Last Thursday’s hearing on Dr. Ben Carson’s nomination as the secretary of Housing and Urban Development was noteworthy for several reasons.
Perhaps foremost, the question of Dr. Carson’s qualifications to serve in that post were almost completely ignored. Although a letter delivered to the chair of the Senate Committee on Banking, Housing, and Urban Affairs included the signatures of a raft of prominent, and some eminent, urban studies scholars (historians, sociologists, political scientists, demographers, and anthropologists all strongly represented), and challenged Carson’s qualifications to oversee an agency of HUD’s scope without administrative experience or expertise in either housing or urban development, the issue was virtually ignored in the committee’s deliberations. Senator Mike Rounds (R-SD) joked that if Carson could handle brain surgery, running HUD would logically be easy. Carson pledged a “listening tour” and to unleash the power of private enterprise to solve housing and development problems. This will be a neat trick in a housing market where, as Jason DeParle notes,
The big problem is that it costs more to build even modest housing than millions of households can pay, whether the builder is greedy or not. That’s partly because restrictive zoning and overzealous building codes drive up the price. But it’s mostly because of the inherent cost of the basics: land, interest, materials, utilities. As a rule of thumb nationwide, even an efficient nonprofit developer can’t build an apartment affordable to a household making less than about $32,000 a year. That leaves out nearly a third of American households.
Carson, true to form, offered few specifics about his policy goals, suggesting primarily that if people earned more money they would no longer need HUD support to afford housing. While such a statement is true by virtue of its tautological nature, Carson’s focus on increasing wages and earning is notable for contradicting most of Carson’s declared policy positions. He’s spoken against raising the minimum wage, declared that social welfare payments create “dependency,” and suggested that the free market will raise wages if millions of low-wage workers simply make themselves more valuable to capitalism. It’s also striking that Carson’s attention to contributing factors to poverty varied in inverse proportion to HUD’s mandate to act on them. Indeed, while Carson seemed to recognize the interconnections between housing policy and other social problems, as Kriston Capps argues at Citylab, he seemed to have no particular ideas about what HUD might do about them, particularly given his opposition to HUD’s Affirmatively Furthering Fair Housing rule, which is central to housing desegregation and helping low-income and minority Americans live in areas with greater social resources and educational opportunities, as I’ve written here before (and Raj Chetty, Nathaniel Hendren, and Lawrence Katz demonstrate here).
Specific questions raised by Catherine Cortez Masto and Sherrod Brown about HUD’s role in preventing a new foreclosure crisis and in serving the one in four renters who pay more than half of their income for housing were brushed aside without concern proposed action.
Things got a bit more entertaining when Elizabeth Warren pressed Carson on his ability and inclination to regulate potential conflicts of interest between HUD policy and government officials in an administration flush with real estate developers. Such concerns would apply of course to the Trump Organization’s widespread, and largely undisclosed, real estate holdings, which will remain under the control of Trump’s sons in a conflict resolution scheme that strains credulity, and to the extensive investments (pending divestment) of Jared Kushner in low-income housing. It’s only fair to state that as yet there is no evidence of a direct conflict of interest. Yet Carson seemed to be wholly unaware of the potential for one.
Perhaps many people were shocked, given the attention to Trump’s potential self-dealing through the presidency, that Carson wouldn’t make this pledge. But I think that the exchange was revealing in ways that neither participant likely intended. First, Carson suggested that he would not block a program that would benefit the public if particular individuals would make “ten dollars.” Warren reminded Carson that the more likely order of magnitude of such gains would be in the tens of millions. Carson seemed to have no idea what’s at stake in the agency that he’s being tagged to run. However, Warren’s focus on Trump’s potential to engage in self-dealing through HUD, while politically salient to the legitimacy of a President-Elect who has given no indication of grasping a distinction between the national interest and his own, also reveals a troubling acceptance of a status quo at HUD where the agency’s nominal mission of ensuring adequate housing on a non-discriminatory basis has been subordinated to the distribution of financial benefits to highly capitalized and politically connected developers. Indeed, the problem of corruption is intimately connected to deep historical shifts in HUD’s mission and political status that Jake Blumgart describes in n+1.
