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American Homeowners’ Underwater World

Peter Dreier

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The release of former Treasury Secretary Tim Geithner’s new book, Stress Test — his self-serving account of the Obama administration’s effort to address the nation’s economic crisis and mortgage meltdown — has triggered a great deal of controversy and debate. Was the Obama economic team too cozy with, or too sympathetic, to Wall Street? Was the stimulus package large enough? Did Geithner, Larry Summers and Ben Bernanke stifle the views of dissidents within the administration — especially Council of Economic Advisors chair Christina Romer and FDIC chair Sheila Bair (perhaps not surprisingly, both women) — who urged bolder approaches?

But on at least one issue, there is a growing consensus: The Obama administration did too little, too late, to help troubled homeowners, who faced plummeting home prices and the risk of foreclosure.

Obama’s closest advisors wrongly assumed that as the economy improved, Americans would be better able to buy homes and pay the mortgage on existing homes. But the economic recovery was slower than expected, many unemployed people who did find jobs had to settle for less pay than before, and many homeowners found themselves with ballooning mortgage payments or with mortgages worth less than the value of their homes. Between 2006 and 2011, Americans lost about $7 trillion in home equity due to plunging housing prices — the largest overall loss of wealth than at any time since the Depression.

In a new book entitled House of Debt, and in a recent Washington Post column, economists Atif Mian of Princeton and Amir Sufi of the University of Chicago persuasively argue that the Obama administrative was too focused on bailing out banks and not focused enough on helping homeowners reduce their escalating mortgage debt. In his recent profile of Mian and Sufi, New York Times reporter Binyamin Appelbaum quoted Romer, now back at her teaching post at U.C. Berkeley, saying: “I now think that fiscal stimulus would have been more effective had we also had a more effective housing plan.” In back-to-back columns this week, New York Times columnists Paul Krugman (“Springtime for Bankers”) and Joseph Nocera (“Bankrupt Housing Policy“), echoed this view. Many others, including members of Congress, have joined this growing chorus.

But it is not too late for the Obama administration to act on this rare policy consensus. The key player on this issue is Mel Watt, the head of the powerful Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. Last week, Watt — who assumed his job in January — broke his silence at a speech at the Brookings Institution. It was his first major policy address and many people — bankers, developers, housing activists, mayors, members of Congress — eagerly awaited his remarks.

There are many things Watt can do to change the direction of these two mortgage giants which were put into government trusteeship after the mortgage meltdown. The eyes of many observers are on a variety of plans to restructure or privatize them. But one of the most pressing issues right now is the nation’s epidemic of “underwater” mortgages.

Many housing activists and homeowners hoped that Watt would announce his support for “principal reduction” — allowing Fannie and Freddie to re-set mortgages for underwater homeowners so that their payments reflect the current market value of their homes. This approach is already part of other mortgage modification programs. Experience reveals that it leads to more sustainable mortgages and reduces the likelihood of foreclosures. Moreover, Watt can do this without Congressional approval.

Unfortunately, Watt had little to say about the millions of Americans who are drowning in mortgage debt in his prepared remarks at Brookings. But in response to a question, he said: “It doesn’t mean we are not considering it. It just means we’re not ready to talk about it at this point,” according to the Los Angeles Times.

Some pundits and politicians claim that America’s housing market is now recovering from plummeting home prices and a years-long lull in new construction. But the so-called recovery is very uneven. Many communities remain devastated by widespread foreclosures and vacant homes. They will not be rescued by the rising tide of home prices, which has bypassed many parts of the country.

Many foreclosed houses in the hardest-hit areas are being purchased by Wall Street hedge funds and private equity firms, not homeowners who intend to live there. One of them, the Blackstone Group, is now the nation’s largest owner of single-family rental homes. These practices have artificially boosted home prices in some areas but made local housing markets even more volatile. The investors are making a killing renting the properties, but continuing to drain wealth from these communities.

It begs the question: recovery for whom?

Certainly not Jaime and Juana Coronel, whom Fannie Mae is trying to oust from their 1,200-square-foot home where they’ve lived for 25 years. The Coronels worked their entire lives, in landscaping and factory work, to afford the home where they raised their four kids. In 2010, after Jaime’s hours were cut at work, Fannie Mae foreclosed on them even though they had the income to qualify for a loan modification.

Since the foreclosure, Jaime (who recently suffered a stroke) and Juana have paid the equivalent of a modified mortgage payment in rent to Fannie Mae in order to continue living in their home. But last November, without giving a reason, Fannie Mae began eviction proceedings against the family. Jaime and Juana offered to repurchase their home at its current market value, about $200,000, which is what Fannie Mae would get for the house in the open market. Fannie Mae responded by demanding that they pay $400,000 — about twice the home’s market value — including a $45,000 cash deposit. A real estate agent from Century 21 verified that the Coronels qualify for a loan at the home’s current market value.

Joining forces with the community organizing group the Alliance of Californians for Community Empowerment (ACCE), the Coronels, along with friends and neighbors, have told Fannie Mae that they won’t move without a fight. They’ve demanded to know why Fannie Mae would put them out in order to sell it to someone else, most likely an investor, at a lower price.

The prolonged negotiations came to a head in a recent phone call between the Coronels and several Fannie Mae officials, including vice president Elonda Crockett. A Fannie Mae attorney told the Coronels that Fannie Mae is not allowed to sell them back the property at market value while they are still in the house. They even defended Fannie Mae’s current policy of opposing principal reduction, warning that it would lead to an epidemic of families refusing to pay their mortgages — despite a lack of evidence that anything of the sort happened when banks reduced principal on many loans as part of mortgage settlements.

The Coronels are hardly alone. The total value of America’s owner-occupied housing remains $3.2 trillion below 2006 levels. According to Zillow, a real estate database, 9.8 million households still owe more on their mortgages than the market value of their homes. That’s one-fifth of all mortgaged homes. Without government intervention, many of them are at risk of joining the almost five million households that have already suffered through foreclosure since the housing bubble burst in 2007.

With my coauthors Alex Schwartz of the New School, Gregory Squires of George Washington University, Saqib Bhatti of the Nathan Cummings Foundation, and Rob Call of MIT, I conducted a study, Underwater America: How the So-Called Housing Recovery is Bypassing Many American Communities, which was released last week by the Haas Institute at UC-Berkeley. Our study identified the 15 metropolitan areas, 100 cities, and 395 ZIP codes with the highest proportion of underwater mortgages.

How bad is it? More than 10 million Americans, spread across 23 states, live in ZIP codes where between 43 percent and 76 percent of homeowners are under water. The biggest concentrations are in Georgia, Florida, Illinois, Michigan and Ohio. Places with so many underwater homes are toxic; they depress the value of surrounding homes and undermine local governments’ fiscal health.

The blame for this tragedy lies mostly with banks’ risky, reckless and sometimes illegal lending practices. In the late 1990s and early 2000s, millions of Americans bought or refinanced homes in an overheated market. Mortgage brokers lied or misled borrowers about the terms of these mortgages, often pushing borrowers into high-interest subprime loans, even when they were eligible for conventional mortgages.

They particularly targeted minority areas. In 2006, when subprime lending was at its peak, 54 percent of blacks, 47 percent of Latinos and 18 percent of whites received high-priced loans, according to the Federal Reserve Board.

Not surprisingly, the nation’s worst underwater areas are disproportionately in black and Latino neighborhoods. In almost two-thirds of the hardest-hit ZIP codes, African-Americans and Latinos account for at least half of the residents.

The banks’ risky loans eventually came crashing down, devastating communities and causing financial havoc. The federal government rescued the banks, but nobody came to the rescue of the homeowners and communities the banks left behind.

The banks own some of these underwater loans, but when homeowners ask them to reset mortgages, they often get a cold shoulder or a bureaucratic run-around. In 2012, some of the biggest banks signed a settlement agreement with 49 state attorneys general to modify mortgages. This has resulted in some mortgage modifications, but many of these banks continue to heap abuse on their customers, and sufficient relief has not reached trapped homeowners. As Mian and Sufi point out in House of Debt, the Obama administration created several initiatives to help troubled borrowers, but these programs do not require banks to reset loans as a condition of getting federal funds. The government’s Home Affordable Modification Program (HAMP) has helped only one-quarter of the four million homeowners it was supposed to reach.

Many banks and private mortgage companies pooled large numbers of subprime loans into private securities and sold them to investors. The banks that service these securities have used principal reduction on some loans but, in general, they’ve been reluctant to do so, which will eventually push many homeowners over the cliff into foreclosure.

In the face of the financial industry’s intransigence and the federal government’s half-hearted measures, many local officials have their backs are against the wall. Some are prepared to address the problem of underwater mortgages by using their eminent domain authority to purchase these troubled loans from lenders and re-sell them to homeowners at current market values.

Richmond, California is the first city to adopt this idea, but the approach is gaining credibility as local officials confront the ravages of underwater mortgages in their communities. In the next few months, a growing number of cities are likely to embrace the eminent domain solution. The banking and securities industry is clearly worried about this growing movement. They’ve organized a webinar this week, sponsored by the American College of Real Estate Lawyers, to encourage corporate lawyers to challenge local governments trying to help underwater homeowners.

Local activists and city officials are still hoping that the Obama administration — and particularly Mr. Watt — will take action. The most important thing they can do is get Fannie Mae and Freddie Mac to adopt principal reduction.

Fannie and Freddie own and/or guarantee the biggest bulk of the nation’s underwater loans. Watt’s predecessor as FHFA head — Ed DeMarco, a holdover Bush appointee — opposed government efforts to help homeowners hurt by the Wall Street mortgage meltdown and the dramatic plunge in housing values. But in January, Congress finally confirmed Watt after a seven-month delay orchestrated by Congressional Republicans.

Although not well-known to the general public, FHFA controls over $5 trillion in housing assets and has enormous influence over the nation’s mortgage market, including the lending practices of banks.

Watt should allow, encourage, and even require banks to modify mortgages for “underwater” homeowners (with loans controlled by Fannie and Freddie) so they can stay in their homes and pay their mortgages based on the current value of their home. If underwater mortgages were reset to fair-market values of homes, it would help homeowners and communities alike, and pump billions of dollars into the economy each year. It would also save taxpayers huge sums, especially local governments that have lost property tax revenues but still have to pay for the maintenance and security of vacant properties.

In addition, Watt should:

  • Allow renters to remain, and continue to pay rent, in foreclosed homes with leases, fair rents, just cause/no fault eviction and quality conditions.
  • Comply with federal law that requires Fannie Mae and Freddie Mac to contribute a percentage of their (now substantial) profits to the National Housing Trust Fund to help build, rehabilitate and preserve affordable housing
  • Make it a priority to sell foreclosed Fannie and Freddie homes to residents and nonprofits rather than absentee investors.
  • Issue a statement nullifying DeMarco’s threat to retaliate against homeowners within any jurisdiction that dared to use its eminent domain authority to purchase underwater mortgages.
  • Restore Fannie and Freddie’s role in investing in rental housing, which DeMarco scaled back over the past two years without any explanation, even though their rental investments remained profitable throughout the crisis.

Watt fills the FHFA job at a time when the public opinion is increasingly concerned with widening inequality, a declining standard of living, and the growing political influence of big business and Wall Street.

Watt can’t fix all these problems by himself. But he has more power than any other single person to stem the ongoing damage of the mortgage crisis by enacting a long-awaited program of principal reduction — a win/win deal with American homeowners and communities.

What is Watt waiting for?

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Los Angeles’ Burdened Renters

For more information, read Jessica Goodheart’s story on squeezed Los Angeles tenants, “The Rent’s Getting Too Damn High!”

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Do Incarcerated Firefighters Deserve a Path to Employment?

Since 1983 six inmate firefighters have died while working on fire containment. Today they are paid $2 per day — and an extra $1 when fighting active fires.

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Cal Fire crew photo by Justin Sullivan/Getty Images

California estimates that the Conservation Camp inmate-training program saves state taxpayers up to $100 million per year through firefighting and responses to other emergencies.


 

As California’s wildfire season grows ever longer and more intense, the state has relied heavily on thousands of prisoners, including women, to battle blazes alongside approximately 6,000 professional full-time and seasonal firefighters. Prisoner advocates, however, point out that these inmates’ criminal records prevent them from working as firefighters almost anywhere in California after their release.

Critics of the inmate program also say prisoners risking their lives to battle dozens of fires every year should get more out of the program than their current $2 per day and the additional $1 they receive whenever fighting active fires. The state’s Cal Fire firefighters earn between $3,273 and $4,137 per month, plus benefits, not counting overtime, according to a Cal Fire spokesperson. California has been using inmate firefighters since World War II, when the workforce for Cal Fire was depleted.


Approximately 3,700 inmates work at fire camps and about 2,600 of those are qualified to work on the front lines of active fires.


When Laura Weigand applied to California’s Conservation Camp, the program that trains inmates to fight wildfires, she knew it would be an uphill battle, literally. She was 43 when she joined the camp in 2009, twice the age of most of the women in pre-camp endurance trainings. One endurance test – hiking two miles straight uphill in 45 minutes – felled plenty of younger women, but Weigand was the first to the top of the hill, which meant she had her choice of camps to complete her trainings. She picked Malibu.

Two weeks after she completed training, she was working alongside Cal Fire firefighters to put out the Crown Fire, earning a fraction of what professional firefighters made for the same amount of risk. But she said she didn’t feel exploited because she went into the program to get away from the prison grounds.

“The days flew by, because there were different experiences. Even though it was not good pay it was better than you get in prison,” she said. But a foot injury threatened her limited freedom.

“I was hiking on a broken metatarsal bone for two years and was afraid to tell them about it because I didn’t want to get kicked out of the program.”

Weigand eventually became a “swamper” or trainer of other incarcerated firefighters. She estimated that she trained about 300 women before she left prison in 2012.

A Cal Fire inmate hand crew head to the fireline on a brush fire. (Photo:  David Toussaint/Getty Images)

The California Department of Corrections and Rehabilitation (CDCR), cooperating with the California Department of Forestry and Fire Protection (Cal Fire) and the Los Angeles County Fire Department, operate 44 conservation camps across the state, including three female camps. Camp populations range from 80 to 160 inmates working and learning in minimum-security facilities, supervised by correctional staff. When they’re working on an active fire, Cal Fire staff supervise them.

CDCR says approximately 30 percent of applicants who volunteer for the program successfully complete the curriculum. Not all inmates are eligible. Those who have committed more serious crimes, such as arson, rape or other sex offenses are disqualified.

Overall, there are approximately 3,700 inmates working at fire camps and approximately 2,600 of those are qualified to work on the front lines of active fires, according to CDCR. As of August 31 there were just over 1,100 inmate firefighters across 123 crews deployed to the Carr, Mendocino Complex, Hirz, Cooks, Cherae, Stone, Cache and Holy Fires.

After being released in 2011, Weigand didn’t apply to be a professional firefighter because she was above most fire departments’ threshold age. But Weigand, who now works at Social Model Recovery Systems, a substance abuse and mental health nonprofit, says even if she were younger, she probably couldn’t have gotten such a job, because most local and county firefighting jobs require an emergency medical technician (EMT) license, and most former inmates, even those convicted of lower level felonies, can’t obtain that.

In an email, a Cal Fire spokesperson said the department doesn’t require an EMT license for employment, but admitted that many fire departments throughout the state have at least the expectation of an EMT license for employment.

Such a barrier doesn’t make sense to Romarilyn Ralston, who was imprisoned 23 years and served as a fire camp swamper and clerk for Cal Fire while incarcerated. Now, as a member of the Los Angeles chapter of the California Coalition for Women Prisoners, and program coordinator for Project Rebound at California State University, Fullerton, she’s advocating for raising state employment opportunities for former inmates who made it through the Conservation Camp program.

Ralston told Capital & Main that, even though the program offers valuable training, the lack of EMT training at the camps, as well as the seeming prohibition against hiring former felons for many firefighting jobs statewide, amounts to “an exploitation of prison labor.”

“They should be paid at least the minimum wage, which is $15 in L.A. County,” Ralston added. “They’re putting their lives on the line and saving California hundreds of millions a year.”

The CDCR has estimated that the Conservation Camp program saves California taxpayers between $90 million and $100 million per year through firefighting and responses to other emergencies. Those who make it through the program, when not fighting active fires, may also be asked to clear firebreaks, maintain parks and clear fallen trees and debris. Since 1983 six inmate firefighters have died while working on fire containment, according to CDCR.

Recently California has taken steps to ease restrictions on former felons, though none of the measures would mandate local emergency medical services authorities to allow them to earn EMT licenses.

As part of the 2018 budget bill, Governor Jerry Brown expanded employment opportunities for former inmate firefighters through the Ventura Conservation Camp (VCC), in Ventura County. The program is for parolees only, and the first group of 20 is set to begin training this fall.

An omnibus safety bill, AB 1812, approved by Governor Brown in June, would allow graduates of approved fire camp training to apply for lower-level emergency medical responder (EMR) licenses, though not for EMT licenses.

California’s legislature is taking other small steps toward lowering the employment bar for incarcerated firefighters and other ex-cons seeking professional employment.

Assembly Bill 2293, in its original version would have, with certain conditions, prevented the authority licensing paramedics and EMTs from denying certification to anyone with a criminal record. But faced with strong opposition from the Emergency Medical Services Administrators Association of California, and the National Association of Emergency Medical Technicians, who said hiring those with criminal histories could pose a public safety risk, AB 2293 was amended down to a data reporting bill, according to California Assemblywoman Eloise Gómez Reyes (D-San Bernardino), who assisted in crafting both versions of the bill.

“We decided to address a glaring deficiency, which is the lack of data [on who is being denied jobs],” Gómez Reyes said of AB 2293, which now heads to an uncertain future on the governor’s desk.

Today, Gómez Reyes added, the state only has anecdotal data on many former prisoners being denied EMT certification or jobs based on their criminal past, but no hard numbers yet. “We’re trying to see in what circumstances are people being given these licenses, and what we suspect are the majority of circumstances of people being denied because of past offenses. Whatever decision we make in the future is going to be based on accurate data.”

Another bill, AB 2138, authored by Assemblymen Evan Low (D-San Jose) and David Chiu (D-San Francisco), would ease licensing restrictions for former inmates in a variety of occupations, but not firefighters. That’s still an important step, according to David Fathi, director of the American Civil Liberties Union National Prison Project, because its passage could remove some “arbitrary” barriers to employment.

“In many states there are over 100 occupations that former prisoners can’t pursue,” Fathi said. “One of the best predictors of successful reentry is securing and keeping stable employment. And yet as a society we go out of our way to make it difficult for prisoners to get a job when they get out. This is especially absurd when the prisoner has learned the skill in prison.”

Fathi points to a neighboring state, Arizona, which last year eased restrictions on ex-cons from becoming professional firefighters, as well as to a study from Arizona State University, which showed that states with larger employment barriers for felons have higher recidivism rates.

“Employment disqualification for former prisoners should be the rare exception,” Fathi said, “and it should be based on an individualized assessment of the risk posed by the particular person — not simply upon a criminal conviction.”


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Ohio, NJ and California Pension Funds Invested $885 Million in Hedge Fund That Controls National Enquirer Parent

Co-published by MapLight and Fast Company
Under Republican governors, two states pumped hundreds of millions of dollars of pension cash into a high-risk hedge fund that took control of the National Enquirer’s parent company, American Media Inc.

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Photo by Justin Sullivan/Getty Images

Co-published by MapLight and Fast Company

During the last five years, taxpayers in New Jersey, Ohio and California  have owned large financial stakes in the owner of the media company that allegedly helped the Trump campaign bury negative stories, according to documents reviewed by Capital & Main and MapLight.

Under Republican governors, New Jersey and Ohio committed at least $650 million of pension cash into Chatham Asset Management, a high-risk hedge fund that has taken control of the National Enquirer’s parent company, American Media Inc., which is at the center of the federal investigation into President Donald Trump’s 2016 campaign. California’s pension fund also has a $235 million stake in a Chatham fund.

The hedge fund is run by Anthony Melchiorre, a GOP donor who reportedly met with the president and AMI CEO David Pecker at the White House soon after Trump took office. Melchiorre and his wife have donated more than $100,000 to Republican candidates and party committees since 2010.

Trump’s former attorney, Michael Cohen, recently pleaded guilty to breaking campaign finance laws stemming from payments he made to women to hide affairs with the former reality TV star and real estate magnate. AMI executives helped Cohen purchase stories that could have hurt Trump’s presidential bid, according to the Wall Street Journal.

AMI has denied it helped Trump’s campaign, although Pecker was recently granted immunity as part of the Cohen probe. Former FEC commissioner Trevor Potter, the head of the nonprofit Campaign Legal Center, last week said the situation “presents a serious legal problem for AMI.” If those legal troubles end up depressing the market value of AMI, teachers, firefighters, cops and other public employees also could potentially suffer losses at a time when their pension funds are already facing shortfalls.

A New Jersey Treasury Department spokesperson said in an email that its Division of Investment “is in regular contact with its investment partners regarding underlying portfolio companies and provides feedback when appropriate. While DOI plays no role in the management of a fund’s portfolio companies, it expects the funds to invest in good businesses with strong management teams that follow all applicable laws.”

“I am personally appalled by the Enquirer being an accessory to Cohen’s criminal behavior on behalf of the candidate,” said Tom Bruno, a state union representative who is the chairman of the pension’s board of trustees and serves on New Jersey’s State Investment Council, which oversees the pension system’s investments.

“If the allegations are true, I would vote and argue for full divestiture,” he said. “I cannot talk on behalf of the entire SIC, but I will be doing everything in my power to convince a majority to vote the same way.”

Chatham did not respond to questions about how exposed taxpayers and pension systems might be to AMI and any financial consequences of its legal entanglements. A spokesman for the Ohio pension system said Thursday that the state asked for its money to be withdrawn from the Chatham fund in 2015; the money was redeemed in 2017.

“State officials are well-positioned and duty-bound to investigate allegations of potential wrongdoing in hedge fund portfolios,” said former Securities and Exchange Commission attorney Edward Siedle.

In 2013, former New Jersey Gov. Chris Christie’s administration moved $300 million of pension cash into the Chatham Fund, LP, which has owned a stake in AMI, according to SEC records. Last year, barely three months before Christie left office, his administration steered another $200 million to another Chatham vehicle.

In 2013 and 2014, an Ohio pension system partially controlled by Gov. John Kasich’s appointees committed $150 million to Chatham. The hedge fund finalized its deal to buy an ownership stake in AMI in the summer of 2014.

The Christie administration’s shift of $500 million into Chatham makes New Jersey retirees a substantial investor in the hedge fund, which manages $3.2 billion in assets, according to state records. Those records show the original $500 million investments are now worth as much as $692 million.

Best known for its lurid Enquirer headlines (“Aliens Are Living in My Toilet”), AMI has been beset by a difficult environment for print publications. Chatham has warned that its investments are risky and that a client “may lose its entire investment in a troubled company.” In early 2018, private equity giant Blackstone removed Chatham from one of its major investment funds.

Along with the public pension funds, four other private pension funds — including those for Ford and Toyota Motors employees — have had investments with Chatham, according to financial research firm Preqin.

AMI represents a large portion of Chatham’s portfolio. Internal hedge fund records from late 2017 show that AMI investments comprised 23 percent of the Chatham Asset Partners High Yield Fund’s portfolio. The hedge fund also has officials who serve as directors at AMI.

Attorney Jay Youngdahl, a former Harvard researcher who has served as a steelworkers pension trustee, said state officials may be able to take action to try to protect retiree investments.

“There are often clauses in agreements between pension funds and hedge funds that give states certain rights and recourse if they believe retirees’ money has been invested in companies engaging in criminal activity,” he said.


This story has been updated from its original version.

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Los Angeles Tenants: The Rent’s Getting Too Damn High!

A local dispute over evictions highlights the emergence of a tenants movement that is pushing back against rapacious landlords and a nationwide housing affordability crisis.

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Jose Nuñez, a tenant facing eviction. (Photos by Jessica Goodheart)

California tenants are taking their grievances to local governments, to courtrooms
and to the ballot box.


 

The ad on Redfin’s website suggested a “wonderful” opportunity for an investor: a 25-unit building in a “NO RENT CONTROL AREA” of Los Angeles County. But it also obliquely warned of impending peril for the inhabitants: “[D]rive by only, tenants are unaware of the sale.”

On October 2016, the tenants of a complex on East 61st Street, in an unincorporated area of South Los Angeles County, received a letter informing them that the two-story stucco building, built in 1925, had a new owner.

The entry to Nuñez’s apartment building.

What happened next suggests the lack of protections afforded the state’s low-income renters, particularly those residing in neglected and deteriorating housing. But the tenants’ response also highlights the emergence of a movement that is pushing back against rapacious landlords and a nationwide housing affordability crisis that cuts across income levels, but hits the country’s poorest residents hardest.

In California, tenants are taking their grievances to local governments, to courtrooms and, in November, to the ballot box, where voters will decide a controversial measure that could give municipalities more latitude to regulate rents.

Jose Nuñez, 62, was one of about a dozen tenants in the 61st St. building in Florence-Firestone—one of the county’s most densely populated neighborhoods—to receive an eviction notice, according to Silvia Marroquin, an organizer with Strategic Actions for a Just Economy (SAJE), a Los Angeles-based non-profit that is working with the tenants.


At one property, a desiccated rat was visible in the exposed laths of one of the building’s archways. Water dripped from the ceiling of an empty apartment that had been gutted.


Nuñez says he was puzzled to be given 60 days to vacate the apartment he has lived in with his wife, Juanita Rodriguez, for 20 years. “I was asking myself Why? because I always paid my rent on time,” he says.

Nuñez suspects that the building’s owner was unhappy that tenants had begun to demand repairs in response to being asked to pay for parking and utilities. “The owner shouldn’t have been so unfair with us. He should have come to us and let us know that he wanted to raise rents,” said Nuñez through an interpreter. He added that he would have kept quiet about repairs and agreed to modest rent increases.

Marroquin thinks the owner has other motives, as well: finding new tenants who will pay higher rents.

On a mid-August visit to the property, a desiccated rat was visible in the exposed laths of one of the building’s archways. Water dripped from the ceiling of an empty apartment that had been gutted. The unit’s former tenant, Monica Gomez, a 49-year-old seamstress, remembered being woken in the middle of the night more than a year ago by water dripping on her head. (She and her two sons have since moved out of the apartment and in with a friend.)


Los Angeles County has not had a rent control policy for its unincorporated areas since Ronald Reagan was president.


The building’s owner, 3 Peacocks, is a limited partnership with ties to Swami International, a 40-year-old property management company with which it shares the same address in the city of Gardena. As of September 2017, the building was being managed by Torrance-based Crystal Property Management, according to a letter sent to tenants.

A group of about 20 tenants plan to file a lawsuit in Los Angeles County Superior Court early this week and will name all three entities as defendants, according to Grant Riley, the tenants’ attorney, who claims the owner and property managers have been negligent in maintaining the building.

Monica Mittal, who works for Swami International and is listed as a signatory for the corporate general partner of 3 Peacocks LP, did not respond to a request for comment, nor did Crystal Property Management.

Several tenants have left in response to the eviction notice, but others – like Nuñez – have remained, turning down $1,500 if they agree to vacate the building by the end of July, according to Marroquin, who says it is not enough money to allow them to find housing in the area.


L.A. County supervisors are getting pressure from landlords, who argue that rent control will make the housing crisis worse by providing a disincentive for new investment in housing.


Jose Nuñez is in visible pain as he paces an immaculate room that holds the couple’s bed, couch and a folding table. He left his job at a plastics factory five years ago after injuring his back. He’s looked at apartments in the area and has been dismayed by rents that range from $1,000 to $1,200 per month. The $668 monthly rent he says he now pays eats up a sizable chunk of his $975 monthly disability payment.

But even as Nuñez gets ready to do battle in court, he has joined an effort to affect policy at the local level. His eyes light up as he shows me a hand-made sign. In Spanish, it reads, “Here in the County of L.A. Firestone and Florence: We want a stop to the high rents. Now!”

Stopping or slowing Los Angeles County’s rising rents will take some work.  The county has not had a rent control policy for its unincorporated areas since Ronald Reagan was president. But Los Angeles County Board of Supervisors members Sheila Kuehl and Hilda Solis moved the ball forward on rent regulation in May of last year, the same month that a group of tenants from gentrifying East Los Angeles marched to the board’s Kenneth Hahn Hall of Administration auditorium in support of rent control. The supervisors voted to establish a “Tenant Protection Working Group” of real estate professionals, tenant lawyers and social service providers, which has been meeting since early January to hammer out recommendations.

In its final report, dated August 15, the working group recommended by a 7 to 2 vote (with one abstention) that the county adopt a rent stabilization policy that would limit allowable rent increases for certain multifamily apartment buildings in unincorporated parts of the county. There are more than 93,000 rental units in unincorporated Los Angeles County, according to a report by the county’s chief executive office.

The working group also recommended the establishment of “Just Cause” eviction protections, which limit the reasons tenants can be evicted from their apartments. