American Banker’s recent article on displacement financing shined light on an issue that many community organizations deal with on a daily basis — watching their low-income clients pushed out of their homes.
Much of this displacement resulted from financial transactions where banks knew, or should have known, that rent increases and displacement of existing tenants were imminent. Our organization recently published a report that found widespread complicity among banks in financing displacement in Oakland, California.
During the last decade, large-scale foreclosures in Oakland led to the direct displacement of many homeowners. Bank subprime lending spurred an economic crash that directly increased the renter population, and single-family homes were converted into rental housing at an unprecedented rate. Tenants in such homes generally have fewer protections than those in multi-family buildings. Our research shows how “serial evictor” speculators in hot rental markets secure bank loans to buy properties rented by low-income tenants in order to raise rents and/or evict current residents to convert these affordable units to more expensive residences.
Displacement financing by banks runs counter to their obligation to help meet low- and middle-income communities’ credit needs under the Community Reinvestment Act. In many cases, bank lenders know when a borrower landlord’s business model includes raising rents and evicting tenants. Displacement mortgages underwritten based on this business model are deeply problematic.
Oakland has the fastest pace for gentrification and displacement in the Bay Area; homelessness increased 36% in Alameda County from 2016 to 2017, while many working-class people were forced to move out of town. Renters need to earn $48.71 per hour (nearly four times the minimum wage) to afford median rent of $2,553.
Our report identifies First Republic Bank as the worst actor in financing Oakland’s displacement crisis. According to our research, the bank has made several hundred loans to problematic landlords, who then filed over 500 eviction petitions throughout Oakland. We also point to several dozen other banks, firms and institutions who have funded problematic property owners or serial evictors, as identified by nonprofit groups.
Evictions like these, where there is often no fault on the part of the tenant, or where tenants are forced to leave as a result of harassment by the landlord, can have long-term financial repercussions for tenants. Their personal credit may be damaged, making it difficult to find employment, new housing or access loan products. Relocation expenses can drain savings, putting homeownership and asset building further out of reach.
Displacement mortgages not only result in eviction of low-income tenants, but also lead to the permanent removal of units from community affordable housing stock where it is desperately needed. In financing displacement, banks exacerbate the credit needs of the low- and medium-income communities they are meant to serve. This is the exact opposite of CRA.
There is a different path forward for financial institutions.
Our Anti-Displacement Code of Conduct has been signed by 65 community groups and churches. This code of conduct asks banks to underwrite for existing rents, develop policies to mitigate the risk of displacement financing and to reinvest for homeowner, community and small business stability.
There has already been interest from banks about signing on to the code of conduct. These banks recognize that their lending activities may have negative effects and are choosing to be proactive. At the same time, Signature Bank recently agreed to follow similar principles laid out in the Association for Neighborhood and Housing Development’s anti-displacement policies. And a Freddie Mac spokesman has indicated that the government-sponsored enterprise “would not provide financing to someone with a history, reputation, or the explicit intent to rapidly raise rents or displace tenants.”
For banks around the country, the choice should be clear: Do they want to be working with or in opposition to the communities they are chartered to serve?This post was originally published here