There’s been a dialectical relationship between HUD’s emergent capture by development interests and corruption, which has had the consequence of crippling the agency’s capacity to provide housing. As Jason DeParle writes, the period 1970-1990 saw a one million unit surplus of affordable housing relative to poor families change to a five million unit deficit. As urban historian Thomas Sugrue writes, the political weakness of HUD’s housing provision and desegregation missions left plenty of space for graft:
In the early 1970s, its program to expand Federal Housing Administration-backed mortgages to underserved urban areas was hijacked by real estate speculators and politically connected developers, who sold shabby houses to desperate buyers at above-market prices, backed by inflated appraisals. When buyers defaulted on their mortgages (especially as interest rates spiked), taxpayers covered the loss. HUD was unwilling to come down hard on predatory lenders or to stiffen regulations.
Pierce was the perfect agent for Reagan’s mission to gut HUD. He oversaw dramatic cuts in the agency’s already meager budget. Federal support for low-income-housing subsidies plunged from $26 billion to $8 billion. More than that, Pierce undercut HUD’s civil rights mission: Housing was nearly as segregated at the end of the 1980s as it had been at the decade’s start. Urban housing conditions deteriorated, the construction of affordable housing slowed to a trickle, and urban poverty deepened.
HUD, however, still channeled money to private housing developers and contractors. And under Pierce, the vultures circled…. Pierce’s staff turned over with alarming frequency. Seven assistant secretaries for housing came and went, and the agency became a patronage mill for inexperienced Republican hacks.
In the current climate of austerity, where HUD, like other agencies, doesn’t spend funds so much as administer tax incentives in the hopes of encouraging someone to provide housing for lower-income households, the prior problem of graft has largely been replaced by the capital barriers of entry to the large-scale development game. In 2012, an industry journal for rental housing operators described how Jared Kushner was able to develop a multifamily rental housing empire by
stealthily target[ing] complex off-market mega-deals for properties that aren’t exactly jet-set destinations. The company aims for distress-ridden class-B apartment communities in second-tier cities such as Toledo and Baltimore…. That pair of strategic strikes has helped expand the diversified company’s rental housing portfolio by more than 11,000 units during the past year or so.
These deals often involve taking over and refinancing the debt of current landlords (not building more housing), and doing so before properties hit the open market. Although there is nothing to suggest that Kushner’s organization has behaved unethically or illegally in such deals, they are dependent upon a matrix of connection and access to credit:
old and new relationships with owners, investors, lenders, intermediaries and others help Kushner source off-market opportunities–and close quickly at favorable financing terms. Kushner is contractually prohibited from discussing details of the Baltimore portfolio investment, but confirms that this opportunity came to the team off-market via relationships.
Beyond operational and deal-sourcing capabilities, Kushner’s ties to deep-pocketed institutional capital managers help leverage its banking relationships.
That institutional backing and the financial “horsepower” it brings is critical in securing debt at the best rates and terms, observes Jordan Ray, managing director with Mission Capital Advisors, which arranges financing for investors and sells distressed debt on behalf of lenders. Hefty equity resources also allow these joint ventures to close value-add and opportunistic deals more quickly than lesser-heeled suitors–another key factor winning deals in today’s highly competitive environment, Ray adds.
The importance of business relationships, large-scale finance, and information to large-scale activity in the multifamily rental housing industry mean that HUD’s work must necessarily guard against conflicts of interest because being a player in that market requires companies to cultivate influence.
And it also means that HUD’s leadership will face potentially difficult conflicts between its mission of encouraging a sufficient supply of affordable housing and profit-oriented decisions by large investors as landlords. As Prashant Gopal recently wrote in Bloomberg, private equity funds like Blackstone have moved aggressively to buy rental properties since the 2008 mortgage bust (to the tune of $25 billion and 150,000 single family houses), moving aggressively to the scene of the worst carnage of the foreclosure crisis.
Blackstone built its rental-home business with an advantage few if any other buyers could match: billions of dollars in credit from large banks. Its Invitation Homes subsidiary quickly became the largest single-family home landlord in the U.S., with 50,000 properties. Altogether, hedge funds, private-equity firms and real estate investment trusts have raised about $20 billion to purchase as many as 200,000 homes to rent. The buying — often by employees who brought stacks of certified checks to foreclosure auctions on courthouse steps — helped turned down-and-out markets such as Arizona, California, Florida and Georgia into booming ones as the firms outbid local investors and drained markets of foreclosures.
