The Beacons Are Lit

By John Mauldin

In the film version of Tolkien’s Lord of the Rings: Return of the King, there’s a three-minute scene you should watch or re-watch. It is relevant to our situation today. Gondor needed to light the beacons for aid.

At the other end of the beacons, no one is sure whether the very reluctant king will honor the ancient, thousands-year-old treaty. Then you see the doubt on his face turn to firm resolve as he gives the order: “And Rohan will answer.”

Now, in answering, Rohan wasn’t simply helping its ally. The enemy was coming for them, too. They were very aware of that fact. Saving Gondor was the best way to save Rohan.

Today in the real world, we also face a dark, implacable, powerful foe. It is a microscopic virus that we now know is a threat, a very serious one. We in the United States have just seen the beacons. The warning travelled not just a few hundred miles but around the world: from China and Korea, to Italy and Spain, and now here.

The beacons are lit. How will we answer?

It’s Happening

Back in late January, the initial Wuhan outbreak finally caused the Chinese government to impose travel restrictions, close factories, and so on. Over here, some of us immediately knew that would mean supply chain problems. I sent some reports on it to Over My Shoulder members in early February. (Members can read them here and here. Quite interesting in hindsight.)

Later in February, recalling my patented “bug hitting the windshield” metaphor, I said, “It’s beginning to look like virus COVID-19 could be the windshield against which the global economy meets its maker.” We can now strike the “beginning” part of that statement. It’s happening.

I was initially hopeful the virus would spread slowly enough to get us into summer, when it should recede and then we would have a vaccine fairly soon. Neither is happening. I’m now convinced, as I said in my midweek letter that we could lose untold tens or hundreds of thousands of lives, even with drastic action. Without that action, the toll could be millions. As of Friday noon, it appears that we are going to take at least most if not all of the very necessary painful actions.

In that update I referred you to two links. If you didn’t read them already, please do.

If you are someone who is skeptical of scientists, the media, and so on… I’m with you. But this time I am listening because these same experts have been right.

Dr. Scott Gottlieb is not some crazed liberal. He is a physician and public health expert who was appointed FDA commissioner by President Trump. And he, along with Trump NSC biodefense advisor Luciana Borio, wrote, in The Wall Street Journal on January 28 (!) that we should Act Now to Prevent an American Epidemic. Then they wrote again on February 4, saying we must Stop a US Coronavirus Outbreak Before It Starts. Many other experts said the same.

Note, both of those were on the reliably conservative WSJ editorial page. This is not a mainstream media hoax. It is not an anti-Trump plot. It is not clueless professors trying to get funding. This is real and they have been right. You can ignore them if you want. I choose to listen.

I’m saying this strongly because as recently as this week, I’m still hearing from lots of readers who don’t get it. I won’t give examples.

The US lost 2,996 lives on September 11, 2001. We thought that was enough to go to war. And all the experts say the coronavirus will likely kill many more than that, just in the US.

Would some of them have died soon anyway? Sure. But so would some of the 9/11 victims. We didn’t use that fact to minimize their loss and we shouldn’t minimize coronavirus deaths, either. This is not a figment of the imagination. It is tragically, fatally real.

Some want to compare COVID-19 to the swine flu.

Let’s look at the facts.

Charts: WWL-TV

The data shows that, at this point in the outbreak, COVID-19 is spreading faster than H1N1 and is killing many more of its victims. This is not nonsense. It is fact.

We don’t know a lot about the Chinese government’s internal deliberations, but I feel sure they saw curves very much like these. At first, it hid its head in the sand and tried to hide the outbreak from the world as well. Then that became impossible. That is why it took what looked to foreigners like insanely harsh containment measures and rushed to build temporary hospitals.

I don’t think Xi Jinping did that because he is a great humanitarian. He saw a serious threat to China’s people and economy, and possibly his own regime’s survival. So he acted decisively and still saw thousands die.

Here in the US there’s every reason to think our experience could be far worse than China’s without immediate action. It is not confined to just one city; we have large outbreaks on both coasts and more popping up everywhere. All 50 states now have cases. Worse, we are reacting much later than China did. I am convinced that a rigorous national lockdown and social distancing is the only way to stop this from reaching epically tragic proportions. Yes, it will have a huge economic cost. We just have to collectively pay it. The alternatives are worse.

Going to War

Coronavirus is both a public health problem and an economic problem, and the two work against each other. The measures we must take to save lives necessarily mean shutting down large parts of our consumer-driven economy. People are losing jobs and businesses are losing revenue.

Does that mean we simply ignore the virus and let people get sick and sometimes die? No, that won’t work, either. Our healthcare system can’t handle what would happen. It would collapse and be unable to help anyone with anything.

We need to sustain the economy for however long it takes to beat down the virus. That’s going to mean massive fiscal stimulus spending—multiple trillions of dollars’ worth. We are going to have to do for everyone the kind of things we have long done for natural disaster victims—emergency grants, subsidized loans, exemptions from rules, and more.

How will we pay for it? There are several ways but they all involve massive government debt and deficits that will shock us. We’re going to figure it out because we have no choice. The good news is, we’ve done this before. We fought and won World War II on a massive pile of debt.

Those who experienced the world war years as adults are mostly gone. We know their stories, though. Americans faced their common foe together, with shared sacrifice. Widows bought war bonds with their savings. Common goods were rationed. Every able-bodied male not needed for industry or farming was in uniform, and many women, too. Everyone sacrificed, and it worked.

We must sacrifice this time, too. It’s going to be inconvenient, expensive, and aggravating. We will exceed that World War II peak in the debt chart several years sooner than projected—possibly even this year. I don’t like it, either. But we have to do it.

We Are Facing a Depression, Not a Recession

We are already seeing large increases in request for unemployment insurance. It is going to explode. Let’s look at this data from homebase. A stunning 39% drop in the number of hourly employees going to work in the US just in the last 10 days. Is there anybody who thinks that’s not going to increase?

Quoting from Homebase:

Many of the hardest-hit cities—San Francisco, San Jose, Seattle, New York—showed steep declines last week that align with the rise in coronavirus cases. Seattle was the first to see significant impact early last week, but other cities quickly caught up. The introduction of forced closures and shelter-in-place orders has furthered the slowdown. San Francisco, Boston, Pittsburg, New York, and San Jose currently have the greatest reduction in hours worked, down by more than 50% in each city on Tuesday.  

3 out of 5 workers in San Francisco did not go to work last week. It will get worse. The reduction in work hours there was 64%. Middle America cities are in the 40 to 50% range.

Mike Shedlock has been tracking government data on employment. You can read his entire take at the link, but extrapolating the loss of jobs would mean an unemployment rate of close to 12% and a U-6 rate of 39%.

Even if he is wrong by half, which I don’t think he is, that unemployment number ALREADY is staggering. We are literally down well over 10 million jobs and going to 20 million.

I know that Amazon is hiring 100,000 workers and giving them all a raise. Good on Jeff Bezos. Seriously. But that is only a fraction of 1% of the jobs we are losing. We the People, the government collectively, should step in to help the remainder of those people. The coronavirus is not their fault.

Sidebar: A hotel exec friend who runs 125 hotels has let 90–95% of the staff go. Literally tens of thousands. There are 54,000 hotels in the country. Do the math. Another friend handles the backroom for 2,200 dentists. 80% have shut down as they can’t get the masks and other things they need. There are 100,000 dentists with an average employment of maybe 10 people. Minimum 500,000 employees, plus dentists, without income. Average income per employee is $50,000. Dentists are critical but they have to have the basic gear to do it.

There are literally hundreds of examples. Dear gods…

Nobody in their right mind, given what might happen this weekend (if the rumors are true), can possibly think these employment numbers will not get worse. These are not recession numbers.

They are depression numbers.

Let me be clear. The US is facing a deflationary depression. One cannot have the economic impacts we are seeing and think they will magically go away when the virus does. That’s not how economics and business work.

I am not the first person to say it, but we need something like a Marshall Plan for the US. I recognize that Europe and the rest of the world are struggling too. I get it.

But the entire world will go into a deflationary depression if we do not solve the crisis in the US. Hopefully an eventually strong US can help lead the world out.

I am calling for significant quantitative easing or whatever you want to call it. I get the irony in that.

The Federal Reserve is largely responsible for where we are today, keeping rates too low for too long, and the government running deficits way beyond nominal GDP. These are bad things.

But we have to deal with the situation as it is today. And today, much of our country is under stress and wondering how they’re going to feed their families. How do they pay their rent? Electric bills? 100 other items? Some of us can individually help our family and friends, but collectively we need to step in and help everyone.

Grousing about bad policies and mistakes of the past doesn’t solve the problems we face today. There is no need to punish the average American for bad Federal Reserve policy that they had no control over any more than we should punish them for the coronavirus. Maybe when this is all over we can think about how we ensure better policy in the future.

What Will It Take?

There’s no single perfect answer; we will muddle through this, making mistakes along the way but hopefully learning from them. Any way you look at it, the numbers will be staggering.

Spending even a few trillion dollars to protect everyone’s income during the lockdown period isn’t crazy at all. I think it is the best option available. And we need to do the same for our business so they will be there when we get through this. Not just big business, but every small business as well.

President Trump said the other day that they will help the airlines because the virus is not the fault of the airlines. Quite true. Even though they spent 96% of their profits on stock buybacks. We absolutely have to have the airlines functional when this is over. But perhaps for companies that used their money for stock buybacks, that aid comes with an equity kicker for taxpayers. Nonvoting equity to be sure. But if they ask us to socialize the risk while they spend money on stock buybacks, it’s only fair to expect a little in return. Asking for outright grants? Get real guys (unless it goes directly to employees who were laid off).

Hotels, cruise ships, microbreweries and restaurants, hair salons, and a hundred thousand other small businesses need to survive in order to hire people when we reach the other side.

It’s not about whether some business is “mission-critical” or vital to the economy. It’s about all the jobs those businesses provide. To the worker, a job at a cruise company is no different than a job at an airline company. It’s their income and the way they support their family.

Of course, we have to be smart about how we do this. We also have to be fast. Speed trumps everything. I know there is great concern someone might get something they don’t deserve. We all need to get over that. Right now, speed is more important. We have to help as many as possible, as fast as possible. We can sort out the mistakes later, and recover any excess payments via the tax system.

Furthermore, while I cannot reveal my sources, I know for a fact that the unemployment websites of some states have crashed. They simply weren’t built to handle the volume of applications.

