May 2024
Dear friends, family and constituents,
I am writing this three-part newsletter series to share a historical and social understanding of housing in order to contextualize the initiatives I’m pursuing this year. This understanding is imperative to inform our political views because power and oppression, as well as cooperative practice and resistance, move and repeat along consistent principles. When we see how certain arguments, dispositions and circumstances result in similar outcomes over and over again, we can identify the path that realizes the outcomes we desire and become empowered to move along it.
I am reminded of Dr. Martin Luther King’s Sermon, ‘Transformed Nonconformist’ when he spoke of how “the philosopher Nietzche once said that every man is a hammer or an anvil, that is to say every man either molds society or is molded by society. Who can doubt that most men today are anvils continually being molded by the patterns of the majority.” When we engage in study, we find the way to no longer be the anvil, but instead the hammer.
So while brief, I hope this newsletter series can highlight a few historical moments and social conditions that are important for us to understand in order to imagine and organize towards system-level solutions. Throughout, I share other resources for you to further your study. In this newsletter specifically, I will outline how housing became a financial product and how this process is the major driver of the global housing crisis today.
What Is Financialization?
“Housing has lost its social function and is seen instead as a vehicle for wealth and asset growth. It has become a financial commodity, robbed of its connection to community, dignity and the idea of home”
- Leilani Farha, UN Special Rapporteur on the Right to Housing, 2017
In my previous newsletter, we talked about how Franklin Roosevelt’s New Deal housing programs expanded the small, regional housing markets that had very few homeowners into one large, nation-wide market where private homeownership was seen as a must. Once the housing market became an essential commodity, a unit that could be bought and traded in order to make returns, it became a prime target for “financialization.”
Financialization refers to the increasing importance and influence of finance, financial markets, and financial institutions in the workings of a particular market or the economy. This influence happens when financial products are created using already existing commodities or services in a particular industry, in our case houses. One example of these financial products is the mortgage-backed securities (MBS) that caused the 2008 financial collapse and housing crisis.
A security is basically an investment, technically the term refers to the contract that signifies owning an investment. A mortgage-backed security is an investment where an investor is making money from a large group of mortgages, often thousands, that have been put together.
The mortgages end up in these groups through a chain of events. First, a consumer bank gives out a mortgage to a homeowner. A consumer bank is a bank that just provides consumer services, such as checking and savings accounts, and does not make investments. Once the mortgage is issued, this bank sells the mortgage to an investment bank or a private-equity firm. When these financial institutions buy the mortgages, they are the ones to put the mortgages into a mortgage-back security and then they either sell these securities to potential investors or hold onto them themselves.
All investors expect to make a return on their investment and for investors of mortgage-backed securities, this return comes from the collective interest rates of all the mortgages in the mortgage-backed security. No new homes, tangible goods or mortgages are created in this process. To create a mortgage-backed security, a new financial product, the investment banks just bundle together pre-existing financial products, in this case the mortgage debt, and then sell this off to multiple investors.
Through processes such as this, financial products become new types of units, commodities, that can be bought and traded. In housing, each new financial product ultimately reflects a new set of relationships and configurations between houses and the debt that goes along with them. These arrangements happen because someone thinks there is the potential for profit . They can be created by the banking industry, private-equity firms, or other investment firms, and are registered and regulated through the federal Securities and Exchange Commission.
How Financialization Led To The 2008 Housing Crisis
The documentary Inside Job came out shortly after the financial crisis and does a good job explaining how the financialization of the housing industry unfolded with mortgage-backed securities and how this process led to mass foreclosures and the historic housing crisis. It highlights the perverse incentives that arose between consumer banks and investment banks.
Investment banks preferred mortgages with higher interest rates because there was the potential to make larger returns, as is the case with subprime mortgages. The consumer banks became incentivized to give out as many subprime mortgages as possible. The more mortgages they issued, the more they had to sell to investments. Consumer banks however were unaffected if the homeowner defaulted, because they no longer owned the mortgage. They recorded the sale of the mortgage and moved on.
