Capitalizing on Collapse
A well-documented consequence of the recent foreclosure crisis was a pronounced dislocation in the single-family home market. Large institutional buyers backed with Wall Street capital emerged to capitalize on this dislocation. These firms acquired hundreds of thousands of single-family homes to create a pool of institutionally-owned single-family rentals (SFRs) in markets across the U.S. Existing research highlights both positive and negative effects of this investor activity. Analyses suggest that home purchases and subsequent investments by these actors have reduced vacancies and aided recovery from the housing bust, however, studies also show associations between institutional investment in SFRs and increases in home prices and evictions.
Concentrated Foreclosure Activity and Distressed Properties in New York City
Since the mid-2000s millions of Americans have had personal experiences with foreclosure. Both homeowners and renters were affected by the surge in foreclosures over the last decade and neighborhoods of all types nationwide were exposed to risky mortgage lending, foreclosure sales, and vacant properties. Many studies have shown that foreclosures have negative effects on individuals and neighborhoods. Much of this research has focused on the effects of foreclosures on sales prices of neighboring homes and on neighborhood conditions like crime and neglected and poorly maintained properties.
Financial Engineering by City Governments
The use of financial derivatives, such as interest rate swaps, by city governments has been covered in the news media with some frequency over the past few years. The preponderance of these stories focus on the negative outcomes associated with these financial instruments, particularly in terms of increased interest payments, termination payments or other financial losses. While reporting on the issue often stops with simply stating the losses, some media accounts call into question the use of these instruments by governments at all.
Taking a Risk
For most of the 20th century, the municipal securities market was a sleepy backwater where governments went to raise money for roads, bridges, and wastewater systems. Most cities financed their infrastructure with debt that relied on conservative or well-seasoned market structures. At the end of the century, however, local governments entered a period of “entrepreneurial” finance as federal support for urban development declined. In the years leading up to the global financial crisis, many US governments began utilizing new bond structures and riskier financial instruments to, potentially, lower borrowing costs.
Cashing In On Distress
The finance industry plays an important role in shaping inequality. Private financial institutions determine, often in partnership with government, where to invest in housing, economic development, and infrastructure. These investments are often drastically uneven, fostering job growth and housing value appreciation in some areas and economic decline in others. One manifestation of this disparity is dramatic differences in access to services. While the affluent are able to build home equity and retirement accounts via access to “mainstream” financial services, the poor are disproportionately reliant on “alternative” or “fringe” services, such as check cashing outlets (CCOs), payday lending, and subprime mortgages.