We should help people first and businesses later. For one thing, helping people will help businesses by restoring their customers’ confidence and spending power. Some businesses are hurting more than others. The travel industry, restaurants, and many service businesses are in the worst position because they can’t make up lost revenue. This lockdown period means revenue is lost forever to them.

As soon as possible, we should help businesses who agree to use the money to pay their employees throughout this crisis. They actually know who is working and needs the money. Perhaps rent forbearance for a few months in conjunction with loans to landlords?

What we absolutely must avoid, in my view, is creating even the perception that regular workers are saving Wall Street or wealthy people in general. That mistake in the financial crisis years is still haunting us.

Fortunately, we can save companies and jobs without rewarding executive incompetence. It’s really not hard. We can save our economy without turning socialist. That’s not hard, either.

But it will be expensive. I won’t get into specific plans because they’re evolving so fast. I may not endorse everything the government does, but I strongly endorse doing something rather than nothing.

We could be talking $4–$5 trillion. Everyone knows that I have been a deficit hawk and a scold on debt for over 40 years. I am the anti-Paul Krugman.

Except right now, in this particular situation, I think Paul Krugman and I would agree. (I am seriously laughing at myself as I write that.) The stimulus that is being talked about today is not enough. It must be more. Much, much more.

How Things Are Going to Change and What We Should Do

1.   I can’t say this enough. We are facing the strong possibility of a deflationary depression. That cannot be allowed to happen. That is going to mean significant amounts of government debt, much of which will have to be monetized by the Federal Reserve. I fully get that is risking an inflationary episode as a result.

I am not going to spend a great deal of time next explaining complex economic realities. In order to get inflation, there has to be a significant increase in demand along with an increase in the money supply. We are going to increase the money supply, but it is not clear that demand will significantly increase afterwards at anything like what we had before.

This crisis could emotionally scar a generation just as much as the Great Depression affected our grandparents and great-grandparents. Especially after the Great Recession just 10 years ago.

The 1990 recession and the bubble blowing up in Japan, even accompanied by massive monetary stimulus on the order of what we are talking about now, did not result in inflation. The Japanese became savers. It literally changed their habits.

There are ways to control an inflationary episode. There is damn little you can do with a deflationary depression.

2.   The entire episode will change the way we structurally organize our business lives. Companies are finding out they can do more remote work. Workers will enjoy that. We may not need as much office space. We are also going to find out that we might need less of certain things. I am not going to speculate on what. But that means a lot of jobs that existed pre-crisis are simply not going to come back in any viable form post-crisis.

We cannot keep a small business going beyond a certain point. Pick a number. Three months? Six months? At some point if you as a business owner can’t figure it out, you have to lose government support. You and your employees will have to figure out something else to do. Not unlike it was a few months ago.

3.   This is important. The country ramped up for World War II. But when the war was over, the soldiers came home and mustered out of the armed services. We cannot stay on a wartime footing for more than a few months after the end of this crisis. No permanent government programs. Period.

I suggest that since we are blowing out the budget anyway, why not sell a few trillion dollars of 100-year, 1% bonds and use the entire proceeds on infrastructure projects over the next four years. No high-speed trains, just replacing our roads and bridges, water systems, and upgrading our grids.

This may seem radical, but the world can absorb those bonds along with the other bonds we will need to sell. The Federal Reserve is not allowed to go into a primary auction. But as soon as those bonds are sold, the Fed can buy them. Why can’t the Fed offer a 1% profit to anyone who would buy that bond and sell almost immediately? Open it up to individuals, if possible, but damn well make sure the banks participate. You don’t have to issue the entire amount on day one, just as the money is needed. Which reduces inflationary risk.

What that does is put people back to work—people whose jobs are no longer viable. And we actually get something for the infrastructure expenditures that will last for generations. Gods know we need to spend money on infrastructure. It is crumbling.

4.   Let’s assume we keep everybody afloat for six months, although I sincerely hope it is not that long. An extreme lockdown could mean a few months, not six months. What do we do after the virus is contained and we have vaccines?

5.   UGH. I hate saying this. I truly do. But we may be in a period like at the end of WW2 where the Fed controlled the entirety of the yield curve. Maybe this is the Great Reset 1.0, or a good practice round. Let’s do what we can and learn from it.

We could do the same thing with businesses. It’s an easy way to collect data and present it to the government. I am sure that Zuckerberg, Brin, et al. can whip that up on their own nickel as part of the war effort.

6.   This may seem like it’s out of left field, but many unemployed workers are already using Facebook. I’ll bet you between Facebook, Google, SAP, and other Silicon Valley computer wizards, they could come up with a way to identify need and connect with the US Treasury to make sure checks go out. In a compliant way. Yes, some people will try to cheat the system. When we find them, we will need to discuss with them what Americans should do in the middle of a crisis. Cheating is not one of them. But I believe the bulk of Americans will do the right thing. Let’s make it quick and easy for them.

We are now all too familiar with the concept of social distancing. We need to think about economic distancing. When we have economic partners who act irrationally, hiding data about a new virus for months, allowing it to spread worldwide, destroying supply chains in the meantime, how much do we want to rely on them in the future? Every major flu of the past 20 years has come out of China. Just saying…

This is a virus we can beat. It is not the zombie virus. But someday it could be, and this is a great test to learn how to deal with it. Let’s not forget these lessons. Countries that want to hide their data are candidates for economic distancing.

7.   It should be obvious, but we need to think about supply chains. The US is running out of something as simple as mouth testing swabs. It seems the entire world supply is made by two companies. When I was asked where I thought those were, I replied “China.” It is worse. They are both in Milan, Italy. Milan is in lockdown. The swabs are on the dock. But they are in their own kind of quarantine.

8.   Let’s look at some positives. Jobs and manufacturing were already coming back closer to the marketplaces, albeit using robots and 3D printing. But that still means jobs. That will accelerate. Over time, that means a lot more jobs in North America and Europe. And better supply chains.

We really need to look at where critical medical and socially necessary products are made. We can’t fix it all at once, but we should make a start.

Once the CDC and FDA stopped trying to control things, we’re seeing a “Cambrian Explosion” of innovation and drugs to deal with COVID-19. The Milken Institute has a list of 101 different vaccines and drugs that are in process or are being tested.

Freed of government regulation, doctors are finding that certain drugs already available can reduce the time a patient is sick from 11 days to 4 days. That is a huge increase in survivability. It turns out the malaria drug has a significant effect. Who knew? Well, pretty much nobody until doctors began throwing everything against the wall to see what would stick.

People are beginning to post do-it-yourself ventilators made from parts you can get at a hardware store. Put some of those automobiles and Boeing workers on an assembly line. History note: The first ventilators were made by Boeing for bombers in World War II. American ingenuity can help us a great deal.

9.   Dr. Mike Roizen asked me to emphasize that there are things you can do to improve your own immunity. His top three are make sure you get a lot of sleep, eat healthy, and manage your stress. I would add as much social distancing as you practically can.

Bill Ackman was right a few days ago on CNBC. Trump needs to lock this country down. I know for a fact that the National Guard is being mobilized in many places. I need to apologize to my friend Governor Greg Abbott of Texas, who was locking Texas down as I sent out my last letter.

BUT, and this is a big but, look at this real-time flight tracker as of 11 am Friday. Does this look like a matrix for spreading a virus to you? These are flights that are IN THE AIR right now.

Maybe we need to rethink what is necessary flight (as in freight and foods and medicine) and what can be avoided. For at least a few weeks. As the links I provided at the beginning showed, every day of lockdown makes an exponential difference.

I know for a fact that the National Guard is being mobilized in numerous states. One can only speculate about the reason but you don’t do that unless you are planning to take serious action. I hope by the time you get this letter, in less than a few hours after I hit the send button below, that has already been announced.

We Can Do This

We can do this. And when I say “we,” I mean myself and my American investor-readers, because our country has blessed us greatly. We have the means to get through this. Not everyone does. In fact, relatively few do. We are the fortunate ones. This is our calling and our responsibility. Not only can we do it, we must do it.

If you are not in America, you can do it as well. I am pulling for everyone in the world. Every country is going to have to figure out how to deal with its own problems. We need a world that is thriving and growing so that humanity can move forward to a much brighter future.
Personal Thoughts

I’ve given you a lot to think about today. These are my unvarnished thoughts. I want your thoughts as well. I do read every comment and letter. My staff makes sure I get one sometimes LONG Word document of each and every one. I do my best to answer.

You stay safe and healthy and maybe use the time, if you have some, to call friends and family. A phone call is clearly social distancing. But it is much appreciated and will make somebody’s day much better.

Hang in there, there is going to be so much opportunity as we come out of this. And all of the old opportunities that I’ve been saying and talking and writing about over the years are not going away. Just postponed for a few months. Have a great week and I’ll be back again.

As I was doing the last-minute edit, I find my daughter Amanda, who lost both her jobs yesterday, is in the hospital as she lost all feeling on her right side. In the CT scan now. Stress as her husband just went back to school and she was the primary breadwinner with two young girls? This stuff is all too real…

(Publisher’s Note: I am sad to inform you that as we were preparing this letter for publishing, we learned that Amanda has suffered a stroke. John, our thoughts and prayers are with you, Amanda, and your entire family. –Ed D’Agostino)

Your believing we’ll get through this analyst,

John Mauldin
Co-Founder, Mauldin Economics

Closed by covid-19

Paying to stop the pandemic

The struggle to save lives and the economy is likely to present agonising choices

PLANET EARTH is shutting down.

In the struggle to get a grip on covid-19, one country after another is demanding that its citizens shun society.

As that sends economies reeling, desperate governments are trying to tide over companies and consumers by handing out trillions of dollars in aid and loan guarantees. Nobody can be sure how well these rescues will work.

But there is worse. Troubling new findings suggest that stopping the pandemic might require repeated shutdowns. And yet it is also now clear that such a strategy would condemn the world economy to grave—perhaps intolerable—harm. Some very hard choices lie ahead.

Barely 12 weeks after the first reports of people mysteriously falling ill in Wuhan, in central China, the world is beginning to grasp the pandemic’s true human and economic toll. As of March 18th SARS-CoV-2, the virus behind covid-19, had registered 134,000 infections outside China in 155 countries and territories.

In just seven days that is an increase of almost 90,000 cases and 43 countries and territories.

The real number of cases is thought to be at least an order of magnitude greater.