The investment banks grouped “sound” mortgages, mortgages that were not likely to default, with increasing amounts of the risky subprime mortgages. Investment banks convinced investors these securities were safe even though there was more risk, by claiming that the revenue from all the mortgages combined would buffer the losses of a few defaults.
The likelihood of defaulting was and still is an effect of both the borrower’s financial stability, but more importantly, that these mortgages have predatory terms that made them more likely for people to default on. Predatory terms can include high interest rates, payments that increase sharply after a certain amount of time, or when the borrower has to pay all the interest before starting to pay off the actual cost of the home. Ultimately, the goal of these loans is to extract as much money as possible from people before they default, with the least amount of value given to the homeowner before that happens.
In contrast, the federally-insured mortgages given to white borrowers through the New Deal programs were designed to support people in not defaulting (read more here). They did this through low interest rates, a longer time-frame to repay the loan, and the interest was evenly spread across it. With these loans, if the borrower for reason still defaults, the federal government paid the bill. As I shared in part one and in conversation with Professor Summers, only white homeowners were eligible for these supportive loans, while Black and other Americans of color were barred from them. After decades of being barred from supportive financing that led to homeownership, it was the same communities that were targeted heavily by predatory lending which ultimately led to their dispossession.
Financialization Today: Private-Equity and Single-Family Homes
“Hundreds of thousands of single-family homes are now in the hands of giant companies -Squeezing renters for revenue and putting the American dream even further out of reach”
Banks lobbied hard to make sure any public backlash to the 2008 financial crisis did not result in reinstantiating banking regulations and we still have risky mortgage-backed securities today. In addition, the bailouts gave the investment banks the cash capital they needed to create new forms of financialization from the mass foreclosures. As a result, several companies emerged to buy up foreclosed properties at a discount of 30 to 50%, in order to either rent them out or sit on the houses until they increased in value again. By 2016, 95% of the distressed mortgages on Fannie Mae and Freddie Mac's books were auctioned off to Wall Street investors (Mari). Private-equity firms acquired more than 20,000 homes in desirable cities and middle-class suburban neighborhoods, creating a tantalizing new asset class: the single-family-rental home (Mari).
With multiple investors at the helm, these companies continuously morphed and the chain of ownership of the actual houses became murky. For the NY Times Mag, Francesca Mari followed one of these new companies, called Strategic Acquisitions, which eventually turned over management to Colony Capital, whose real estate holdings later merged with other companies and culminated in the Blackstone subsidiary Invitation Homes. Invitation Homes became the largest single-family-rental company in America, with 82,500 homes at its height. Each sale and consolidation was meant to generate profits for both the seller and the buyer.
According to the housing researchers Mari interviewed, what makes private-equity landlords particularly rapacious is their imperative for growth; their need to chase double-digit returns within 10 years. The private-equity firms, with Blackstone at the vanguard, found there was a way to generate more profits through a new financial product they developed: a single-family rental securitization which is a mixture of residential mortgage-backed securities, collateralized by home values, and commercial real estate backed securities, collateralized by expected rental income (Mari). In 2013, Blackstone's Invitation Homes securitized the first bundle of single-family rentals and those who bought these bonds received 3-5% in monthly interest until their principal was returned, generally in 5 years.
As a result of this financialization, the rental income needs to cover not only the mortgage, but also the interest payments distributed to the bond holders- creating an imperative to keep occupancy, rent and fees as high as possible. Fees, often a surprise to the tenant, have become a required part of their business model; one company made $14 million/year on them and an additional $12 million/year on tenant clawbacks, such as retaining security deposits (Mari).
One interviewee sums it up:
“What is really dangerous to tenants and communities is a full integration of housing within financial markets. Because of the way our financial markets are structured, stockholders expect ever-increasing returns. All of this creates so much pressure on the companies that even if they wanted to do the right thing, which there's no evidence that they do, all of the entanglements lead to an incentive of not investing in maintenance, transferring all the costs onto tenants, constantly raising rents.”
