Hedge funds profit from the ashes of lockdown

MINNEAPOLIS (FOX 9) – For Shanika Henderson, the dream of owning her own home is on hold, but she can’t help but wonder if her landlord has taken that dream away from her and hundreds of other potential North Minneapolis homeowners.

“Some of the stories are heartbreaking, what people have to go through just to get a home, it’s awful,” Henderson said.

She rents her house in the Folwell neighborhood on Girard Avenue North to a company called HavenBrook.

In the eight years she has lived in the house, she has watched it slowly crumble.

On a recent afternoon, she walked around the house’s leaking basement, water damage, sagging floors, and pointed out a stove that had a gas leak.

And although HavenBrook promises round-the-clock repairs, she said it rarely delivers.

“I guess you sort of have the good and the bad, but I’ve been following the bad for a really long time,” Henderson said.

In Minnesota, HavenBrook has more than 600 single-family homes, but a third of its inventory — 199 homes — is in north Minneapolis.

City of Minneapolis inspectors have received 273 complaints and documented 1,594 violations at HavenBrook homes since 2018. Of those violations, 103 related to “safety and quality of life.”

In Columbia Heights, the city revoked rental licenses for 21 HavenBrook homes due to failure to resolve code violations at two rental homes.

Earlier this month, Minnesota Attorney General Keith Ellison filed an initial lawsuit against the company, claiming HavenBrook deceived and defrauded its tenants.

Renters are also organizing through a group called United Renters for Justice and demanding a meeting with HavenBrook.

THE AMERICAN DREAM vs. WALL STREET INVESTORS

But it’s not just another bad owner story.

HavenBrook and companies like it, which convert single-family homes into rental units, represent a fundamental shift in thinking about housing.

What was once considered an age-old way for American families to build generational wealth, single-family housing is now a new class of investment and a mechanism for Wall Street to get rich.

Realtor Lisa Carter specializes in first-time buyers in North Minneapolis.

In a hot market, with multiple offers, its customers are often ignored. In some cases, she thinks her clients have lost out to investors who pay cash.

“It’s one of my least favorite parts of my job is telling the client they haven’t gotten their house back, it just makes me cringe,” Carter said..

A WIDENING RACIAL GAP

There are plenty of reasons people cringe about buying a home these days.

The Twin Cities area has one of the largest racial gaps in homeownership in the nation, despite very high levels of homeownership overall, according to the Minnesota State Demographic Center.

This racial gap is particularly large in Minneapolis where white ownership is 77%, while black ownership is only 25%.

While owning a home is still part of the American dream, the opportunities are hardly the same.

A data dashboard developed by the Minneapolis Federal Reserve shows that the number of investor-owned single-family homes in the Twin Cities has doubled over the past 15 years, from 1.8% to 4%.

In North Minneapolis, HavenBrook and other out-of-town investors own as much as 16% to 24% of homes, in some of the city’s poorest census tracts.

Libby Starling, director of community development and engagement at the Federal Reserve Bank of Minneapolis, said the Fed developed the dashboard to have real data instead of speculation about the impact of ownership by investors. single-family home investors.

“Where is the line between a business opportunity and a business model and something that makes us uncomfortable as a community?” Starling said. “This is capitalism in action.”

HavenBrook’s focus on North Minneapolis wasn’t a fluke, it was a strategy, said Yonah Freemark, a researcher at the Urban Institute who examined “Who Owns the Twin Cities?” and found HavenBrook at the top of the list.

The study, which relied on regression analysis of single-family home ownership models, showed that investor ownership widens the racial ownership gap.

“I think their strategy was very clearly to target communities where foreclosure rates were highest, where homeowners were most vulnerable, and in the Twin Cities area, North Minneapolis was at the center of the foreclosure crisis, and they rushed in and took advantage,” Freemark says.

FROM THE ASHES OF FORCLUSION

To understand the rise of HavenBrook and similar businesses, one need only look back to the foreclosure crisis in 2007, when predatory lenders decimated North Minneapolis, with not just risky subprime loans, but outright criminal fraud. .

It left thousands of homes on the north side underwater, empty and boarded up. Where most people saw financial ruin, Wall Street saw opportunity.

HavenBrook, a Georgia-based private equity fund, was one of many big investors, including Blackstone, Apollo Capital, Invitation Homes and Zillow, that spent $36 billion to gobble up more than 200,000 homes nationwide. .