Spooked, governments are rushing to impose controls that would have been unimaginable only a few weeks ago. Scores of countries, including many in Africa and Latin America, have barred travellers from places where the virus is rife.

Times Square is deserted, the City of London is dark and in France, Italy and Spain cafés, bars and restaurants have bolted their doors. Everywhere empty stadiums echo to absent crowds.

It has become clear that the economy is taking a much worse battering than analysts had expected.

Data for January and February show that industrial output in China, which had been forecast to fall by 3% compared with a year earlier, was down by 13.5%. Retail sales were not 4% lower, but 20.5%.

Fixed-asset investment, which measures the spending on such things as machinery and infrastructure, declined by 24%, six times more than predicted. That has sent economic forecasters the world over scurrying to revise down their predictions. Faced with the most brutal recession in living memory, governments are setting out rescue packages on a scale that exceeds even the financial crisis of 2007-09.

This is the backdrop for fundamental choices about how to manage the disease. Using an epidemiological model, a group from Imperial College in London this week set out a framework to help policymakers think about what lies ahead. It is bleak.
One approach is mitigation, “flattening the curve” to make the pandemic less intense by, say, isolating cases and quarantining infected households. The other is to suppress it with a broader range of measures, including shutting in everybody, other than those who cannot work from home, and closing schools and universities. Mitigation curbs the pandemic, suppression aims to stop it in its tracks.

The modellers found that, were the virus left to spread, it would cause around 2.2m deaths in America and 500,000 in Britain by the end of summer. In advanced economies, they concluded, three months of curve-flattening, including two-week quarantines of infected households, would at best prevent only about half of these.

Moreover, peak demand for intensive care would still be eight times the surge capacity of Britain’s National Health Service, leading to many more deaths that the model did not attempt to compute. If that pattern holds in other parts of Europe, even its best-resourced health systems, including Germany’s, would be overwhelmed.

No wonder governments are opting for the more stringent controls needed to suppress the pandemic. Suppression has the advantage that it has worked in China. On March 18th Italy added 4,207 new cases whereas Wuhan counted none at all.

China has recorded a total of just over 80,000 cases in a population of 1.4bn people. For comparison, the Imperial group estimated that the virus left to itself would infect more than 80% of the population in Britain and America.

But that is why suppression has a sting in its tail. By keeping infection rates relatively low, it leaves many people susceptible to the virus. And since covid-19 is now so widespread, within countries and around the world, the Imperial model suggests that epidemics would return within a few weeks of the restrictions being lifted.

To avoid this, countries must suppress the disease each time it resurfaces, spending at least half their time in lockdown. This on-off cycle must be repeated until either the disease has worked through the population or there is a vaccine which could be months away, if one works at all.

This is just a model, and models are just educated guesses based on the best evidence. Hence the importance of watching China to see if life there can return to normal without the disease breaking out again.

The hope is that teams of epidemiologists can test on a massive scale so as to catch new cases early, trace their contacts and quarantine them without turning society upside down. Perhaps they will be helped by new drugs, such as a Japanese antiviral compound which China this week said was promising.

But this is just a hope, and hope is not a policy. The bitter truth is that mitigation costs too many lives and suppression may be economically unsustainable. After a few iterations governments might not have the capacity to carry businesses and consumers. Ordinary people might not tolerate the upheaval. The cost of repeated isolation, measured by mental well-being and the long-term health of the rest of the population, might not justify it.

In the real world there are trade-offs between the two strategies, though governments can make both more efficient. South Korea, China and Italy have shown that this starts with mass-testing. The more clearly you can identify who has the disease, the less you must depend upon indiscriminate restrictions.

Tests for antibodies to the virus, picking up who has been infected and recovered, are needed to supplement today’s which are only valid just before and during the illness (see article). That will let immune people go about their business in the knowledge that they cannot be a source of further infections.

A second line of attack is to use technology to administer quarantines and social distancing. China is using apps to certify who is clear of the disease and who is not. Both it and South Korea are using big data and social media to trace infections, alert people to hotspots and round up contacts.

South Korea changed the law to allow the state to gain access to medical records and share them without a warrant. In normal times many democracies might find that too intrusive. Times are not normal.

Last, governments should invest in health care, even if their efforts take months to bear fruit and may never be needed. They should increase the surge capacity of intensive care. Countries like Britain and America are desperately short of beds, specialists and ventilators.

They should define the best treatment protocols, develop vaccines and test new therapeutic drugs. All this would make mitigation less lethal and suppression cheaper.

Be under no illusions. Such measures might still not prevent the pandemic from extracting a heavy toll.

Today governments seem to be committed to suppression, whatever the cost. But if the disease is not conquered quickly, they will edge towards mitigation, even if that will result in many more deaths.

Understandably, just now that is not a trade-off any government is willing to contemplate.

They may soon have no choice.

Brexit solved with the sword of Damocles

The UK is being belligerent, the EU inflexible. But a deal can be done this year

Gideon Rachman

UK EU Sword of Damocles
© James Ferguson

The prelude to the trade negotiations between Britain and the EU has felt like the weigh-in for a heavyweight title fight.

As they prepared for Brexit Two, the rematch, the two boxers shouted threats at each other. Boris Johnson, the Blond Bomber — fresh from a knockout victory in the UK election — swore that he would come out swinging. Britain, he said, was ready to break off talks, rather than take a step backwards and compromise. Boris’s corner seemed confident that Michel Barnier — the Bruiser from Brussels (still undefeated, after two years of brutal negotiations) — was now ripe for the taking.

Meanwhile Mr Barnier’s trainer, Jean-Yves Le Drian (also known as the French foreign minister) warns that Britain and the EU will “rip each other apart”. On Monday, March 2, the bell rang for the start of the discussions, and the two boxers headed out into the ring.

It is all very exciting and very worrying, even for experienced observers. Mujtaba Rahman, head of the Eurasia Group in Europe, warned last week that: “Odds of no deal are rising and space for a deal is shrinking — and rapidly.” Others take a similar view.

There is no doubt that the issues involved are complex and the timetable is tight. The British side is belligerent and unprincipled. The EU side is complacent and inflexible.

None of that looks good. But, despite all this, I think a trade deal will be agreed by the end of the year. I even have a fair idea what it will look like.

Why the confidence? Partly, because we saw both the EU and Britain flirt with no deal during the negotiation of the withdrawal agreement last year, and then back off. Ultimately, neither side was prepared to accept the destructive consequences. It is certainly possible that one or both sides will miscalculate this time and we will end up with no deal. But the odds are that, as with the withdrawal agreement, a compromise will be found.

As Eurasia’s Mr Rahman has observed, the biggest issue in the negotiations is Britain’s “super hardline on divergence and the need to square this with EU’s expectations on the level playing field”. For those unfamiliar with the jargon, this means that the UK insists that it must retain the right to diverge from EU law. In response, the EU insists that if Britain undercuts EU standards on labour law, the environment or state subsidies, then it cannot also expect tariff-free and quota-free access to the EU’s single market.

It sounds like a big problem. Fortunately, the argument may be more about theory than reality. That is because the Thatcherite purists within Mr Johnson’s Conservative party are losing the ideological battle. They argued for 30 years that Brussels regulation was strangling the British economy and that the UK should break free to opt for a low-tax, small-state model.

But the pro-Brexit voters in the north of England, who delivered the last election for Mr Johnson, have been promised higher public spending and more social protection. The idea of Britain as “Singapore-on-Thames”, always a misleading analogy, is sliding off the agenda.

What remains of the original Brexit agenda is the Johnson government’s determination to restore British sovereignty, removing the EU’s right to legislate directly or indirectly for the UK.

This distinction between theory and practice opens the way for an eventual deal. The British will insist on their right to diverge from EU law but will assure the Europeans that, in practice, they will retain social and environmental standards that are at least as stringent as those of the EU.

This is rather like a child insisting that it will determine its own bedtime but indicating that, in practice, it will go to bed at 8pm as normal.

The EU, naturally, will not take this pledge on trust. It will grant Britain tariff and quota-free access to the European single market. But it will also set up a formal process through which the EU reviews British legislation.

If the European Commission or parliament (or some combination) finds that the UK has un-levelled the playing field, the EU will retain the right to impose tariffs on Britain.

Any such deal would involve risks and compromises for both sides. The British will have to trade with a sword of Damocles over their heads, which might discourage investment.

The UK will also have to accept that the EU will decide on breaches unilaterally. Having insisted on British sovereignty, they can hardly complain if the EU side also makes sovereign decisions.

As for Brussels, it will have to accept that a review process will mean that there is an element of constant negotiation in the UK-EU relationship. This is a feature of the EU-Switzerland relationship that Brussels is desperate to avoid replicating.

There is also clearly a risk that the British would game the system, by making incremental changes that eventually amount to significant divergence.

Even so, both sides will make real gains from the sword of Damocles solution. The EU avoids the danger of a total regulatory free-for-all. Britain retains a decent level of access to its most important market. And both sides retain a co-operative relationship with like-minded neighbours in an increasingly dangerous world.

It is less exciting than a first-round knockout. But it makes more sense.


The right medicine for the world economy

Coping with the pandemic involves all of government, not just the health system

IT IS NOT a fair fight, but it is a fight that many countries will face all the same. Left to itself, the covid-19 pandemic doubles every five to six days. When you get your next issue of The Economist the outbreak could in theory have infected twice as many people as today.

Governments can slow that ferocious pace, but bureaucratic time is not the same as virus time.

And at the moment governments across the world are being left flat-footed.

The disease is in 85 countries and territories, up from 50 a week earlier. Over 95,000 cases and 3,200 deaths have been recorded. Yet our analysis, based on patterns of travel to and from China, suggests that many countries which have spotted tens of cases have hundreds more circulating undetected (see Graphic detail).

Iran, South Korea and Italy are exporting the virus. America has registered 159 cases in 14 states but as of March 1st it had, indefensibly, tested just 472 people when South Korea was testing 10,000 a day. Now that America is looking, it is sure to find scores of infections—and possibly unearth a runaway epidemic.

Wherever the virus takes hold, containing it and mitigating its effects will involve more than doctors and paramedics. The World Health Organisation has distilled lessons from China for how health-care systems should cope (see Briefing). The same thinking is needed across the government, especially over how to protect people and companies as supply chains fracture and the worried and the ill shut themselves away.

The first task is to get manpower and money to hospitals. China drafted in 40,000 health workers to Hubei province. Britain may bring medics out of retirement. This week the World Bank made $12bn and the IMF $50bn available for covid-19. The Global Fund, which fights diseases like malaria and TB, said countries can switch grants.

In America Congress is allocating $8.3bn of funding. The country has some of the world’s most advanced hospitals, but its fragmented health system has little spare capacity. Much more money will be needed.

Just as important is to slow the spread of the disease by getting patients to come forward for testing when outbreaks are small and possible to contain. They may be deterred in many countries, including much of America, where 28m people are without health coverage and many more have to pay for a large slug of their own treatment.

People also need to isolate themselves if they have mild symptoms, as about 80% of them will.

Here sick pay matters, because many people cannot afford to miss work.

In America a quarter of employees have no access to paid sick leave and only scattered states and cities offer sickness benefits. Often the self-employed, a fifth of Italy’s workforce, do not qualify. One study found that, in epidemics, guaranteed sick pay cuts the spread of flu in America by 40%.

Sick pay also helps soften the blow to demand which, along with a supply shock and a general panic, is hitting economies. These three factors, as China shows, can have a dramatic effect on output. Manufacturing activity there sank in February to its lowest level since managers were first surveyed in 2004. In the quarter to March the economy as a whole could shrink for the first time since the death of Mao Zedong.

The OECD expects global growth this year to be its slowest since 2009. Modelling by academics at the Australian National University suggests that GDP in America and Europe would be 2% lower than it would have been in the absence of a pandemic and perhaps as much as 8% lower if the rate of deaths is many times higher than expected.

Financial markets are pricing in fear. The S&P 500 has fallen by 8% from its peak on February 19th. Issuance of corporate debt on Wall Street has more or less stopped. The yield on ten-year Treasuries dipped below 1% for the first time ever.

In rich countries, most of the economic effort has been directed towards calming financial markets. On March 3rd America’s Federal Reserve cut rates a fortnight before its monetary-policy meeting, and by an unusually large half-a-percentage point (see article). The central banks of Australia, Canada and Indonesia have also acted. The Bank of England and the European Central Bank are both expected to loosen policy, too.

Yet this slowdown is not a textbook downturn. Lower rates will ease borrowing costs and shore up sentiment, but no amount of cheap credit can stop people falling ill. Monetary policy cannot repair broken supply chains or tempt anxious people into venturing out. These obvious limitations help explain why stockmarkets failed to revive after the Fed’s cut.

Better to support the economy directly, by helping affected people and firms pay bills and borrow money if they need it. For individuals, the priority should be paying for health care and providing paid sick leave.

The Trump administration is considering paying some hospital bills for those with the virus.

Japan’s government will cover the wages of parents who stay at home to care for children or sick relatives; Singapore’s will help cab drivers and bosses whose employees are struck down.

More such ideas will be needed.

For companies the big challenge will be liquidity. And although this shock is unlike the financial crisis, when the poison spread from within, that period did show how to cope with a liquidity crunch. Firms that lose revenues will still face tax, wage and interest bills. Easing that burden, for as long as the epidemic lasts, can avoid needless bankruptcies and lay-offs. Temporary relief on tax and wage costs can help.

Employers can be encouraged to choose shorter hours for all their staff over lay-offs for some of them. Authorities could fund banks to lend to firms that are suffering, as they did during the financial crisis and as China is doing today. China is also ordering banks to go easy on delinquent borrowers.

Western governments cannot do that, but it is in the interest of lenders everywhere to show forbearance towards borrowers facing a cash squeeze, much as banks did to public-sector employees during America’s government shutdown in 2018-19.

There is a tension. Health policy aims to spare hospitals by lowering the epidemic’s peak so that it is less intense, if longer-lasting. Economic policy, by contrast, aims to minimise how long factories are shut and staff absent.

Eventually governments will have to strike a balance. Today, however, they are so far behind the epidemic that the priority must be to slow its spread.

Banks in talks with Fed on further steps to boost lending

Wall Street seeks assurances they can breach liquidity requirements to help stricken companies

Laura Noonan and James Fontanella-Khan in New York, and James Politi and Brendan Greeley in Washington

A pedestrian walks on Wall St., as concerns about coronavirus disease (COVID-19) keep more people at home, in front of the New York Stock Exchange (NYSE) in New York, U.S., March 18, 2020. REUTERS/Lucas Jackson
Lenders want the Fed to flesh out its promise not to sanction those who run down their liquidity buffers © Reuters

US banks are seeking assurances from the Federal Reserve that they will not be penalised if they temporarily breach liquidity rules because of emergency lending to clients stricken by the coronavirus crisis.

Lenders are pressing the central bank to flesh out its promise not to sanction those who run down their liquidity buffers to aid the economy, and are also exploring other ways the Fed and banks can work together to boost lending without banks taking on too much risk.

The news follows statements from the Fed designed to get banks lending, including publicly encouraging them to reduce their capital and liquidity buffers to minimum levels and take funding from a crisis-era liquidity facility known as the discount window.

“There’s been a lot of dialogue and it’s been very constructive,” said a senior executive at one large bank. Peers confirmed that talks between the Fed and banks over boosting lending had been going on for several weeks, resulting in public announcements setting the tone for banks to do more lending.

"Our message to everybody is we need to keep the funds flowing to get the economy going. That is job one,” said Patrick Harker, president of the Philadelphia Fed. “The shock that's hit our society and our economy is severe. So we need to do whatever it takes, all of us, not just the Fed, but everybody, to get the money to where it’s needed now."

The Fed wants banks to step up lending to companies whose businesses will be starved of cash because of enforced shutdowns during the coronavirus pandemic. Workers face layoffs or reduced hours as normal life is suspended across entire cities for an indefinite period of time.

Severe turbulence in financial markets means that bigger companies are also demanding more support from banks, including drawing down emergency funding lines and asking for new facilities.

A Fed statement last week allowing banks to run down their capital and liquidity buffers was intended to do just that, but senior executives say it fell short of the mark, prompting further discussions.

The buffers refer to the highly liquid assets such as cash and T-bills banks hold above their regulatory obligation to carry high quality liquid assets equal to at least 100 per cent of net cash outflows over a 30 day period of stressed conditions. The requirements were put in place after the 2008 financial crisis to ensure the banks could survive another meltdown.

One senior executive said that regulators had given "clear" guidance allowing the banks to dip further into their capital buffers without having to halt dividend payments or bonuses.

On liquidity, the Fed said regulators would “support” banks that use their liquidity buffers “to lend and undertake other supportive actions in a safe and sound manner”.

The first senior executive said there was still some work to be done to convince banks to get their liquidity levels down to those minimum levels instead of the 120-140 per cent of 30-day outflows that they traditionally maintain.

“There could be days when you would fall below that based on how the market moves" we want to make sure if we're below that some days we don't get penalised because we're doing what we're being asked to do,” he added.

Q&A document designed to clarify the Fed’s approach said firms that dip below the 100 per cent most submit a plan to its supervisor which was “appropriate to the circumstances . . . and the economic environment for getting back above it”.

“I’m a little worried about going below 100 per cent,” the first executive said, adding that while he “trusts” the Fed not to penalise banks, he feared backlash from media and other third parties if banks were known to have breached their minimum levels.

The government is also canvassing Wall Street on the mechanics of how to get public money to small businesses in an effective way.

Banks have also been clear in their discussions with the Fed that while they will increase lending, there are limits to their support, even though the large banks who attract the highest level of Fed supervision have more than doubled their capital and liquidity over the past decade.

“We can’t take on inordinate amounts of risk,” said a senior executive at a third big US lender, adding that while it might be popular to make a lot of loans now, “we also have to collect”.

“If the Fed expects us to bail out small businesses they are wrong,” said a banker at one of the largest US banks by assets. “We are not going to take undue risks . . . we see things much more closely than the Fed so we are not going to risk everything because they want us to do so. It’s not going to happen.”

Other bankers said the institutions did not want to launch support schemes for particular industries, and would not make rescue loans to strategically important companies who are unlikely to be able to repay their debts.

Two executives said that they will continue to provide credit lines to large companies that have longstanding relationships with their banks but they were less likely to support smaller businesses that are expected to be hard hit by the lockdowns imposed to limit the spread of the virus.

A $60 Billion Housing Grab by Wall Street

Hundreds of thousands of single-family homes are now in the hands of giant companies — squeezing renters for revenue and putting the American dream even further out of reach.

By Francesca Mari

Credit...Photo Illustration by Nix + Gerber Studio for The New York Times

Chad Ellingwood wasn’t really in the market for a home in the summer of 2006. But when his best friend came across an intriguing listing in Woodland Hills — a bedroom community in Los Angeles County’s San Fernando Valley — the two men decided to visit on a whim.

Entering the property beneath the canopy of a grand deodar, Ellingwood, a big man with a gentle presence, felt as if he had been transported to a ranch house in Northern California, much like one he often visited as a child, all old growth and overgrown greenery — olive trees, citrus trees, sycamores and redwoods.

He and his friend meandered past a pond to an inviting teal house built in 1958, “a whimsical masterpiece,” Ellingwood told me. Inside there was a “captain’s quarters” — a room designed to look like the hull of a boat with a built-in water bed and drawers — and numerous stained-glass windows that the couple who owned it had made themselves.

The pièce de résistance depicted a faerie woman with flowing hair whose fingers turned into peacock feathers. Behind the house were a couple of small buildings, one of which was office-size — a meditation “Zen den,” Ellingwood thought. The other was an A-frame, Swiss-chalet-style granny unit above the garage, where the owner displayed a toy train collection.

“The house was not in amazing shape,” Ellingwood said. “It needed some help. But I loved it. I wanted it immediately.”

One of Ellingwood’s goals had always been to buy a house by the time he turned 30 — a birthday that unceremoniously came and went six months earlier.

When Ellingwood began speaking to lenders, he realized he could easily get a loan, even two; this was the height of the bubble, when mortgage brokers were keen to generate mortgages, even risky ones, because the debt was being bundled together, securitized and spun into a dizzying array of bonds for a hefty profit.

The house was $840,000. He put down $15,000 and sank the rest of his savings into a $250,000 bedroom addition and kitchen remodel, reasoning that this would increase the home’s value.

Suddenly adulthood was upon him. He married on New Year’s Eve, and his wife gave birth to their first child, a son, in April. When his 88-year-old grandfather, an emeritus professor of electrical engineering at the University of Houston, had a bad fall, Ellingwood urged him to move into the house for sale just across his backyard.