These predatory practices go beyond just impacting the tenants of those rental homes. Rents in the overall area often go up due to the oligopolistic power these companies have over the local housing markets they are operating in. Not only rentals, their presence also affects the affordability of housing that is for sale. The neighborhoods that these private-equity companies operate in are predominantly Black and Latino; as a consequence, evictions are often higher in these neighborhoods (Mari). Blackstone for its part has exited the market and is leaving the fallout for others to deal with; the exit earned $7 billion, more than twice what it invested (Mari).
While I shared a few parts here, this whole article by Francesca Mari is worth a read. It follows the personal stories of multiple tenants and their intimate portrayals communicate the devastation and daily hardship of these financial products.
What Has Financialization Meant For Oakland?
Here in Oakland, we’ve witnessed foreclosures, homes bought up by private-equity firms, and ever increasing rents and the resulting homelessness. The Mom 4 Housing campaign sought to highlight these struggles and contradictions, specifically choosing to occupy 2928 Magnolia, a house under the corporate ownership of Wedgewood.
The stories that are woven through 2928 Magnolia reflect a long history of dispossession due to financialization. The owners from 1943-1987 were Carter Alanders and Willa Mae Roberts, a Black family who had previously foreclosed on another house due to predatory terms. These terms included a high interest rate, a short pay-back period, and a loan that “ballooned” at the end (Curbed). They also included that the trustees of the loan could sell the property if a loan payment was missed and if the Roberts were unable to pay the taxes or failed to keep the house and property insured (Curbed). In 1939, the federally insured mortgages made monthly mortgage payments cheaper than rent, but the Roberts were excluded from this benefit by the color of their skin. They paid over half their wages to their eventual mortgage on Magnolia, which they were able to hold onto despite the extractive terms that were also present there.
When Willa Mae passed in 1987, an investment company bought the house and sold it in 1994 to Betty Mack, for over 23 times what the house price was in 1943 (not adjusted for inflation). Betty Mack had moved from poor, rural Texas and was a hospice healthcare worker who fostered babies with special needs. The few lending options available to her meant she had to buy the house with a subprime mortgage from AAMES Home Loan Co., a Los Angeles-based subprime lender that specialized in “loans to risky borrowers, charging higher interest and fees to compensate” (Curbed). Mack lost the house to foreclosure in 1996. In August 2019, Catamount Properties, a subsidiary of Wedgewood, bought the house on Magnolia Street from a local absentee landlord for half a million dollars.
This repeating cycle of dispossession ended with the Moms 4 Housing action, that led to the house being bought and placed in the OakCLT (community land trust). With the house now in the land trust, it means the land beneath the house cannot be sold, leading to permanent affordability (CLT 101).
The stories of those who moved through the Magnolia house are not isolated stories; KQED wrote a very similar story about a Black grandma’s home in Pinole. The story follows a grandma’s struggle to buy her home even after the passing of legislation inspired by the Moms 4 Housing struggle, Senate Bill 1079, introduced by Sen. Nancy Skinner. This legislation mandated that tenants have the opportunity to purchase their home if it goes through foreclosure, by being given 45 days to match the highest bid. However, as KQED lays out, companies such as Wedgewood arrive at the auction events with $600K in cash and purposefully drive up the price so no one else can purchase it. Many tenants, including the elderly grandmother the story follows, cannot compete. Even when land trusts come to their aid, as one did in this story, 45 days is not enough time for fundraising.
Once in corporate ownership, the price of a house can increase exponentially. Wedgewood itself follows a house flipping model, performing minimal low-cost work before selling the house again at a much higher price. In 2020, they owned 125 properties across the Bay Area and had flipped thousands of homes in the years preceding (Curbed).
Similar to Blackstone and Invitation Homes, their business model is also only successful if they participate in tenant harassment and pressure tactics. This has included misleading tenants' on their right to continue residing in a house that’s acquired and depriving tenants of power and water (LA Times). The California Attorney General's office eventually brought forward a complaint on behalf of the tenants, which Wedgewood settled out of court for $2.75 million (LA Times).
