They’re Still Redlining

Wall Street has developed new forms of housing discrimination to profit off communities of color.

Eight years after the housing bubble burst, the wreckage of the mortgage crisis continues to pile up, with at least five million homes lost to foreclosure to date. The toll has been greatest among blacks, who were twice as likely as their white counterparts to lose their homes.

Foreclosure-effected displacement among communities of color has been so pronounced that some have argued it’s potentially greater in scope than the postwar Great Migration.

The same actors who bear responsibility for the financial crash have been upbeat about its aftermath: in 2011, analysts at Morgan Stanley blithely proclaimed that the US was in the midst of a transformation from an “ownership society” to a “rentership society,” a prediction that proved prescient, in part thanks to Wall Street’s own efforts.

Over the last two years, investors have purchased more than 200,000 homes — most of which were foreclosed — with plans to convert them into rental properties. A new single-family home rental empire, controlled primarily by major investment groups such as the Blackstone Group, is poised to take advantage of growing rental demand in the wake of the foreclosure crisis.

In addition to understandable alarm, Wall Street firms’ new role as landlords has inspired a good deal of nostalgia for the days when the rental market was overseen by supposedly beneficent mom-and-pop outfits. But Wall Street’s new rental empire is less a game-changer than an intensification of longstanding patterns of exploitation in the housing market.

Just as not all communities suffered the same level of devastation as the result of foreclosures, not everyone is equally likely to be swept into this new “rentership society.” Thus far, it appears people of color make up the majority of those at the mercy of the new Wall Street landlords.

A survey by the Right to the City Alliance suggests that in California, those renting from Invitation Homes — a subsidiary of the Blackstone Group, and the largest owner of single-family homes in the US — are overwhelmingly people of color. In Los Angeles, that number is a staggering 96 percent. In addition, my reporting from Chicago indicates that many have already gone through foreclosure, and thus have few alternative housing options.

Consequently, the single-family home rental market is best understood not as a brand new development but as the latest manifestation of a longstanding feature of urban life: a dual housing market that locks people of color out of the most secure means of accessing housing, thereby pushing them into substandard options often offered at a significantly higher cost.

In short, Wall Street has found a way to wring additional profit out of the misery of the housing crash. After foreclosing on millions of homes, investors and the banks that back them have been able to purchase properties at bargain-basement prices, then graciously offer to rent them back (in some cases, literally, to their former owners).

The distinctly racialized aspect of this scheme recalls enduring forms of housing discrimination. Call it redlining, redux.

Housing discrimination occupies an ignominious role in US history: it’s one of the key mechanisms through which wealth has been stolen from blacks and other people of color.

Some officials responsible for regulating the housing market acknowledge that such discrimination still exists, but they typically portray it as the work of a few bad apples. Last month, for example, New York Attorney General Eric Schneiderman announced that his office was filing a lawsuit against the parent companies of Evans Bank for allegedly engaging in redlining, the practice of denying mortgage loans to borrowers in neighborhoods of color.

The suit against Evans Bank charges that it excluded residents of majority-black neighborhoods in East Buffalo, New York from access to mortgage products, regardless of residents’ creditworthiness. Schneiderman has opened a wider investigation into potential redlining by banks operating in New York state, and warned that he might file further lawsuits in order to ensure that all residents have an “equal opportunity to obtain credit,” regardless of their skin color.

But there’s more to the story than a few discriminatory banks.

Prior to 2008, some of the same banks Schneiderman’s office is reportedly investigating flooded now credit-scarce areas with high-interest or subprime loans. During the subprime lending boom, such predatory loans were five times more likely to be made in African-American neighborhoods than in white ones.

This practice, sometimes called “reverse redlining,” was merely the next stage in a cycle of exploitation enabled by a dual housing market. Communities of color, having historically been denied access to credit, were next aggressively targeted for subprime loans. As a result, black communities and other communities of color are also now disproportionately impacted by foreclosures — which, due to persistent segregation, remain concentrated in minority neighborhoods. Among US zip codes where at least 43 percent of homeowners are still underwater, two-thirds of these areas are majority black or Latino.

As a credit crunch took hold and lenders grew less likely to grant new mortgage loans or refinancing to residents of neighborhoods with high foreclosure rates, borrowers from minority neighborhoods were denied at much higher rates. Bank of America, for instance, has reportedly denied loans from neighborhoods of color in Los Angeles at four times the rate that it denies loans from white neighborhoods.

In other words, the re-emergence of redlining in communities of color is as much a predictable outgrowth of a cycle of legal exploitation as it is a matter of illegal discrimination.

