a joint venture with the
Carlyle Group, the third largest private equity firm in the world with
$276 billion dollars in assets. Just last week, Carlyle announced that
real estate drove a large jump in their quarterly earnings and that the
earnings they will return to shareholders is at a record high. \1\
---------------------------------------------------------------------------
\1\ https://www.wsj.com/articles/carlyles-fourth-quarter-earnings-
jump-11643886001
---------------------------------------------------------------------------
When my lease expired in November, my new landlord told me they
needed to reevaluate my rent based on the market bouncing back. They
suggested nearly a 50 percent rent increase from what I had been
paying. That's right--that's a 50 percent increase which would put my
rent at about $3,800 per month. This was happening while Omicron was
surging. I was shocked.
I tried to negotiate. I sent them listings of other apartments in
my neighborhood, some even on my block, to show that the increase was
unreasonable for what was available in the area. Eventually, they were
willing to come down on the rent but when they sent me the lease
renewal there was a section that gave the landlord the right to
terminate my lease at any point and double my rent to more than five
thousand dollars with only 30 days notice. It was clear they wanted me
out.
I told them I was willing to sign the lease renewal with a more
reasonable rent increase if they removed the section that could double
my rent on such short notice. They refused. I've continued to pay my
rent on time, every month, but the landlord has stopped cashing my
checks. I suspect they are getting ready to start eviction proceedings
against me.
The eviction moratorium in New York ended last month. My sense of
security is gone. These private equity landlords count on people like
me to be thrown out of our homes to maximize their profits.
This is not an isolated incident. I immediately started talking to
my neighbors and tenants in other buildings owned by the same landlord
and noticed similar patterns: massive rent increases, evictions,
hazardous violations and harassment, and confusing ownership structures
that make it hard for tenants to know who truly owns our buildings.
According to the New York City Department of Housing, Preservation,
and Development (HPD), Greenbrook's portfolio has received 3,022 total
violations--this is about an average of 1.7 open violations per
residential unit. \2\
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\2\ https://whoownswhat.justfix.nyc/en/address/BROOKLYN/70/
PROSPECT%20PARK%20WEST/summary (February 8, 2022)
---------------------------------------------------------------------------
My neighborhood of Bedford-Stuyvesant is considered to have the
highest concentration of Black residents in the United States according
to census data. In New York City, eviction rates in zip codes in which
a majority of residents are people of color are three times as high as
rates in zip codes that are predominately White. I'm not surprised that
these predatory firms are targeting predominantly Black and Brown
neighborhoods. Many of these companies go to pensions for capital to
expand their portfolios--in some cases pricing out union members and
the retirees they are acting on behalf of.
Greenbrook Partners and the Carlyle Group are just two of the many
predatory real estate firms that are fundamentally changing housing
across the country. These companies treat housing as an investment
vehicle rather than as shelter. But this is my home--and it serves the
purpose of keeping me safe, warm, and out of the elements. This is a
basic human right.
In listening to the previous hearing on private equity in housing
held by this Committee, I was struck that some senators argue that
these hearings are misguided because large investment firms, including
those in private equity, buy just 1 to 2 percent of single family homes
sold nationally. But what about private equity's role in multifamily
buildings like mine? They want us to believe that private equity is a
tiny player in housing.
It's just not true. According to the Financial Times, private
equity has just had its busiest 6 months in the last 40 years, and the
industry shows no signs of stopping its expansion into our homes. In
just 2 years, my landlord Greenbrook Partners purchased at least 110
properties in Brooklyn. The vast majority were purchased during COVID-
19.
They've done this before. In a 2019 report on private equity
companies, we learned of a similar business model used on mobile homes:
buying parks, jacking up rents and fees, and counting on it being too
expensive for residents to move.
They are perfecting this extractive business model and are taking
it to new extremes. These firms promise their investors returns while
obscuring the devastating consequences, leaving tenants like me and my
neighbors in impossible situations. They buy up homes in New York and
all across the country that would have otherwise been affordable.
As our communities faced the trauma and grief from losing loved
ones, losing jobs, and following guidelines to stay home to mitigate
the spread of the virus, these predatory firms made it impossible to
feel any sense of safety in our homes. We saw our communities come
together to support each other; health care workers working around the
clock, people bringing their neighbors groceries. We looked out for one
another. Meanwhile, Wall Street took the opportunity to rake in
unfathomable profits.
This tangled web of high finance is incredibly difficult to
navigate for tenants like myself. This ruthless business model is
entirely reliant on disaster capitalism and systematic displacement of
families. Our basic human right to housing is being exploited to make
these firms slightly wealthier.
As a tenant directly impacted by these predatory practices, I am
asking that you consider establishing comprehensive, nationwide tenant
protections like rent control, prohibition on excessive fines and fees,
just cause eviction protections, and a tenant right to counsel. This
would end unreasonable rent increases, unfair fees, and landlord
refusal to renew leases without a reasonable justification. We need to
give tenants a fair shot at defending ourselves against evictions and
unsafe living conditions.
The housing market is rapidly consolidating. As the largest
landlords, builders, and investors increasingly partner with one
another, people like myself and my neighbors all across the U.S. will
continue to feel the consequences. But I can promise we will continue
to grow a strong tenants movement to demand a more just housing system.
The Members of this Committee have a choice to make: you can either
support housing as a human right or allow investors to use our homes as
investment vehicles to generate endless profits.
______
PREPARED STATEMENT OF TOBIAS PETER
Research Fellow and Assistant Director, AEI Housing Center
February 10, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
PREPARED STATEMENT OF JOEL GRIFFITH
Research Fellow, Institute for Economic Freedom and Opportunity,
Heritage Foundation
February 10, 2022
Chair Brown, Ranking Member Toomey, Members of the Senate Committee
on Banking, Housing, and Urban Affairs.
My name is Joel Griffith. I am a Research Fellow in Financial
Regulations at The Heritage Foundation. The views I express in this
testimony are my own and should not be construed as representing any
official position of The Heritage Foundation.
What Is Happening With Housing Prices?
Echoing the last housing bubble, Government policies are once again
artificially driving up housing prices. Spanning the pandemic era from
February 2020 through September 2021, home prices soared 27.1 percent.
\1\ Over the past 12 months, home prices are up 19.5 percent, dwarfing
the prior 12 months jump of 7.1 percent, while residential property
prices in the United States adjusted for inflation are now just 2.2
percent below the all-time record levels of the 2006 bubble. \2\ Home
prices are increasing far greater than family income growth is. The
home-price-to-median-income ratio now stands at more than 7.2
(eclipsing the 7.03 peak in late 2005), significantly higher than the
levels of well under 5.0 experienced from 1980 to 2000. \3\
---------------------------------------------------------------------------
\1\ Federal Reserve Bank of St. Louis, ``S&P Dow Jones Indices
LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPINSA]'',
https://fred.stlouisfed.org/series/CSUSHPINSA (accessed December 13,
2021). The Case-Shiller Home Price Index tracks home prices given a
constant level of quality. See S&P Dow Jones Indices, ``Real Estate:
S&P CoreLogic Case-Shiller Home Price Indices'', https://
us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller
(accessed January 10, 2022).
\2\ Federal Reserve Bank of St. Louis, ``Real Residential Property
Prices for United States Data (QUSR628BIS)'', https://
fred.stlouisfed.org (accessed December 14, 2021).
\3\ Longtermtrends, ``Home Price to Income Ratio (U.S. and
U.K.)'', Home Price to Median Household Income Ratio (U.S.) Data, 1980
to 2005, https://www.longtermtrends.net/home-price-median-annual-
income-ratio/ (accessed December 14, 2021).
---------------------------------------------------------------------------
Home Mortgages. The decline in long-term interest rates has induced
and enabled borrowers to take out bigger loans, feeding the rise in
prices. \4\ The impact of the surge in home prices is now eclipsing the
cost savings of lower interest rates. The mortgage-payment-to-income
ratio hit 32.7 percent in September 2021--the highest level since 2008.
\5\ A return to 6.6 percent 30-year fixed mortgage rates (still below
the historical average) from current rates of near 3.0 percent would
increase a mortgage payment for a new borrower by 50 percent even with
no increase in home prices. \6\
---------------------------------------------------------------------------
\4\ Interest rates for 30-year fixed mortgages fell from 3.5
percent prepandemic to just 2.65 percent at the beginning of 2021 and
now hover near 3.0 percent. Freddie Mac, ``30-Year Fixed Rate Mortgage
Average in the United States [MORTGAGE30US]'', retrieved from Federal
Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/
MORTGAGE30US (accessed December 15, 2021).
\5\ Federal Reserve Bank of Atlanta, ``Metro Area Home Ownership
Affordability Monitor Index'', September 2021, https://
www.atlantafed.org/center-for-housing-and-policy/data-and-tools/home-
ownership-affordability-monitor.aspx (accessed December 13, 2021).
\6\ Author calculations using Bankrate, ``Amortization Schedule
Calculator'', https://www.bankrate.com/calculators/mortgages/
amortization-calculator.aspx (accessed December 10, 2021).
---------------------------------------------------------------------------
Rental Prices. Median apartment rental costs have jumped more than
15 percent this past year. \7\ Because leases often roll over annually,
the Consumer Price Index (CPI) data from the Bureau of Labor Statistics
(BLS) does not yet fully reflect this surge. Numerous cities
experienced rent increases well in excess of 30 percent. For the past
20 years, rental prices have increased at a greater pace than inflation
has. Nationally, rental prices increased 38 percent in just the past
decade. \8\ Some urban areas have experienced far steeper jumps in
rent. For instance, rental prices in the Seattle metro area jumped 58
percent over the past decade. \9\ And rents in the largely rent-
controlled San Francisco metro area soared 51 percent--both nearly
triple the overall rate of inflation. \10\
---------------------------------------------------------------------------
\7\ Chris Salviati, et al., ``December Apartment List National
Rent Report'', Apartment List, November 29, 2021, https://
www.apartmentlist.com/research/national-rent-data (accessed December
14, 2021).
\8\ Federal Reserve Bank of St. Louis, ``Consumer Price Index for
All Urban Consumers: Rent of Primary Residence in U.S. City Average
Data (CUSR0000SEHA)'', https://fred.stlouisfed.org/series/CUSR0000SEHA
(accessed December 13, 2021).
\9\ Federal Reserve Bank of St. Louis, ``Consumer Price Index for
All Urban Consumers: Rent of Primary Residence in San Francisco-
Oakland-Hayward, CA (CBSA) Data (CUURA422SEHA)'', https://
fred.stlouisfed.org/series/CUURA422SEHA (accessed December 13, 2021).
\10\ Ibid.
---------------------------------------------------------------------------
Why Are Housing Prices Rising Faster Than Usual?
The Scapegoat: Institutional Single Family Residence (SFR) Investors
``Institutional owners'' of rental properties are being scapegoated
for the rise in home prices and rental costs. But institutional
investors own fewer than 2 in 1,000 (0.2 percent) of all single-family
homes (SFR) and just 1 percent of all rental homes. \11\ In fact, not
in single State do institutional investors own more than 1 in 100 of
all available housing in the State. Despite the intense media focus,
institutional investors purchased only 1 in 1,000 (0.1 percent) of
homes sold in the United States in 2020--a smaller share than in 2006
just prior to the prior housing market peak. \12\
---------------------------------------------------------------------------
\11\ National Rental Home Council, Institutional Owners of Single-
Family Rental Homes.
\12\ National Rental Home Council, Institutional Owners of Single-
Family Rental Homes.
---------------------------------------------------------------------------
In fact, of the 10 States with no institutional SFR ownership, 7
rank in the top 10 of recent home price appreciation--with Idaho in the
lead at 24 percent. \13\
---------------------------------------------------------------------------
\13\ National Rental Home Council, Institutional Owners of Single-
Family Rental Homes.
---------------------------------------------------------------------------
The bottom line is that institutional SFR ownership is not
measurably impacting local home price dynamics to the upside. In fact,
the opposite may be occurring. RealtyTrac reports, ``On a national
basis, investors across the country paid an average 29.4 percent less
than homeowners in Q2 2021.'' \14\
---------------------------------------------------------------------------
\14\ RealtyTrac Investor Purchase Report, Fall 2021. https://
www.realtytrac.com/blog/realtytrac-investor-purchase-report-fall-2021.
---------------------------------------------------------------------------
The Reality: Primary Drivers of Rising Prices Nationally Are Government
Subsidies, the Federal Reserve, and Local Regulations
Government-sponsored enterprises (GSEs)--namely, Fannie Mae and
Freddie Mac--continue to dominate the mortgage market. Investors who
purchased Fannie Mae and Freddie Mac bonds and mortgage-backed
securities (MBSs) ultimately provide funds for people to finance homes,
and these bondholders and MBS investors enjoy implicit Government
backing. Investors in MBSs receive cash flows from interest and
principal payments on the pool of mortgages comprising the MBSs. With
the GSEs under continued conservatorship, it is common knowledge that
taxpayers will make good on promised cash flows if either Fannie or
Freddie were to ever fail again financially. The moral hazard created
by Government backing leads to riskier lending, because it allows
investors to ignore the true financial risks of those underlying
mortgages and securities. \15\
---------------------------------------------------------------------------
\15\ ``The unpriced implicit guarantee, which reduced interest
rates for mortgage borrowers, helped cause more of the economy's
capital to be invested in housing than might otherwise have been the
case.'' Congressional Budget Office, Transitioning to Alternative
Structures for Housing Finance: An Update, August 2018, p. 7, https://
www.cbo.gov/system/files?file=2018-08/54218-GSEupdate.pdf (accessed
January 6, 2022).
---------------------------------------------------------------------------
The Federal Reserve Continues To Purchase MBSs
Since March 2020, the Federal Reserve has driven down mortgage
interest rates and fueled a rise in housing costs by purchasing $1.2
trillion of MBSs from Fannie Mae, Freddie Mac, and Ginnie Mae. The $2.6
trillion now owned by the Federal Reserve is 88 percent higher than the
levels of March 2020. \16\
---------------------------------------------------------------------------
\16\ Board of Governors of the Federal Reserve System (U.S.),
``Assets: Securities Held Outright: Mortgage-Backed Securities:
Wednesday Level [WSHOMCB]'', retrieved from Federal Reserve Bank of St.
Louis, https://fred.stlouisfed.org/series/WSHOMCB, December 14, 2021.
---------------------------------------------------------------------------
Proponents of such intervention often argue that it is necessary to
increase the rate of home ownership. However, robust home ownership was
established in the United States long before the Government became
heavily involved in the housing market. From 1949 to 1968 (the year
that Fannie Mae was allowed to purchase nongovernment-insured
mortgages), Government-backed mortgages never accounted for more than 6
percent of the market in any given year. \17\ Yet the home ownership
rate was 64 percent in 1968, virtually identical to what it is now.
---------------------------------------------------------------------------
\17\ Norbert J. Michel and John Ligon, ``GSE Reform: The Economic
Effects of Eliminating a Government Guarantee in Housing Finance'',
Heritage Foundation Backgrounder No. 2877, February 7, 2014, p. 6,
https://www.heritage.org/housing/report/gse-reform-the-economic-
effects-eliminating-government-guarantee-housing-finance.
---------------------------------------------------------------------------
On the local level, stringent zoning restrictions, density
limitations, and aggressive environmental regulation limit the supply
of housing while increasing the costs of construction. Regulations
often account for more than 30 percent of the costs of rental housing
construction. \18\ Rent control further compounds the problem by
deterring new construction, giving landlords fewer incentives to spend
on upkeep and remodeling, and reducing the future supply of housing.
---------------------------------------------------------------------------
\18\ Paul Emrath and Caitlan Walter, ``Regulation: Over 30 Percent
of the Cost of a Multifamily Development'', National Association of
Home Builders and National Multifamily Housing Council, June 2018,
https://www.nmhc.org/contentassets/60365effa073432a8a168619e0f30895/
nmhc-nahb-cost-of-regulations.pdf (accessed December 15, 2021).
---------------------------------------------------------------------------
Congressional inaction has expanded the Government's role in the
wake of the prior financial crisis. Government subsidies have increased
borrowing and demand for housing without increasing supply, leading
once again to higher home prices and increased taxpayer risk. Subsidies
and Government guarantees of MBSs will perpetuate inflated prices,
deprive other sectors of needed financial resources, and place the
burden of catastrophic risk on the Federal taxpayer. It is difficult to
argue that these policies improve the status quo for anyone other than
the lenders, securitizers, and MBS investors who will gain additional
Federal protections. Optimally, Congress would gradually remove Federal
mortgage guarantees and subsidies and narrow the scope of business for
the GSEs.
Policy Recommendations To Address Housing Prices
Policymakers should:
Sever the special status given to the GSEs.
This approach would communicate to the market that this implicit
guarantee is terminated and allow MBS prices to more fully reflect the
risk involved. Continuation of these guarantees leads to excessive
risky debt. Private investors, not Federal taxpayers, should bear the
financial risks.
Raise Fannie Mae and Freddie Mac mortgage guarantee fees
immediately while the GSEs remain in conservatorship.
This fee is paid by the lender seeking the Federal guarantee,
although it is effectively passed along to the borrower in the form of
a higher interest rate. Raising the fees on defaults would make the
rates available on nongovernment-guaranteed mortgage loans more
competitive, scaling back the role of the GSEs. Some potential
borrowers may choose to forgo home ownership for the time being,
alleviating some of the artificially induced housing demand.
Eliminate the geographic price differentials for conforming
loan limits for loans purchased by the GSEs.
Limits in high-cost areas are up to 50 percent higher than the
baseline. In 2022, the baseline conforming loan limit will jump a
record 18 percent from $548,250 for a single-family residence to
$647,200. In high-cost areas, the maximum will rise from $822,375 to
$970,800. \19\ The GSEs should also gradually reduce the baseline
conforming loan limits.
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\19\ Federal Housing Finance Authority, ``Fannie Mae and Freddie
Mac Conforming Loan Limits for Mortgages Acquired in Calendar Year 2022
and Originated After 10/1/2011 or Before 7/1/2007'', November 2021,
https://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-
Limits/FullCountyLoanLimitList2022-HERA-BASED-FINAL-FLAT.pdf (accessed
December 15, 2021).
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Narrow the GSEs' focus to financing primary home purchases.
Approximately 90 percent of GSE volume is currently devoted to
refinances, investor purchases, lower loan-to-value loans, and pricier
homes purchased by higher-income earners. This support should be
eliminated. In particular, subsidizing cash-out refinances \20\ impedes
middle-class families from accumulating net worth.
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\20\ To learn more about cash-out refinancing, see, for example,
Zach Wichter, ``Cash-Out Mortgage Refinancing: How It Works and When
It's the Right Option'', Bankrate, November 11, 2021, https://
www.bankrate.com/mortgages/cash-out-refinancing/ (accessed January 6,
2022).
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Reject eviction moratoria.
Initially, the decrease in cash flow from an eviction moratorium
affects the landlord only. However, landlords will increase rents to
mitigate the heightened risk of future moratoria and to recoup revenue
already lost. Prospective renters may find themselves subject to
increased security deposits and tighter credit checks. Ultimately,
fewer affordable housing units may be constructed.
Consider the impact of local regulations on housing
affordability.
By reforming land-use laws--in effect, increasing supply--rental
prices could plateau or even decline. Likewise, repealing rent control
would incentivize construction of additional housing units.
Discontinue State and local rent control.
Rental costs reflect the supply limitations and costs imposed by
stringent zoning restrictions, density limitations, and aggressive
environmental regulation. Capping rent increases does nothing to make
housing less costly to build. But it will have the perverse effect of
shrinking future supply by deterring new construction and incentivizing
landlords to spend less money on upkeep and remodeling.
With rents capped, demand likely will increase further, but with
supply unable to keep up with demand, housing shortages will likely
continue.
Criticism of rent control as bad economics is hardly limited to
landlords or to free-market conservatives. As far back as 1965, Gunnar
Myrdal, one of the visionaries behind Sweden's welfare State, warned,
``Rent control has in certain Western countries constituted, maybe, the
worst example of poor planning by Governments lacking courage and
vision.''
Economics professor Assar Lindbeck, Myrdal's fellow Swede,
cautioned in 1972, ``In many cases rent control appears to be the most
efficient technique presently known to destroy a city--except for
bombing.''
In 1989, communists running Vietnam linked the abject condition of
Hanoi's housing directly to rent control. Then-Foreign Minister Nguyen
Co Thach said, ``The Americans couldn't destroy Hanoi, but we have
destroyed our city by very low rents. We realized it was stupid and
that we must change policy.''
Rent control may score cheap political points, rent control and
handcuffing property managers does nothing to solve the affordable
housing problem. Adding new controls will only force renters to live in
more dilapidated conditions and preclude additional units from being
built.
Refrain from offering conforming loan amortization options
beyond the traditional 30-year repayment term.
Fannie Mae and Freddie Mac extending the maximum amortization to
480 months from the current 360 months will encourage riskier lending
and incentivize borrowers to overleverage their finances. Although the
monthly payment may be lower, the borrower accrues substantially higher
total interest payments. These extended amortization schedules result
in upward price pressure as borrowers become more willing, and more
able, to borrow more money.
Terminate the Federal Reserve's monthly purchases of MBSs
and begin diminishing the size of its MBS portfolio.
Artificially increasing the amount of capital available for the
residential home mortgage market and distorting interest rates is
exacerbating home unaffordability.
Conclusion
Optimally, Congress will work to make housing more affordable by
gradually removing Federal guarantees and subsidies and eliminating
Federal mandates. The economy will further benefit as the artificially
large flow of capital to the housing market is allocated to other
sectors. State and local governments share a responsibility to
eliminate artificial barriers to housing affordability.
______
PREPARED STATEMENT OF SALLY MARTIN
Director of Building and Housing, City of Cleveland, Ohio
February 10, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM R. MICHAEL WALLER
Q.1. How do local zoning rules and ``not in my backyard''
attitudes exacerbate the affordable housing crisis,
particularly in urban settings?
A.1. Local zoning rules and ``NIMBY'' attitudes can decrease
access to stable, healthy housing by restricting needed
development in markets where there is an affordable housing
shortage. Local zoning and ``NIMBYism'' that decreases
affordable housing options disproportionately affect children
and low-income families. The lack of affordable options causes
some poor families to remain in sub-standard unstable housing
conditions. One tenant told Appleseed that she had to stay in
an apartment with an unaddressed rodent infestation because she
did not earn enough money to move to another apartment complex
in her community. Lack of affordable options lead other
families into living ``doubled up'' with family members,
residing in extended stay motels, seeking refuge in homeless
shelters, and even the living on the streets.
The effects of unsafe housing are far reaching. Poor
housing conditions can cause serious physical health problems
including increased rates of asthma and skin conditions like
eczema. Children living in substandard conditions are more
likely to experience hunger, deteriorated emotional health, and
chronic absenteeism from school.
Homelessness and housing instability also lead to high
student mobility (moving in and out of schools). For a child,
high school mobility can lead to lower school engagement, poor
grades, and an increased risk of dropping out of school.
Student mobility affects teachers and the other students in the
class as well, because of disruptions in the classroom
environment.
Q.2. What tax or financing advantages do institutional
investors receive that give them incentives to buy property,
but then fail to properly maintain or invest in the properties?
A.2. Georgia Appleseed has not extensively researched these
incentives and we are not able to respond to this inquiry.
Q.3. Tenants living in buildings owned by institutional
landlords seem to be evicted at high rates. What factors point
to those evictions being the result of strategic business
decisions made by institutional landlords, rather than mere
coincidence?
A.3. Research conducted by our community partners (bolstered by
my experience representing clients in eviction proceedings)
demonstrate that institutional landlords pursue evictions as a
strategy to coerce tenants into paying disputed or unfair fees,
charges, and rent and withdrawing complaints about living
conditions. A December 2017 Federal Reserve Bank of Atlanta
discussion paper found that corporate landlords, especially
large institutional investors, were far likelier than other
owners to evict their tenants. In the final quarter of 2021,
corporate landlords filed 76 percent of all evictions in a
five-county sample.
Georgia's eviction system has structural qualities that
make it particularly useful for unscrupulous landlords to
intimidate tenants. Evictions in Georgia are cheap to file,
expedited in practice, and benefit all landlords, but
particularly the institutional landlord. Attorneys that
represent an institutional landlord in eviction proceedings can
easily schedule dozens of hearings in one day. Continuances to
benefit the landlord are generously granted by eviction courts
forcing tenants to return on multiple occasions, possibly
missing work and/or having to arrange for childcare. As a
practical matter, there is no appeal for low-income tenants and
legal services lack capacity to serve tenants in eviction
proceedings.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM ANETA MOLENDA
Q.1. Tenants living in buildings owned by institutional
landlords seem to be evicted at high rates. What factors point
to those evictions being the result of strategic business
decisions made by institutional landlords, rather than mere
coincidence?
A.1. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM SALLY MARTIN
Q.1. What tax or financing advantages do institutional
investors receive that give them incentives to buy property,
but then fail to properly maintain or invest in the properties?
A.1. Response not received in time for publication.
Q.2. Tenants living in buildings owned by institutional
landlords seem to be evicted at high rates. What factors point
to those evictions being the result of strategic business
decisions made by institutional landlords, rather than mere
coincidence?
A.2. Response not received in time for publication.
Additional Material Supplied for the Record
LETTER SUBMITTED BY WESLEY EDMO, MSW, INDIGENOUS PEOPLES ADVOCACY
DIRECTOR, MHACTION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY PRIVATE EQUITY STAKEHOLDER PROJECT
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY CINDY NEWMAN, THE HIGHWOOD'S
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]