This is all happening as private developers claim to have no incentive to build below-market, deeply affordable housing, because of the double-digit profits they are also chasing. Most affordable housing construction is done with public subsidies through nonprofit affordable housing developers. However, with what I’ve outlined above, when housing is built in the private market it may not stay affordable for long. A generation or two of occupants will have affordable rent, but soon due to the forces of financialization and securitization, housing in the private market will become affected. Permanently affordable housing comes through other mechanisms such as community land trusts and social housing, which I will outline in part-three of this newsletter series.
Financialization Tries To Create Something From Nothing & Part Three: Public Lands for Public Good
In the documentary Push by Leilani Farha, former Special Rapporteur on adequate housing and housing rights who I have worked with on housing issues in Oakland, one of the interviewees describes financialization as a magic trick that tries to create something out of nothing. I hope I’ve shown in this newsletter how financialization at its core does this and is as a result, exploitative. Eventually these magic tricks become exposed as illusions because the constraints of reality cannot be ignored. 2008 is bound to repeat itself if we do not invest in alternatives.
In my next newsletter, I will share the role that public bodies can play in meeting our housing needs, and how this can actually result in more accessible and beautiful homes. I will share work that is happening right now that inspires me, such as Seattle’s Measure 135 that created a Social Housing Department and how Vienna created a whole housing sector that serves the public good. I will also share how there are modular, prefabricated housing units that exist today that could be deployed in Oakland to get 5000 people off of the streets.
All of these solutions are possible here in Oakland and I have been planting their seeds for many years, both as an organizer and now as a legislator. I plan for 2024 to be the year that these seeds start to break through the soil and see the light.
In service and solidarity,
Councilmember Carroll Fife
Items In This Newsletter
Policy & Updates
1. MACRO Now Has A Direct Phone Number!
Events & Community
2. Celebrating Martha Humphrey As Mother Of The Year!
3. Juneteenth Celebration Of Freedom Awards
Policy & Updates
1. MACRO Now Has A Direct Phone Number!
In the event of a non-violent, non-emergency situation, you can now call these civilian responders directly at 510-446-2276.
Until now, the program has relied on 911 dispatchers to divert calls to Oakland Fire Department, which then referred to MACRO responders. However, this method was only diverting a fraction of calls from OPD to MACRO, even though the need for their services was higher.
When you call, a dispatcher will ask some initial questions to confirm if the situation is appropriate for a MACRO responder. Since MACRO responders are not police, responders are not able to be dispatched to emergencies or situations where someone is being violent or carrying a weapon. They also are not able to set foot inside of private property, such as a business or home.
They operate across all of Oakland, with current hours 6:30am-1:45pm (seven days a week), and 2:00-10:00pm as staffing permits. With the goal of eventually having increased funding and scope, they hope to become 24/7.
Email is also an effective way to get a hold of them at MACRO@oaklandca.gov . When emailing MACRO, make the subject: "Request for Service @ Address/Location + Incident Type" and in the body of the email include a description of the incident, any relevant history and if possible, a picture.
What is MACRO?
The Mobile Assistance Community Responders of Oakland (MACRO) is a civilian response program that was launched in April 2022 in order to divert calls from the police and fire departments that can be better handled by civilians. These types of calls include behavioral health issues or concerns for a person's mental health and well-being. This makes MACRO a critical tool in Oakland, where our 911 system has struggled to respond quickly to emergency calls partly due to the high volume of non-emergency requests.
For more information, see their website here.
Events & Community
2. Celebrating Martha Humphrey As Mother Of The Year!
Celebrating Martha Humphrey! Martha began to foster children in the 1970s, dedicating her home in the service of her foster children, which included a nursery. Her kindness and attention to her children led to her receiving more and more calls from foster agencies. Now at 96 years old and for over 50 years, Martha Humphrey has fostered over 300 children and continues to day!
