Wall Street is sucking as much from the real estate crash of 2007 as possible by securitizing reclaimed properties and then renting them back to the people who still need a place to live. You might recall this scheme from a post I wrote in 2011 about Mitt Romney and his plans to revive the housing market. Now those plans are reality, and that reality is responsible for one 2-year old child's death.
Perhaps the most controversial development in America’s housing “recovery” is the role played by large private equity firms. In recent years, they have bought up more than 200,000 mostly foreclosed houses nationwide and turned them into rental empires. In the finance and real estate worlds, this development has won praise for helping to raise home values and creating a new financial product known as a “rental-backed security.” Many economists and housing advocates, however, have blasted this new model as a way for Wall Street to capitalize on an economic crisis by essentially pushing families out of their homes, then turning around and renting those houses back to them.
The Cedillo family's tragedy can be directly linked to Wall Street's principle of minimal investment, maximized return. In Arizona, private equity investors were sucking up foreclosures at a record rate. Progress Residential was particularly active, buying as many as 200 homes in one month, regardless of their condition.
The two-story house that would soon become the Cedillo family’s home was in fine structural condition when the family signed the lease. It hadn’t sat vacant for long. Earlier that year, the former owner, Lloyd Carter, sold the house to avoid foreclosure after realizing that he owed $100,000 more on his mortgage than the house was worth. (“I didn’t even know who they sold it to,” Carter told me. “The title agency just sent the documents with the courier and met me at a Starbucks.”)
There were a number of small rehab issues: a cockroach infestation, oil that had spilled in the driveway, and a sloppy paint job. Christine recorded some of these problems and others on a walk-through inspection, but she wasn’t overly troubled. “All I was looking for was a place big enough for us to be together,” she said. Until then, she had been living in her parents’ apartment in Tempe with Zahara and her younger daughter Elysiah.
The one serious problem was the lack of that pool fence. Before the family moved in, Christine asked the Golba Group, the property management company hired by Progress to lease and maintain many of its houses, to install one. As she recalls, Lacey, the property agent, left for a moment and when she returned “said they weren’t going to put it up.” Christine offered to cover the cost and was informed that the family could install their own barrier, but only if it didn’t affect any of the landscaping and wasn’t fixed to any permanent structures, which to Christine sounded impossible.
They weren't going to put one up. Building codes in California require pools to be completely fenced with self-latching gates out of the reach of small children. Arizona's building codes are a little more complex, but still require fencing around a pool with a latch on the gates. Yet this management company was not going to fence the pool.
Golba did, however, suggest that Progress’s need to achieve a high rate of returns for its investors had brought a financial pressure previously unheard of to the single-family rental market. “Institutional owners want to know, 'How much money did I make on every single square foot? How much money did I have to put in capital wise, and how much money did I make on that capital?'... It’s all about spreadsheets when it comes to institutional owners.”
That bottom line might come with a heavy price for families, though. Because you know how this story ends, right? 2-year old Zahara crawled through the doggie door out to the patio and then went across to the unfenced pool where she drowned.
This is what the pool area looks like now, looking from the house the Cedillos rented toward the pool and the neighbor's house. The picture is from a Google-cached property listing in April, after the Cedillo family moved out of the house with broken hearts.
Whatever the return was on that house, it wasn't enough to make up for the loss of a little girl because they couldn't spare the money to fence in a pool. Profits over people. Always.