Blackstone also developed new securitization instruments for trading on the future of rental income:
Two years earlier, Blackstone had fueled its own vast purchases by pioneering a new kind of bond in which investors are paid out of rental streams — a variation on the mortgage-backed securities that made so much money for Wall Street before blowing up. Moody’s rated the biggest portion of Blackstone’s first bond AAA and the firm was able to borrow $479 million at 1.9 percent, less than half the typical 30-year mortgage rate.
When rental income is securitized, and when the collection of rents is moved from the family in the adjacent duplex unit to a Wall Street board room, the stakes change considerably. When Wall Street is America’s landlord, rents rise, and tenants who jeopardize revenue flows with delinquency swiftly find themselves on the streets, as Gopal writes in a different article:
On a chilly December afternoon in Atlanta, a judge told Reiton Allen that he had seven days to leave his house or the marshals would kick his belongings to the curb. In the packed courtroom, the truck driver, his beard flecked with gray, stood up, cast his eyes downward and clutched his black baseball cap.
The 44-year-old father of two had rented a single-family house from a company called HavenBrook Homes, which is controlled by one of the world’s biggest money managers, Pacific Investment Management Co. Here in Fulton County, Georgia, such large institutional investors are up to twice as likely to file eviction notices as smaller owners, according to a new Atlanta Federal Reserve study.
Among these investors?
Colony Starwood Homes initiated proceedings on a third of its properties, the most of any large real estate firm. Tom Barrack, chairman of U.S. President-elect Donald Trump’s inauguration committee, and the company he founded, Colony Capital, are the largest shareholders of Colony Starwood, which declined to comment.
Indeed, it’s more the case than ever that the rental housing market that is so central to HUD’s core mission is constructed around the needs of investors rather than tenants. This connects to two theses of Harvard sociologist and MacArthur prize winner Matthew Desmond’s book Evicted (reviewed here by Jason DeParle): Evictions create dire impoverishment, and evictions happen because they are profitable.
In discussing his research, Desmond posed a framework for understanding housing as central to opportunity: to education, to earning potential, to family stability, to all of the factors Carson identified as more important contributors to poverty, as though to argue that HUD’s efforts to fight them would be futile. Per Desmond:
Do we believe housing is a right? Do we believe that access to decent, affordable housing is part of what it means to live in this country? I think we have to say yes. The reason is very simple: Without stable housing everything else falls apart. We’ve reaffirmed the right to basic education, access to food, and security in old age because we know that, without those things, it is impossible to live a full and flourishing life [ed.: wait a few months].
This concern was addressed in a 2014 letter to HUD from the National Consumer Law Center and other organizations, which warned that this pattern threatened to create a financial bubble while raising rents and crowding families out of a single-family home market increasingly dominated by highly capitalized rental property operators.
Senator Sherrod Brown pointedly recommended in his questioning that Carson and his staff read Evicted prior to taking office. Sherrod Brown nonetheless voted, as did Elizabeth Warren, to pass Carson’s nomination on the full senate. It’s a shame neither of them demanded a book report from Dr. Carson first.
UPDATE: Since Dr. Carson’s committee hearings, the Trump administration released its preliminary budget proposal. Reports indicate the strong influence of the Heritage Foundation on the proposal, which strongly suggests that Carson will be taking over an agency with a substantially smaller overall budget, and a dramatically circumscribed sphere of action. HUD’s budget would be cut by $4.3 billion for 2017, from current levels of $38.8 billion, and nearly $293 billion over 10 years. The plan would end the Community Development Block Grant, devolve affordable housing programs to the states, reduce Federal expenditures for subsidized housing (which will be spent at the discretion of state governments anyway) by ten percent annually for ten years, and eliminate the Federal Housing Administration.
Affordable housing will be built or rehabbed to the extent that it’s profitable for large private developers or politically tenable in state legislatures.
The Trump budget outline also directs the Justice Department to reduce the use of disparate impact analysis, which would effectively end enforcement of the Fair Housing Act.