Have Your Cake and Eat It Too: Profiting From the Subprime Crisis

The same firms that sent the economy into a tailspin with subprime lending practices and activities bordering on the illegal are standing to reap a profit from those very actions, on the backs of US taxpayers. Which tells you a lot about the US economy, and about the state of regulation in the United States; these companies have learned essentially nothing and haven’t even been effectively punished for their role in the crisis. They’re not just getting off with a slap on the wrist, they are actually making money from their poor financial decisions, thanks to the government’s continued support.

Firms involved in exploitative lending and real estate speculation preyed on scores of people in the United States with limited financial literacy and a poor understanding of real estate and finance. People were tricked and sometimes coerced into taking out loans that were entirely inappropriate for their means and abilities, and they lost those homes, along with everything they’d invested in them. For each of those foreclosures that’s become a statistic, there’s a former owner, and a lot of those former owners were individuals pursuing what they thought was the American Dream and trying to do the right thing, attempting to get themselves well positioned financially so they could be comfortable and leave something to their families.

Those same companies are turning right around and ‘investing’ in foreclosures which they can convert to rentals. It’s an interesting shift from banks struggling with huge inventories of foreclosed homes they can’t manage properly and trying to figure out how to unload them without taking massive losses. Now they’re turning into yet another commodity that can be bought and sold, with even more opportunities for exploitation, unless regulators are willing to step in and put things in check.

Being a landlord is not illegal; owning large numbers of properties and managing them as an investment is not illegal either. Speculation that drives up property prices also isn’t forbidden by law, although it’s what a lot of these institutional investors are doing when they come in to buy blocks of homes for the purpose of creating rental units. These put prices out of reach of people who live locally and might be trying to participate in the economic recovery, which means home ownership rates stay low overall.

And, of course, high ratios of renters tend to drive property values down, for a variety of reasons. People who own the homes they live in tend to take better care of them and to be more invested in their communities, in contrast with renters, who have fewer incentives to engage with their homes and neighbourhoods. Institutional landlords can be slow when it comes to responding to tenant complaints of issues, even in the case of urgent health and safety problems like damaged wiring or flooding. Deferred maintenance often falls far behind. Rental units can have high turnover, which can contribute to less safe neighbourhoods and a lack of community cohesion.

Rental rates are also going to climb, which puts even more pressure on low-income communities. When real estate values get depressed, rentals often increase in price, and that’s going to skyrocket with an institutional investor at the helm. These firms have even less motivation to keep people in their homes when tenants can be shuttled in and out of rentals quickly, and every reason to milk as many bucks as possible out of their victims. With a large property management company at the helm, the owner of the property doesn’t even have to deal with the day to day details; an institutional investor just has to show up to collect the cheques.

It wasn’t bad enough to rip communities apart with subprime loans intended to prey on people who were ill-equipped to handle that kind of financial responsibility. The same lenders have to come back when they’re done to tear communities apart again just as they’re trying to rebuild, by snapping up as many usable units as possible and keeping them out of the hands of people who might occupy, restore, and maintain them. All for a profit which may be short term and could be the start of yet another speculative bubble, but the investor doesn’t care. These companies are betting on the chance of getting in while they’re ahead, and getting out before the market collapses.

Leaving communities picking up the pieces yet again as they struggle with the aftermath. How many times will regulators allow this to happen? The writing is on the wall in this case; speculators are swarming and there’s a very real danger that can be easily identified and addressed. Whether regulators choose to act in time or not is in their court, and they would do well to remember that they are the ones who will be held accountable later if they don’t take steps now. We can see the writing on the wall as well, and the public is less tolerant of lax regulatory activities than it once was, having learned this lesson at hard personal cost.

Limiting speculative activity can help communities rebuild and develop strong regional ties that keep money local. Community support can increase safety and quality of living on a local level, which is great, and these same strong communities are less likely to be prone to the financial problems that caused the market collapse in the first place. If the United States is truly on a path to rebuilding, it needs to commit to doing so one community at a timeā€”not by allowing major corporations to exploit people by taking what they want until their communities have gone dry.