The grandfather bought the house with his daughter, Ellingwood’s mother, and the first thing they did was tear down the fence between the two properties, creating one big family compound. In 2009, Ellingwood’s older sister bought a house around the corner.

But shortly after the birth of Ellingwood’s second son, in June 2010, his marriage fell apart. He and his wife each sued for sole custody. To pay his lawyer, he planned to refinance his house, and his grandfather advanced him his inheritance.

By 2012, Ellingwood had paid his lawyer more than $80,000, and in the chaos of fighting for his children, he stopped making his mortgage payments. He consulted with several professionals, who urged him to file for bankruptcy protection so that he could get an automatic stay preventing the sale of his house.

In May 2012, Ellingwood was driving his two boys to the beach, desperate to make the most of his limited time with them, when he got a call. He pulled over and, with cars whizzing by and his boys babbling excitedly in the back seat, learned that he had lost his house. He had dispatched a friend to stop the auction with a check for $27,000 — the amount he was behind on his mortgage — but there was nothing to be done.

Because Ellingwood began to file for bankruptcy and then didn’t go through with it, a lien was put on his house, his “vortex of love” as he called it, that precluded him from settling his debt.

The house sold within a couple of minutes for $486,000, which was $325,000 less than what he owed on it.

In the months after, though, Ellingwood was graced with what seemed like a bit of luck. The company that bought his home offered to sell it back to him for $100,000 more than it paid to acquire it.

He told the company, Strategic Acquisitions, that he just needed a little time to get together a down payment. In the meantime, the company asked him to sign a two-page rental agreement with a two-page adendum.

It was clear from the beginning that there was something a little unusual about his new landlords. Instead of mailing his rent checks to a management company, men would swing by to pick them up. Within a few months, Ellingwood noticed that one of the checks he had written for $2,000 wasn’t accounted for on his rental ledger, though it had been cashed.

He called and emailed and texted to resolve the problem, and finally emailed to say that he wouldn’t pay more rent until the company could explain where his $2,000 went. For more than three months, he withheld rent, waiting for a response. Instead, the company posted an eviction notice to his door.

Ellingwood hired a lawyer and reported to the Santa Monica courthouse on his court date with all of his cashed checks in chronological order. When the judge called his case, the lawyer for Strategic Acquisitions asked to have a moment to review the paperwork. After marking each of Ellingwood’s checks off the accounting ledger, the lawyer concluded that the company had, in fact, erred. Strategic Acquisitions had grown so big so fast that it could barely keep its properties straight.

But it would only get bigger. Strategic Acquisitions was but one of several companies in Los Angeles County, and one of dozens in the United States, that hit on the same idea after the financial crisis: load up on foreclosed properties at a discount of 30 to 50 percent and rent them out.

Rather than protecting communities and making it easy for homeowners to restructure bad mortgages or repair their credit after succumbing to predatory loans, the government facilitated the transfer of wealth from people to private-equity firms.

By 2016, 95 percent of the distressed mortgages on Fannie Mae and Freddie Mac’s books were auctioned off to Wall Street investors without any meaningful stipulations, and private-equity firms had acquired more than 200,000 homes in desirable cities and middle-class suburban neighborhoods, creating a tantalizing new asset class: the single-family-rental home.

The companies would make money on rising home values while tenants covered the mortgages.

When Ellingwood reached out to Strategic Acquisitions in the winter of 2013 to buy his house, it was no longer interested in selling. Ellingwood asked again a year later; the company didn’t reply.

Over the next seven years, Strategic Acquisitions would turn over management to Colony Capital, and Colony’s real estate holdings would merge with a series of companies, culminating in the Blackstone subsidiary Invitation Homes, making Invitation Homes the largest single-family-rental company in America, with 82,500 homes at its height — and 79,505 homes after Blackstone sold its shares at the end of last year. Ellingwood, however, could hardly distinguish among the various L.L.C.s he paid rent to: Strategic Property Management, Colony American Homes, Starwood Waypoint, Invitation Homes.

The offices changed cities, downsized staff, hiked rents and imposed increasingly punitive fees. Ellingwood was required to submit his rent in different ways — online, certified mail, cashier’s check, in person — with slightly different rules, by the 1st, by the 3rd. The leases grew in length from four pages to 18 to 43 as the companies doubled down on strictures and transferred more responsibilities — mold remediation, landscaping, carbon-monoxide detectors — onto the renter.

Ellingwood didn’t know it at the time, but his story was to be the story of millions of renters around the country, the beginning of a downward spiral into the financial industry’s newest scheme to harvest money from housing.

Wall Street’s latest real estate grab has ballooned to roughly $60 billion, representing hundreds of thousands of properties. In some communities, it has fundamentally altered housing ecosystems in ways we’re only now beginning to understand, fueling a housing recovery without a homeowner recovery.

“That’s the big downside,” says Daniel Immergluck, a professor of urban studies at Georgia State University. “During one of the greatest recoveries of land value in the history of the country, from 2010 and 2011 at the bottom of the crisis to now, we’ve seen huge gains in property values, especially in suburbs, and instead of that accruing to many moderate-income and middle-income homeowners, many of whom were pushed out of the homeownership market during the crisis, that land value has accrued to these big companies and their shareholders.”

Chad Ellingwood in his home in the Woodland Hills neighborhood of Los Angeles. After his home was acquired by a private-equity firm, he was soon paying more in rent than he had paid for his first and second mortgage combined.Credit...Damon Casarez for The New York Times

Before 2010, institutional landlords didn’t exist in the single-family-rental market; now there are 25 to 30 of them, according to Amherst Capital, a real estate investment firm. From 2007 to 2011, 4.7 million households lost homes to foreclosure, and a million more to short sale. Private-equity firms developed new ways to secure credit, enabling them to leverage their equity and acquire an astonishing number of homes.

The housing crisis peaked in California first; inventory there promised to be some of the most lucrative. But the Sun Belt and Sand Belt were full of opportunities, too. Homes could be scooped up by the dozen in Phoenix, Atlanta, Las Vegas, Sacramento, Miami, Charlotte, Los Angeles, Denver — places with an abundance of cheap housing stock and high employment and rental demand. “Strike zones,” as Fred Tuomi, the chief executive of Colony Starwood Homes, would later describe them.

Jade Rahmani, one of the first analysts to write about this trend, started going to single-family-rental industry networking events in Phoenix and Miami in 2011 and 2012. “They were these euphoric conferences with all of these individual investors,” he told me — solo entrepreneurs who could afford a house but not an apartment complex, or perhaps a small group of doctors or dentists — “representing small pools of capital that they had put together, loans from regional banks, and they were buying homes as early as 2010, 2011.”

But in later years, he said, the balance began to shift: Individual and smaller investor groups still made up, say, 80 percent of the attendees, but the other 20 percent were very visible institutional investors, usually subsidiaries of large private-equity firms. Jonathan D. Gray, the head of real estate at Blackstone, one of the world’s largest private-equity firms and the one with the strongest real estate holdings, thought he could “professionalize” the fragmented single-family-rental market and partnered with a British property-investment firm, Regis Group P.L.C., as well as a local Phoenix company, Treehouse Group. Blackstone “would show up with teams of people and would look for portfolio acquisitions,” recalled Rahmani, who works for the firm Keefe, Bruyette & Woods, known as K.B.W. (K.B.W. sold some shares of Invitation Homes during its public offering.)

Throughout the country, the firms created special real estate investment trusts, or REITs, to pool funds to buy bundles of foreclosed properties. A REIT enables investors to buy shares of real estate in much the same way that they buy shares of corporate stocks. REITs typically target office buildings, warehouses, multifamily apartment buildings and other centralized properties that are easy to manage. But after the crash, the unprecedented supply of cheap housing in good neighborhoods made corporate single-family home management feasible for the first time.

The REITs were funded with money from all over the world. An investment company in Qatar, the Korea Exchange Bank on behalf of the country’s national pension, shell companies in California, the Cayman Islands and the British Virgin Islands — all contributed to Colony American Homes. Columbia University and G.I. Partners (on behalf of the California Public Employee’s Retirement System) invested $25 million and $250 million in the REIT Waypoint Homes.

By the middle of 2013, private-equity companies had raised or spent nearly $20 billion on single-family real estate, and more than 100,000 homes were in the hands of institutional investors. Blackstone’s Invitation Homes REIT accounted for half of that spending. Today, the number of homes is roughly 260,000, according to Amherst Capital.

“There’s no way of looking at the ownership of properties and understanding who owns them ultimately,” says Christopher Thornberg, a founding partner of the research firm Beacon Economics. While Invitation Homes and American Homes 4 Rent became publicly traded REITs, as far we know “the big money is still in private equity,” he says. (Progress Residential and Main Street Renewal are two such companies.) “They are completely subterranean. They’ve got multiple layers of corporations within corporations within holding companies.”

Colony Capital, the Los Angeles-based private-equity firm run by the Trump megadonor Thomas J. Barrack Jr., didn’t have as much money as Invitation Homes. As a result, it was choosier, says Peter Baer, the founder and chief executive of Strategic Acquisitions, the company Colony contracted to acquire homes.

From early 2012 to 2014, Strategic bought nearly 3,000 homes for Colony. Ellingwood’s home was one of the first. Baer told me he was instructed to buy “conventional product” in the price range of $300,000 to $600,000, typically three- or four-bedroom homes in good school districts that would be easy to rent — i.e., the types of homes desirable to first-time home buyers. Invitation Homes sought similar opportunities. (Some REITs developed software to evaluate public records for such factors, as well as for other metrics like proximity to employment hubs and transportation corridors.)

Throughout 2012 and 2013, representatives of private-equity firms flew to auctions all over the Sun Belt buying in bulk and squeezing out individual investors. By October 2012, as Stephen Schwarzman, the chief executive of Blackstone, said, the company was spending $100 million on homes a week.

Strategic would buy the property, obtain possession (often by offering occupants “cash for keys” — a few thousand dollars to move out as soon as possible), rehabilitate the property to Colony standards and then manage it for a year or two until Colony was ready to take over.

The deals were so good, in fact, that the gush of inventory lasted only a couple of years; the market recovered, in part because of these investors. “Between Invitation Homes and Colony, that created a bottom for the market in Los Angeles that it hadn’t seen for the prior two years,” Baer said. Researchers at the Federal Reserve agree.