The term “redlining” dates back to the 1930s, when the Federal Housing Administration, as part of a massive project to increase homeownership by underwriting private mortgage loans, distributed “residential security maps” to help determine where mortgages could and could not be issued. Neighborhoods considered too “risky” to make loans — those inhabited by black and Latinos, even if small in number — were inked out in red, effectively disqualifying residents from receiving mortgage loans, regardless of their creditworthiness as individuals.

In his exceptional Atlantic essay “The Case for Reparations,” Ta-Nehisi Coates documents how the legacy of redlining has profoundly shaped today’s urban neighborhoods. Describing how the development of the modern suburb proceeded in tandem with urban policies that shored up segregation, Coates relays the story of Daisy and Bill Myers, the first black family to move into the archetypal planned communities of Levittown, Pennsylvania.

The Myers were received with protests and a burning cross; one white neighbor said that Bill Myers was “probably a nice guy, but every time I look at him I see $2,000 drop off the value of my house.”

This concern for falling property values, a near-ubiquitous refrain from those opposing neighborhood integration, was in one sense the euphemism of choice for white homeowners who demurred from more explicit, violent racism. In another, however, it was economic reality — since at least the 1920s, the burgeoning appraisal industry had explicitly opposed integration, going so far as to say that this development would cause “the decline of both the human race and of property values.”

The valuation of property became intertwined, in essence, with the presence or absence of minorities in a given neighborhood. Those who merely rented black tenants homes in white neighborhoods, as Coates recounts, could be charged with “conspiring to lower property values” — surely a uniquely American crime.

It’s the image of people of color being, quite literally, written out of the American Dream that has shaped today’s popular understanding of housing discrimination. But redlining has never been the only urban policy that’s reinforced segregation to drive up property values in lily-white neighborhoods. Slum clearance and “urban renewal” schemes, accompanied by the construction of massive public-housing projects in poor, black neighborhoods, were deployed to the same end.

Prior to the exclusion of African Americans from federally backed mortgage credit, the rental market in major cities exhibited similar dynamics. In the 1930s, thanks to the limited supply of apartments in neighborhoods available to African Americans, a black public-aid recipient in Chicago paid two to three times more in rent than a white public-aid recipient.

Redlining, restrictive covenants and the threat or actuality of white violence have all been means of upholding pervasive segregation. But it’s segregation itself that has enabled a series of schemes to extract profit from urban communities of color. The dual housing market doesn’t just prevent racial minorities from securing quality housing. It also exploits and profits off those locked into the market’s lower tier.

The exclusion from “prime” credit, while harmful in itself, also forces communities of color to secure housing by other means. And it’s those means — from sub-divided slum apartments to subprime loans to substandard rental housing owned by absentee investors-turned-landlords — that have long been a major source of profit for all manner of rentier capitalists.

This history is crucial to making sense of what’s now unfolding in the so-called housing recovery.

Over the past two years, Wall Street’s frenzied purchases of cheap, foreclosed homes have helped drive housing prices upward again, accounting for much of this ostensible rebound. After scooping up homes at fire-sale prices in hard-hit residential neighborhoods, investors are now opening up properties in these formerly homeowner-dense neighborhoods to tenants desperate to find affordable housing.

In cities such as Chicago and Atlanta, where home prices fell sharply and investors bought heavily, there’s evidence that the domination of the home-buying market by large investors able to pay cash is squeezing out would-be owner-occupants. Meanwhile, investors’ overwhelming presence in the rental market is also helping to increase prices at a time when there’s already a crisis of rental affordability.

It appears Wall Street’s rental empire is reinforcing the dual housing market in at least two ways: first, the growth of investor-owned housing, enabled by the foreclosure crisis, is likely further depressing homeownership among people of color. While mass private homeownership is hardly the best system, those priced out of it still typically pay more in rent each month than they would in mortgage payments.

Second, a growing body of reporting and tenant complaints suggests that the investor-owned housing people of color are turning to tends to be substandard. Surveys of Invitation Homes tenants in Atlanta and California revealed a bevy of complaints about maintenance, including unresolved plumbing and electrical problems when tenants moved in.

A Los Angeles couple is suing Invitation Homes, alleging that mold and flooding in their new rental home caused damage to their health and belongings, and that the company demanded they continue to pay rent even after they were forced to move out. A disabled Invitation Homes tenant in Atlanta, meanwhile, says she faces eviction after Invitation Homes began refusing to accept her rent unless she paid a $425 fee for “property destruction,” which resulted after a plumber working for the company had come to fix a backed-up sink.