HavenBrook and other businesses have done so with government-backed, interest-only loans from Freddie Mac.

“It seemed like a good idea to pass on vacant homes to someone who owns them as a rental opportunity. That seemed like a positive,” the Fed’s Starling said.

“The challenge is when it starts to go off the rails, and some of these landlords are not your neighbor down the street, but maybe the neighbor in the Virgin Islands,” she said.

THE RETURN OF THE ‘BIG SHORTS’

HavenBrook, the original home buyer, is now a shell company. It was acquired in 2018 by Front Yard Residential, based in the US Virgin Islands.

Front Yard was bought out last year by a New York hedge fund called Pretium Partners, which already owned 70,000 rental units across the country under the Progress Residential name.

Its founder and CEO is Don Mullen Jr., the guy behind the so-called “Big Short” of the housing market.

In 2007, while working at Goldman Sachs, Mullen bet that the housing bubble was about to burst and shorted the market by buying so-called “credit-default swaps”. Now Mullen is betting those who lost their homes will be forced to rent.

In a speech to investors, uncovered as part of the Panama Papers, Mullen said the strategy is to “capitalize on the severe distress in the U.S. residential real estate market” by renting homes to families “who have been displaced by foreclosure or are otherwise unable to obtain financing when they can afford to purchase a home.”

Freemark, the researcher behind ‘Who Owns the Twin Cities?’ said the strategy hurts the very people who could benefit the most from homeownership.

“Frankly, it is more difficult to become a homeowner when there is not enough housing available at the start. And when available homes are sought after by big investors who may pay a higher cost to be able to buy them in the first place and then hold them longer,” Freemark said.

BIG ‘EQUITY’ SUCKS

To understand the real impact of investment strategy, consider Shanika Henderson’s rental home.

HavenBrook bought the house on Avenue Girard Nord in 2014 for $59,000, it is now worth $141,500, a 140% increase. That’s $82,500 in equity that could have gone to his four children, instead of going to a hedge fund.

“It saddens me that I could do something like this,” Henderson commented.

Now enlarge the frame. HavenBrook purchased the 199 homes in North Minneapolis for $18,321,341. Today they are worth $30,112,000, an increase of 64%. That’s $11,790,659 in equity sucked from neighborhoods that can least afford it. And that’s not even counting the rent the company takes.

Many HavenBrook homes operate as Section 8 public housing. Minneapolis Public Housing has paid Havenbrook $6,541,696 since 2018.

A HEDGE FUND RESPONDS

Pretium declined interview requests.

In statements to FOX 9 investigators from his public relations firm, Pretium distanced himself from the investment strategies of the companies he acquired, saying he “cannot comment on the local investment strategies of Front Yard”.

Pretium said since acquiring Front Yard Residential last year, it has invested $65 million in nationwide renovations and maintenance.

The PR firm had offered to show the maintenance operations of FOX 9 HavenBrook investigators, but declined to do so after the Minnesota attorney general filed a lawsuit.

“Under new ownership, we have quadrupled our local maintenance team and continue to invest significantly to support renovations and maintenance repairs for residents to address pre-existing conditions and improve the resident experience. “, Pretium said in its statement.

A TAX ON “INVESTOR” HOUSING?

This will be news for their tenants as well as the Minnesota Attorney General.

A bill in the Minnesota legislature, backed by the League of Minnesota Cities, would impose an additional sales tax on investors who convert owner-occupied homes to rentals.

Yet such a tax could be regressive because, unless the percentage increases with the price of the house, it would be less of a disincentive to low-cost house conversions in more marginalized communities.

For many in North Minneapolis, the arrival of hedge fund investors in their neighborhoods is part of a larger pattern, as history and housing go hand in hand, from the legacy of covenants on housing to redlining by the banks.

In the 21st century, it is predatory lending, followed by investors, that feeds the bottom.

For those left behind, like Shanika Henderson who lost a lifetime of security and $80,000 in equity by not owning her home, it feels like a hijacking of the American Dream.

“I understand that they are a business and they are supposed to make money and invest as little as possible in the homes they rent out,” Henderson said. “But for me it’s more it’s BS, you know, you always have to take care of the people who feed you and your family as well.”