But even at the time, some saw things differently. “Neighborhoods that were formerly ownership neighborhoods that were one of the few ways that working-class families and communities of color could build wealth and gain stability are being slowly, or not so slowly, turned into renter communities, and not renter communities owned by mom-and-pop landlords but by some of the biggest private-equity firms in the world,” says Peter Kuhns, the former Los Angeles director of the activist group Alliance of Californians for Community Empowerment. Around Los Angeles, the companies scooped up properties in the majority-minority areas of South Los Angeles, the San Gabriel Valley, the San Fernando Valley and Riverside.

Landlords can be rapacious creatures, but this new breed of private-equity landlord has proved itself to be particularly so, many experts say. That’s partly because of the imperative for growth: Private-equity firms chase double-digit returns within 10 years. To get that, they need credit: The more borrowed, the higher the returns.

When credit was tight after the financial crisis, the acquiring firms, led by Blackstone, figured out a way to generate more of it by creating a new financial instrument: a single-family-rental securitization, which was a mix of residential mortgage-backed securities, collateralized by home values, and commercial real estate-backed securities, collateralized by expected rental income.

In 2013, a year after Ellingwood’s home was acquired, Blackstone’s Invitation Homes securitized the first bundle of single-family rentals — 3,200 of them for 75 percent of their estimated value: $479 million. Those who bought these bonds received 3 to 5 percent in monthly interest until their principal was returned (generally in five years). Blackstone put some of that $479 million toward repaying the short-term credit lines it took out to buy the houses.

Because the value of the portfolio of homes had increased since their acquisition, Blackstone could extract much of the difference as cash and buy more homes. Blackstone issued a second bond package of nearly $1 billion six months later. Other REITs like Colony American Homes quickly began doing the same, rolling homes like Ellingwood’s into a $486 million securitization.

With the securitized homes, the rental income now needed to cover not only the mortgage but also the interest payments distributed to bondholders — creating an incentive to keep occupancy and rents as high as possible. In fact, Invitation Homes’ securitized bond model assumed a 94 percent paying-occupancy rate, putting pressure on the company to evict nonpaying tenants right away.

The growth imperative became even more urgent as the REITs began to go public. Since a rebound in the real estate market made acquiring new properties more expensive, companies looked for growth from their tenants: i.e., by raising rents, cutting down operating costs and maximizing efficiencies. In a 2016 fourth-quarter earnings call, Tuomi, the chief executive of Colony Starwood (formerly Colony American), declared that “not getting every charge that you are legitimately due under leases” — termination fees, damage fees and the like — is “revenue leakage.”

In 2016, Colony made $14 million on fees and an additional $12 million on tenant clawbacks, like retaining security deposits, says Aaron Glantz, author of “Home­wreckers,” a book on the single-family-rental industry.

“What is really dangerous to tenants and communities is the full integration of housing within financial markets,” says Maya Abood, who wrote her graduate thesis at the Massachusetts Institute of Technology on the single-family-rental industry. “Because of the way our financial markets are structured, stockholders expect ever-increasing returns.

All of this creates so much pressure on the companies that even if they wanted to do the right thing, which there’s no evidence that they do, all of the entanglements lead to an incentive of not investing in maintenance, transferring all the costs onto tenants, constantly raising rents.

Even little, tiny nickel-and-diming, if it’s done across your entire portfolio, like little fees here and there — you can model those, you can predict those. And then that can be a huge revenue source.”

As Tuomi put it in 2016, “Ancillary revenue is the first kind of low-hanging fruit.”

Ellingwood was soon paying more in rent than he had paid for his first and second mortgage combined. When he owned the house, the most he paid was $3,300 a month. Strategic and later Colony American increased his rent from $3,500 to $3,800 in just a few years. (Strategic did not respond to questions about Ellingwood’s tenancy or that property.)

In August 2017, Waypoint increased it again to $4,150 (a 9.2 percent year-over-year increase — nearly five percentage points higher than the already-burdensome city average). And that didn’t include fees. When Colony took over from Strategic, it introduced an online payment portal. All tenants were required to use it — and using it cost a $121 “convenience fee.” “It was anything but convenient,” Ellingwood told me.

After submitting the payment, which went to the national office, the tenants, he told me, were obligated to call the local office to report it. Once, a landscaping charge appeared on his bill, even though no one was landscaping his property. Three months later, a worker showed up at his house for the first time and asked him to sign a work invoice. Ellingwood refused. (He was able to get the fee removed.)

But the fees, many of which were outlined in his lease, kept coming: lawyer fees, utilities conveyance fees, pipe-snaking fees. In 2015, Colony emailed about a lease renewal, asking him for a new security deposit and inquiring whether his appliances had been included in his original lease, as if to suggest he should be paying a fee for them. “I bought these appliances,” Ellingwood told me. He emailed back: “I have receipts.”

There were also late fees, with which Ellingwood became all too familiar. In 2013, the economy was still weak, and his income was irregular. The bills, however, didn’t stop: $600 a month just for water, power and gas. Then there was child support. He took on odd jobs as a fence builder and an insurance-claims inspector. Sometimes his mother, Dana, who was laid off from an insurance company in 2008, would buy a big cut of meat and ask Ellingwood and his girlfriend, a caterer, to cook it for her, so they could all share it and Ellingwood wouldn’t feel like an object of charity.

One of the first times he was late, a notice of eviction was posted to his door. He paid the rent — and the $50 late fee. But three days later, there was another pay-or-quit notice — this time because he hadn’t paid a $35 delivery fee for the late-fee notice. The second eviction notice, in turn, incurred a second $35 delivery fee.

Over the years, he amassed a stack of late fees, more than 40 of them. “It’s embarrassing,” Ellingwood told me, handing over the stack. Three-quarters of the time, he was late because he didn’t have the money in the bank. One-fourth of the fees were incurred because he was frustrated; he wanted to put pressure on a company that he felt invested nothing in the upkeep of its properties.

After taking Ellingwood to court in Santa Monica in 2013, his landlords filed for eviction two more times over late payments. Struggling with the almost 10 percent rent increase, Ellingwood was late but caught up a couple of weeks before his court date. He paid not only the rent, but $200 in late fees, $70 in notice fees and a $710 legal fee.

A tenant is charged the moment Waypoint or, later, Invitation Homes emails its lawyers to initiate an eviction, whether the company’s lawyers do work or not. (Kristi Des­Jarlais, a spokeswoman for Invitation Homes, says that the company follows “local laws and practices on all legal proceedings.”)

According to Ellingwood, Waypoint thanked him and told him he didn’t need to appear in court. Waypoint, however, never canceled the hearing. Its lawyers showed up, and when the judge marked Ellingwood absent, Waypoint was granted a summary judgment for eviction. Waypoint sat on that judgment until the next time Ellingwood was late: Then the company didn’t bother to post a three-day eviction notice; Ellingwood said it sent the sheriff.

Fortunately, Ellingwood had learned from his high-conflict divorce to document everything, and after the sheriff reviewed his emails with Waypoint, he told Ellingwood to get a lawyer.

For seven and a half years, meanwhile, Ellingwood watched as his home began to crumble. He kept up what he could: He tended his garden, and he made small fixes like snaking the pipes or repairing a short. But he couldn’t tackle the bigger things. The exterior paint peeled and chipped, and the wood underneath began to rot.

After a leak in the bathroom, mold grew on the tiles. Invitation Homes would agree only to crudely patch up the walls where the leak was — with Ellingwood’s own supply of drywall. He had to decide whether to live with the mold or spend the money to fix it himself. He invested a few thousand dollars in a new bathroom floor.

Other leaks, however, sprang up. It turned out that the home’s water pipes were rusted. It took nearly five years for the company to fix an eight-foot section. The shower in a second bathroom continued to leak into the darkroom, ruining the vintage photos shellacked into the walls and ceilings.

The company slapped grout over the cracks. The shower still leaks. “Good thing it’s not your main shower,” a representative told him. (Des­Jarlais declined to comment on Ellingwood’s situation but said that some tenant complaints “date back to previous companies that no longer exist, and in no way should it be suggested that their practices are applicable to the current operations of Invitation Homes.”)

The company certainly didn’t seem to care about the floodplain at the back of Ellingwood’s property. During El Niño, the backyard became a small sea that lapped at his house. The wooden stairs to his granny unit began to split from the side rails. He propped them up with two-by-fours. After two years of Ellingwood’s duly noting the damage and the risks it presented, Invitation Homes asked him to fill out an online work order. Four different workers came to give quotes. “They were looking for the cheapest repair,” Ellingwood said.

Finally, the company picked a man who just wedged new planks on either side of the steps so that they would reach the side rail and bolted everything together. Ellingwood took me out back and poked the base of the steps. The wood crumbled like a soggy graham cracker.

Ellingwood and his girlfriend, Amber Linder — who lived with Ellingwood and helped with his rent — had no idea they weren’t the only miserable Invitation Homes renters until 2017. During a trip to Pittsburgh, Ellingwood saw a television news program with a report about the poor conditions of the company’s rental properties. Through a Google search, he found a private Facebook group of disaffected tenants, now called Tenants of Invitation Waypoint Homes. “That’s when I realized this was not just one small company — it was a national corporation,” Ellingwood told me.

Ellingwood was afraid to join the group, certain that it had been infiltrated by company spies. But by March 2018, he was frustrated enough to ask for membership and discovered that there were more than 1,200 people with complaints just like his. Reading through the comments brought relief. He was especially inspired by the group’s organizer, Dana Chisholm. “She knew her stuff,” Ellingwood told me.

On yet another sunny Los Angeles day in late April, I drove inland to meet Chisholm at a Panda Express on the side of Interstate 5. She is an anti-abortion, Trump-loving conservative Christian who prays every day for the demise of Invitation Homes. She wore a purple shirt, a flowing purple skirt and a silver cross toe ring. “Send” and “Me” — representing Isaiah 6:8 — were tattooed on her heels.

“I am the biggest Trump supporter you are ever going to meet,” she told me. “But this is one area he’s furiously failing at. It’s not like he doesn’t know.”

Stephen Schwarzman, Blackstone’s chief executive, was once the chairman of the president’s economic advisory council and remains a close adviser. The chief executive of Colony Capital, Thomas Barrack, was not only among the largest donors to President Trump’s campaign but also served as chairman of his inaugural committee. Steven Mnuchin, now the Treasury secretary, bought the toxic debt of the failed California bank Indy­Mac with several other investors and, as chief executive and chairman, renamed the bank One­West and then foreclosed on more than 35,000 Californians, reaping government subsidies on nearly every one.