Such stories have clear historical antecedents. During the height of the Great Migration, the apartments typically available to blacks were packed beyond capacity, subdivided illegally, or otherwise altered to profit off of overcrowding.

Cut out of federally backed mortgage credit, blacks seeking to escape manufactured slums had no option but to turn to “contract-buying” — a process in which white middlemen would buy homes in integrating neighborhoods, then turn around and sell them to credit-starved African Americans at a significantly higher rate. Contract-selling represented a new height of housing exploitation, sapping as much as $1 million of wealth from Chicago’s African Americans each day, according to opponents of the practice.

It was all achieved through means that were legal but highly duplicitous: the contract seller would retain the deed to the home until the buyer paid it off — something that almost never occurred, thanks to sky-high monthly payments, as well as hidden fees and insurance in the unregulated industry. Most often, the seller would end up repossessing the home after the buyer missed a single monthly payment, and then begin the process again with a new family.

The contract buyer, meanwhile, forfeited her entire down payment and the sum of her monthly installments. Though the buyers never really owned their homes, they had all the responsibilities of homeownership, and would also lose any money they had spent on repairs and maintenance to the home.

As it turns out, the past isn’t dead — it isn’t even past. Earlier this year, two colleagues and I reported that Invitation Homes, the Blackstone Group subsidiary that’s now the largest owner of single-family homes nationwide, may be giving tenants leases that break local housing laws in order to maximize profits.

A lease we obtained from a Chicago tenant contained several provisions that housing attorneys say look to be illegal — among other things, it attempts to hold tenants responsible for maintenance by stipulating that they must rent the property “as is,” and take responsibility for a number of repairs.

One tenant who was angry at unaddressed maintenance problems in his home on Chicago’s West Side voiced a complaint that evokes Coates’ description of contract-buying: an arrangement that “combined all the responsibilities of homeownership with all the disadvantages of renting.”

“It doesn’t make sense that I would be responsible for someone else’s home,” Antonio Hernandez told me in February as he was struggling to get Invitation Homes to repair a faulty basement railing that he said had caused his mother-in-law to fall and hit her head. “Everything I do to take care of it adds value for them, not for me.”

Other Invitation Homes tenants have complained that they didn’t realize, upon signing their lease, that they would be responsible for the water bill or other maintenance costs.

Perhaps the most troubling element of dual-market deja vu is the way that financialization has been employed in both the contract-selling and the single-family home rental industries to double down on the exploitation of people of color.

In Family Properties,historian Beryl Satter describes the development of a whole secondary industry that invested in contract-selling by purchasing contract papers — in essence, an earlier form of asset-backed securitization. Those few contract-buyers who were able to regularly pay on time often found that just when they saw a light at the end of the tunnel, investors who owned their contract papers would appear and claim that the terms of their agreement were now invalid. They would then be forced to begin paying at an even higher rate.

Likewise, as I reported recently, Wall Street landlords have begun marketing “rent-backed securities,” a cousin of mortgage-backed securities that instead tap tenants’ rental payments as an income stream for investors. There’s considerable concern from housing advocates that, beyond the potential market instability it could cause, the financial product could also have a disastrous impact on tenants whose housing has been transformed into a new asset class.

In the event that bonds aren’t generating the expected profit for investors, rental companies are likely to hit up tenants for the difference — by skimping on maintenance, hiking rents, or evicting those in properties that would be more profitable to sell.

Indeed, studies from the Right to the City Alliance discovered exorbitant rent increases of 37 to 53 percent for lease renewals. Reporting from Charlotte, North Carolina indicates that Invitation Homes initiated eviction proceedings against 10 percent of its renters over several months in 2013, while the city’s largest traditional landlord began evicting just 2.5 percent.

Ensuring that those living in majority-black and Latino neighborhoods have an equal shot at mortgage credit could have some impact on this trend, by reducing the number of those forced to seek out unaffordable rental housing. But looking to individual prejudices to explain savage inequalities obscures the structural conditions that reproduce those inequalities in housing and finance.

Attempting to ensure “equal access to credit,” therefore, is quite different from fighting for universal access to decent housing. It won’t end the present domination of the housing market by investors, or improve the affordability or standards of rental housing on which many will continue to rely.

This history of housing discrimination should point to the necessity of interrogating not only the (very real) racism that has locked people of color out of homeownership in the name of preserving property values, but the concept of property values itself — the modern-day use of which developed in tandem with racial markers, and therefore has little meaning outside of them.

Addressing the dual housing market requires attention to both the practices that lock people of color out of quality housing, and those that profit through the purveying of substandard housing.

And ultimately, only the deprivatization and decommodification of housing will break this cycle of exploitation.