When Mel Watt became the nation’s most powerful housing regulator, his supporters predicted that he would advocate for the working class and help homeowners still reeling from the mortgage crisis.
But now, as his five-year term at the Federal Housing Finance Agency nears an end, some say the former congressman from Charlotte is partly to blame for higher rents and fewer opportunities for first-time homebuyers. A Charlotte Observer investigation found that rents and home prices soared in Charlotte over the past six years as corporate ownership of the housing stock grew — a trend Watt resisted taking action to stop.
Some former allies now say Watt enabled Wall Street firms to capitalize on the nation’s mortgage crisis by refusing to use his authority to help average homeowners avoid foreclosure at the height of the financial recession.
It worked like this: Investor-backed rental companies bought thousands of foreclosed properties and “distressed mortgages” at steep discounts during the Great Recession and converted them to rental properties. Investors made more money as rents went up and the firms expanded into more cities.
Sign Up and Save
Get six months of free digital access to The News & Observer
Some advocacy groups remain upset Watt did not ensure more troubled mortgages were sold to non-profit and local community groups. Instead, critics now say, the federal government saw sales of distressed mortgages go mostly to private equity firms and hedge funds.
A letter signed by more than 100 social justice groups and non-profits from across the country says renters are paying more per month, poor people are having a harder time finding affordable housing and many would-be first-time homebuyers have been priced out of the housing market.
The Nov. 10, 2017, letter, addressed to Watt, accuses his agency of helping create “a new class of Wall Street slumlords.”
“When he was appointed, people hoped he would be an advocate for affordable housing,” Peter Dreier, a professor of urban and environmental policy at Occidental College in Los Angeles, told the Observer. “Instead, he was an advocate for Wall Street. Again and again, he chose Wall Street over Main Street.”
Watt’s role was created during the recession to safeguard the health of the housing market. The agency oversees mortgage giants Fannie Mae and Freddie Mac, which guarantee loans and buy and sell mortgages totaling $5 trillion. One of their primary goals is boosting home ownership opportunities, particularly for people with moderate incomes.
Watt refused multiple requests from the Observer for an interview through an agency spokeswoman. She referred a reporter to comments Watt made in May during a Senate Banking Committee hearing.
That’s when Watt defended Fannie Mae’s decision last year to guarantee a $1 billion loan for Invitation Homes, which is the largest landlord of single-family houses in the nation.
The loan from Wells Fargo involves the purchase of more than 7,000 houses nationwide, including 428 in the Charlotte area, according to government documents.
“We are gathering information, which is the reason that we approved the Invitation Homes transaction….,” Watt, whose term ends in January, said in the hearing. “And we are trying to figure out whether this is really reducing homeownership or whether it is paving the way for more people to get into homeownership. I think you can argue both sides of that.”
In late 2013, the housing market was still feeling the effects from one of the worst economic downturns in U.S. history, when Watt left Congress to lead the Federal Housing Finance Agency.
He served for roughly 20 years as the representative for the 12th District, which then touched six counties stretching from Charlotte to Greensboro.
In his new role, he was charged with directing public policy to deal with millions of soured mortgages and foreclosure and abandoned properties. Taxpayers were on the hook for homes the government had insured against default.
Housing activists and left-leaning politicians initially saw Watt’s nomination by then-President Barack Obama as a victory. He had garnered a reputation as a reliable liberal vote in Congress.
“Mel Watt has never failed to fight on behalf of homeowners facing foreclosures,” U.S. House Democratic Leader Rep. Nancy Pelosi, a California Democrat, said in a 2013 press release.
However, campaign contributions Watt received as a congressman from financial services firms such Bank of America and Goldman Sachs came under scrutiny, says a McClatchy report from July 2010.
Watt was among eight Democrats and Republicans investigated by a congressional ethics office about fund-raising near the time of an important vote on financial regulatory reform. Watt denied wrongdoing and authorities later dismissed the case.
Watt started a few initiatives aimed at helping low-income and first-time buyers afford homes, including allowing down payments as low as 3 percent, according to a McClatchy report in August 2015.
But after about a year on the job, Sen. Elizabeth Warren was already questioning why Watt and his agency had not lowered the balance owed — sometimes called a principal reduction — on millions of mortgage loans controlled by Fannie Mae and Freddie Mac. That would have reduced the mortgage payments for struggling homeowners to reflect the homes’ new, lower market values and helped families avoid foreclosure, affordable housing advocates said.
“You’ve been in office for nearly a year now, and you haven’t helped a single family, not even one” through principal reduction, said Warren, a Massachusetts Democrat, told Watt during a Senate Banking Committee hearing, according to a McClatchy report.
“Chairman Watt, you’ve had a year to do that. You’ve known for five years what the problem is,” Warren said.
Warren, who called Watt “a champion for working families” when he was nominated, said he had missed an opportunity to help 5.4 million borrowers with loans backed by Fannie and Freddie.
Watt said his agency helped homeowners and warned that wide-scale forgiveness of outstanding loans was unlikely to happen.
“It’s just a very difficult issue,” Watt said, according to a McClatchy report in November 2014.
Asked in a 2015 interview with McClatchy why he had not taken more sweeping steps, including principal reductions for homeowners, Watt said that as a regulator he had a duty to guard against easy access to credit for borrowers who were unreliable.
“I kept trying to tell people, even when I was in Congress, I’ve never been an advocate for unreasonable access to credit,” he said, according to the McClatchy report. “I wouldn’t make a loan to my brother-in-law unless I thought he was going to pay me back.”
Investor-backed rental companies now own 300,000 single-family houses nationwide, according to the Urban Institute, a non-profit research agency that tracks housing trends.
Diane Tomb, executive director of the National Rental Home Council, a trade industry group, said critics fail to recognize the positive role investors played in reviving the national housing market and improving neighborhoods by renovating and fixing blighted properties.
“Each home needed $20,000 of rehab to get them back on the market, and that includes paying back taxes,” Tomb said. “And when you look at it like that, that’s schools, that’s fire departments. So when these communities were impacted by these homes going under and folks having to leave, they weren’t only losing good members of their community, they were also losing the revenue that supported a lot of the local libraries, schools, all of that.”
But corporations tend to raise rents faster than mom-and-pop landlords since they need to satisfy investors, said Daren Blomquist, senior vice president of real estate tracking firm Attom Data Solutions.
“They have pressure to maximize profits,” Blomquist said.
The government “legitimized” single family houses as a Wall Street investment after the mortgage crisis, said Maya Abood, a former researcher with the Massachusetts Institute of Technology’s Urban Planning Program who co-authored a recent study titled “Wall Street Landlords Turn American Dream into American Nightmare.”
Government agencies sold thousands of distressed mortgages to Wall Street firms at deep discounts, the study says.
Watt and other leaders failed to reverse course soon enough, Abood said in an interview.
“We have seen what happens when you get this kind of hyper-capitalism before,” Abood said. “We are seeing it again. When you tie the roof over someone’s head to the (Wall Street) market, the result is usually not good.”
Abood said Watt and his agency allowed some of the same Wall Street players responsible for the 2008 mortgage crisis to profit from the foreclosures, distressed mortgages and abandoned homes they help create.
Meanwhile, housing advocates said, the U.S. homeownership rate of about 64 percent remains below the pre-recession levels in the mid-2000s, which were roughly 69 percent.
The trend is troubling because homeownership allows families to accumulate wealth and helps build stable neighborhoods, activists said.
“They made it cheaper and easier for these companies to get financing,” said Kevin Stein, deputy director of the California Reinvestment Coalition, a non-profit that advocates for equal access to credit. “They established this business model. The damage has been done.”