In June 2016, Chisholm told me, she rented a tan-colored ranch house in La Mirada from Waypoint Homes. The house had some problems — the dishwasher was broken, and the faucet in the kitchen barely worked. But her leasing agent promised to have those things repaired, so she signed: $3,000 a month plus a $100 pool-service charge.

After moving in, she realized the pool was losing an inch and a half of water a day — it was leaking into the ground — so she deducted the pool fee from her next month’s rent. She also asked to have the smart lock that came with her home disabled and deducted the monthly $19.95 charge. In mid-July, she got a call from her leasing agent asking her why he was being asked to show her house again. “That was his way of giving me a heads-up,” Chisholm told me.

She looked at her bank account and realized that her rent check hadn’t been cashed. Waypoint told her that it hadn’t been received. In August, she got an automated email from Zillow that inexplicably advertised her home. An Invitation Homes employee emailed to tell her that she would be sent into automatic eviction but that she shouldn’t worry, they wouldn’t act on it.

By then the refrigerator had broken, rats ate the bananas on her kitchen counter and two-inch cockroaches climbed the wall into in her granddaughter’s crib. (Waypoint authorized only two exterminations per year.) Chisholm’s August rent check hadn’t been cashed, either. She was told it hadn’t been received. She begged the office manager to visit her house and observe the problems firsthand.

According to Chisholm, the manager sat with her for hours and broke down in tears. “You don’t know the environment that I’m working in,” Chisholm says the office manager told her.

“Your property manager is lying to you. She has all your checks. They’re stacked up on her desk.” She explained why: By claiming not to receive the checks or by refusing to cash them on the grounds that “they weren’t for the full amount owed” (Chisholm was withholding the pool fee until the problem was fixed), the company could still evict her for nonpayment.

The manager promised to send the checks to Chisholm via certified mail so that she would have proof of payment. And she did. (The manager did not reply to requests for comment.) While Invitation Homes declined to comment on the experiences of any individual tenants, it said in a statement, “We aren’t always perfect, but we do work every day to provide the best possible experience for our residents.”

In February 2017, Chisholm started her first Facebook group. The only person she knew to invite was a fellow tenant of Waypoint Homes, who found her on Yelp. (He wrote to her, bewildered that she had written a positive review of the company; she had done so the month she moved in because a maintenance worker said his bonus depended on it.)

But the group grew, gaining hundreds of members in the first few months. Suddenly she was fielding messages and phone calls from tenants around the country — particularly in Chicago; Phoenix; Atlanta; Florida; Los Angeles; Riverside, Calif.; and Las Vegas, the places where private equity had invested most heavily.

She started to notice patterns. False advertising was one of them. Helena Abonde, a Swedish woman, began to post frequently to the group. In May 2017, she had to leave North Carolina in a hurry after living with her cousin didn’t work out. She decided to return to her old job in Los Angeles and began looking online for housing. She spotted a listing on Zillow — a property in Van Nuys owned by Invitation Homes — with central air-conditioning and a fenced-in yard, perfect for her two beloved dogs.

She called the listed number and was cautioned that houses were flying off the market and that if she didn’t sign a lease and send the first two months’ rent and a security deposit — a total of $6,000 — she would miss out on it. Abonde packed up her car, and as she was driving across the country with her dogs, the leasing agent, Alisa Cota, sent her a 42-page lease. At a rest stop in Albuquerque, Abonde signed it and emailed it back.

When she arrived at the house, no one was there to meet her; instead, Cota sent her the code to the smart lock. Her dogs were panting in the May heat of the San Fernando Valley, and the house was boiling inside. Abonde couldn’t find the air-conditioning controls and called Cota, who looked up the house and told her that the home didn’t have air-conditioning and that she had signed a lease agreeing to the house as-is. If she broke it, she would have to pay two months’ rent after giving notice — $4,800. (Cota apologized to Abonde after quitting her job at Invitation Homes.)

Another common practice was charging burdensome fees. For each utility bill received by Invitation Homes — many single-family-rental companies, or S.F.R.s, put utilities in the company’s name and then charge the utility back to the tenant — the company levies a $9.95 “conveyance” fee.

The company also piled on landscaping fees, $100 monthly pool fees, a $50 monthly pet fee (“pet rents” were up 300 percent, Invitation Homes announced in 2017, accounting for additional gains of $1.5 million) and automatic enrollment in smart-lock services for $18 to $20 a month. The first month of the smart-lock service was free, so that by the time the charge appeared on the rent bill, it was too late to opt out, per the nearly 40-page lease.

And then there were the fees people were charged when they moved out. In Lancaster, Calif., Invitation Homes billed Amy Feng for new doorstops, blinds, toilet-paper holders and shower heads. She was also billed to replace carpet that was 10 years old. In Phoenix, Serena and Latisha Rich lived with a broken sink and leaking pipes despite multiple requests for repair; eventually, they decided to move out.

They said no one from Invitation Homes ever arrived for a walk-through, so they took time-stamped photos to prove they left the home clean. Weeks later, Colony Starwood billed them for more than $5,000 in damages for bedroom doors split in half and broken furniture and fixtures. The Riches took Colony Starwood to court themselves and won.

Of all of Invitation Homes’s practices, those that most alarmed Chisholm involved habitability issues — poor maintenance and lack of inspections. In Georgia, as reported in The Atlantic last year and documented in a Face­book video, Rene Valentin and his wife and their two young children rented a home with defective piping. Their home flooded six times. Once, the water ran six inches high. They say Invitation Homes would pay neither for the removal of the mildewed carpeting nor for the family to stay in a hotel. (When contacted, the Valentins could not comment for this article because they were in negotiations with Invitation Homes.)

As moderator of the group, Chisholm began taking it upon herself to intervene on behalf of tenants. She would email blast Stephen Schwarzman, the chief executive of Blackstone; Charles Young, the chief operating officer of Invitation Homes; Mark Solls, the chief counsel of Invitation Homes; and various Blackstone officials who were members of the Invitation Homes board. Often, the local office would suddenly respond to the issue within hours. (Des­Jarlais, the spokeswoman for Invitation Homes, says that if this happened, it was a coincidence.)

So when William Scepkowski, a Marine veteran, sent Chisholm pictures of his young daughter’s pink, rashy back, a result of her prolonged exposure to toxic mold, Chisholm began emailing. According to Chisholm, Scepkowski couldn’t get anywhere with the local office. He moved his family to a hotel and at 9 p.m. on a Friday cold-called Schwarzman at his office in New York and left a message.

The next day, Chisholm says, he got a call from Rob Harper, an Invitation Homes board member and Blackstone employee, who asked Scepkowski how Blackstone could right the situation. Chisholm says Scepkowski eventually settled for enough money to put a down payment on a house of his own. (As part of the settlement, Scepkowski signed a non­disclosure agreement, so he couldn’t comment for this article. Harper declined multiple requests for comment.)

Not long after, in late August 2018, Chisholm told me she got a call from a number she didn’t recognize. “Hi, Dana. This is Mark Solls” — the chief counsel of Invitation Homes. Dana waited, then laughed. “Charles and I want to fly out to meet you Friday,” she says he said, referring to Charles Young, the chief operating officer. Solls asked that she not tell her Facebook groups, and she agreed — not, she says, because they were asking her to but because she didn’t want to alarm or excite them.

Chisholm spent the intervening days in fear. “These big, global mega­landlords, they’re flying out within days just to meet with me,” she told me. “It was overwhelming. I was scared, scared, scared, scared.” She got a manicure to soothe her nerves and asked her church group to pray for her. On Friday morning, she met Solls and Young where they were staying, at the new Marriott M Club in Irvine, paying $23 for parking.

“What do you want from us, Dana?” Young said, according to Chisholm. “And I said, ‘Um, I want you to admit that you don’t have a 99.8 percent satisfaction rate!.” — something the company claimed.

“I won’t say those words,” Young said slowly, according to Chisholm. “I will say we have room for improvement.”

According to Chisholm, Solls and Young told her that they wanted Chisholm to change the narrative about their company. She told them that changing the narrative meant changing what they were doing. At one point, Chisholm said, “If you want to change the narrative, resolve my issue right now.” In April 2017, she had settled the eviction suit that they filed against her.

She paid $11,000 and got her $5,000 security deposit back. For the entire year, on a house that was leased for $3,000 a month, she paid only $9,000. But she insisted that it didn’t make up for the pain and suffering she was confronting every day. “I said something preposterous,” she told me of the meeting with Solls and Young. She asked to be given her house and millions of dollars for a tenants’ fund. “Mark said: ‘We can’t offer you the house.

You know that.’ ‘I don’t know that, Mark,.” she said. “We can’t give you that house,” Young said, according to Chisholm, “but we can give you enough money to buy a house.” “Mark shot him a look like I thought it was going to kill him right there!” Chisholm told me. When they left, Young and Solls promised to call Chisholm on Monday to build trust.

Over the weekend, Chisholm thought more about how Invitation Homes could redeem itself, and for hours she worked on a proposal to create a victims’ fund that wronged tenants could access in the event that, say, they needed a hotel room because their house flooded for the sixth time. (Chisholm has at times solicited money from group members to support tenant actions against the company.)

She thought $25 million was fair — the same amount Schwarzman had announced he was donating to his high school. And she wanted her nonprofit to have full control of that money and how it was spent. When Solls and Young called as promised, she mentioned her proposal to them and then followed up with an email.

The next day, Solls called while Chisholm was driving. Her proposal would cost way too much, he said. Instead, he offered her a consulting job contingent on her changing the story about Invitation Homes on her Facebook groups: $10,000 a month, with a $50,000 bonus and another $50,000 in six months “if she behaved — well, those are my words not his,” Chisholm told me.

“It was an insult. I would have loved to consult with them if they were willing to change.” Solls and Young declined to comment on their conversations with Chisholm. But Des­Jarlais, the Invitation Homes spokeswoman, wrote in an email: “We were hoping to engage in a constructive dialogue with Ms. Chisholm about whether she could offer helpful guidance. In the end, we could not make it work. But we respectfully disagree with how she characterized those conversations.” Since late 2018, Chisholm has been consulting for other institutional investors instead.

The worst thing about Invitation Homes, in Chisholm’s opinion, is the way they create fear in their tenants. “You either pay these fees and settle with us or we’ll make you homeless, or we’ll ruin your credit with an eviction,” she said of Invitation Homes’ practices. “That is the threat renters live under!”

Invitation Homes and Blackstone insist that they have had no impact on the housing market — other than to set what they describe as a “higher standard for quality across the board.” Company associates repeatedly emphasized that Invitation Homes owns less than 1 percent of the nation’s single-family-rental housing and that it has invested an average of $25,000 into each home it owns. The company says its self-reported statistics speak for themselves: a 96 percent occupancy rate and a 70 percent renewal rate. And in general, Invitation Homes says, renters stay in its houses an average of three years.

But there are other factors to consider. One is the demographics of the single-family renter. According to Invitation Homes, its average tenant is 39 years old, and tenants’ average household income is about $100,000 a year (which, in expensive rental markets like California, is solidly middle-class). About 60 percent of tenants have one or more child at home, half have a college education or higher and 56 percent have a pet (“They pay a special extra fee for that,” Des­Jarlais told me).

According to the credit-rating agency D.B.R.S. Morningstar, the tenants of Colony, which Invitation Homes absorbed in 2017, were “typically former homeowners who often have families and ties to the neighborhood, including a preference for the local school district.”
And so, having bought the bulk of foreclosed homes in certain desirable neighborhoods — many of which didn’t have rental inventory before the crisis — these companies now have what Suzanne Lanyi Charles, a professor of urban planning at Cornell, characterizes as oligopolistic power over some local housing markets. Institutional investors own 11.3 percent of single-family-rental homes in Charlotte, 9.6 percent in Tampa and 8.4 percent in Atlanta. (And as new landlords, they often control a majority of open listings, “which is what renters care about,” Daniel Immergluck pointed out to me.)

Edward Coulson, director of the Center for Real Estate at the University of California, Irvine, found that if single-family-rental ownership in a neighborhood went up by 10 percent, property values went down by 4 to 7 percent. Nevertheless, across its 17 markets, Invitation Homes’ rents increased an average of 4.1 percent from 2018 to 2019. In no market did the company’s rents decrease (though in Nashville, the company, which owned more than 700 homes there, couldn’t reach the scale it wanted once the market recovered and so shed all of them).

Despite concerns — 698 complaints and an alert on its Better Business Bureau profile — demand has remained strong. “There’s a lack of affordable housing in the market on the for-sale side,” Rahmani told me. “Home builders are facing challenges to build entry-level homes. Millennials are choosing to rent longer. There are issues with finding a down payment. There are elevated levels of student debt. Changes in the work force, in terms of how long their job will last and needing to be mobile. So sinking a lot of capital into a house might be something millennials choose to delay.”

Besides former homeowners intent on maintaining an address in a certain school district, typical tenants, according to a former employee, are those who need to find a home quickly. In certain areas, Invitation Homes also seems to rent to a higher-than-average number of minorities. In a small survey of 100 tenants in Los Angeles County, Maya Abood found that 35 percent identified as black or African-American, 39 percent identified as Latino, 23 percent identified as white and 4 percent identified as Asian.

According to Abood, neighborhoods in Los Angeles where at least 15 percent of homes are owned by the largest single-family-rental companies have an average black population of 30 percent. Neighborhoods where no homes are owned by large single-family-rental companies have an average black population of only 6 percent.

Evictions are often higher in majority-minority neighborhoods. According to Elora Raymond’s research at the Atlanta Federal Reserve, nearly a third of all Colony American tenants in Georgia’s Fulton County received an eviction notice in 2015. One of the strongest predictors was the concentration of African-Americans in their neighborhood.

Moreover, Invitation Homes’ profits are directly tied to focusing on places with population growth and critical housing shortages. California — which is experiencing a well-known housing crisis — accounts for 16 percent of Invitation Homes’ portfolio and is one reason it has stronger returns than American Homes 4 Rent, according to analysts at K.B.W.

Apparently untroubled by these developments, Fannie Mae guaranteed a $1 billion 10-year fixed-rate loan to Invitation Homes in 2017, which was securitized by Wells Fargo. The loan is collateralized by 7,204 Invitation Homes rentals. It was the first single-family-rental loan guaranteed by a government-sponsored entity, and Freddie Mac followed suit. “Why is the taxpayer backing up loans so that they can get reduced interest rates?” said Eileen Appelbaum, co-director for the Center for Economic and Policy Research.

“Why do we shift the risk to the U.S. taxpayer and create a huge windfall?” When I remarked that Fannie Mae said it wasn’t going to back any more loans, she laughed. “They won’t have to do it again! This is now an established industry.”

If something goes wrong, Invitation Homes is on the hook for 5 percent of losses; the government is on the hook for the remaining 95 percent. So far, more than 10 S.F.R. companies have securitized rental debt, generating 70 securitizations totaling some $35.6 billion.

At the same time, Invitation Homes continues to streamline, centralizing its operations in Dallas and outsourcing much of its customer service to call centers in Romania. According to K.B.W., in-house maintenance crews cover more than 50 percent of repairs; they are salaried, which means less incentive to increase the scope of projects. Eighty percent of prospective tenants view homes via self-show, punching a code into the smart lock at a designated time. Last year, Invitation Homes’ stock was up nearly 50 percent.

In 2017, Blackstone earned more than $1.5 billion on the I.P.O. of Invitation Homes.

And since then, now that median housing-sale prices have fully rebounded — up 46 percent since 2011 — Blackstone has realized even greater gains by exiting the business entirely, shedding its remaining 41 percent ownership in a series of billion-dollar second offerings from last March to November.

A majority of its shares were bought by mutual funds like Vanguard and J.P. Morgan.

According to The Wall Street Journal, the exit earned Blackstone $7 billion, more than twice what it invested. Blackstone, meanwhile, is moving on — to ­e-commerce warehouses, mobile homes, student housing and affordable housing around the world.

Abood told me that “the easiest thing for people to understand is the most sensationalized: ‘Invitation Homes is a horrible landlord, and people are mad,.” she said. “Yeah, that’s a story.

But the harder story to make people care about is the way that all of our lives are starting to be intertwined into these financial markets that most of us have no investment in. The financiers are making so much money that depends on our everyday debt and expenses. Our mortgages, our rents, our car loans, our student loans. And all of that is dependent on low- and moderate-income people.”

Whenever Ellingwood passed by his front door, he was filled with anxiety, afraid of what he might find posted there. It was mid-April, and he was waiting for a late paycheck and was again past-due on his rent. He couldn’t put off paying any longer, so he called his best friend, Mitch Glaser, with whom he was building an organic-fertilizer company, and asked for a loan of $900.

Glaser, whose home had nearly been foreclosed on in 2012, didn’t hesitate. “He could be in my position, and I could be in his,” Glaser told me. Ellingwood hopped in his truck and drove an hour to West Los Angeles to pick up the money. Then he drove to the Invitation Homes office in Pasadena, stopping at a Wells Fargo to get a cashier’s check — the only type of payment the company would accept. Nearly two hours after leaving his house, Ellingwood walked into the small Invitation Homes office. No one was at the front desk, so he rang a bell.

Finally a woman appeared, and Ellingwood handed her his check. It matched the ledger she saw on her screen. Still, she said, “Let me make sure it hasn’t gone up,” and then started messaging her colleague, Ellingwood’s property manager, on her phone. “This is what the ledger shows,” she mumbled as she typed the words. “Please confirm.” Emblazoned across the wall, in big plastic letters, was the motto: “Together with you we make a house a home.”

Des­Jarlais, the Invitation Homes spokeswoman, later repeated this motto to me. “This isn’t just an in-and-out kind of thing,” she said. “We love our residents.” The company, she told me, is looking to grow in its current markets. “We call that infill — so we’re going to fill in in those concentrated suburban areas that we’re already in ... where we already have geographic heft.” The company, she said, is buying more of what their customers want: 1,700- to 2,400-square-foot homes. A former worker told me that in certain markets, the company is selling off the larger homes that are more challenging to rent.

When I asked Des­Jarlais whether “infill” purchases affect regional housing affordability,
she replied, “The word ‘affordable’ is kind of a subjective term.” Later, she emailed to say, “Our minimal percentage of all purchases in our markets can’t possibly impact affordability — the numbers just don’t hold up.”

At the end of June, Invitation Homes emailed Ellingwood his lease-renewal offer, extending an “early-bird special” with a monthly rent of $4,351 for the first 12 months and $4,569 for the second 12 months if he signed his lease within 10 days. The new 39-page lease made him responsible for things that were typically the purview of landlords: He was financially liable if the home became infested with bedbugs; the company was generally not liable if he sustained property damage, injury or death from exposure to mold. It also said that if Invitation Homes had to take him to court again, he agreed to leave once and for all.

Ellingwood asked the company to show some compassion and not raise his rent. But he had no law to lean on. In the fall of 2018, when California voted on Proposition 10, a bill that would enable local jurisdictions to determine whether rent control or rent stabilization should extend to single-family rentals, the No on Prop. 10 campaign raised $65 million, much of it from publicly traded REITs — more than two and a half times the amount raised by the proposition’s supporters.

Blackstone contributed $5.6 million to the No campaign, and Invitation Homes contributed nearly $1.3 million. The measure was roundly defeated. But this fall, California legislators passed A.B. 1482, a measure that limits rent increases to 5 percent plus inflation for the next 10 years. For the first time in the state’s history, this rental cap applies to single-family rentals owned by corporations or institutional investors.

When Ellingwood didn’t hear back regarding his rent request, he followed up, and after two weeks, the renewal coordinator for Southern California West cut his rent increase in half. Ellingwood didn’t agonize over whether to agree; he signed almost immediately. The only nightmare greater than renting his home from Invitation Homes was not renting his home from Invitation Homes.

Even if he had the money to front a move, which he didn’t, his credit wasn’t good enough to clear a rental application in a housing market as competitive as Los Angeles’s. Moreover, deep down, he believed he had been wronged — first when his house went to auction and then again when Strategic reneged on its promise to sell it back to him. If only he could find the right lawyer, or prove a nuisance long enough, he would be able to get the house back.

“They’ll want to sell it,” Ellingwood told me at his kitchen table late one night. “Or I’ll fight them to the point where they want to sell it back to me.” Nevertheless, knowing that he would not be forgiven if sent to eviction again, I asked Ellingwood if he was worried. “Of course,” he said. “I’m living on the razor’s edge.”

He paused. “But it doesn’t make sense for them to lose me. In fact, that should make me their favorite customer. They live off of their fees.”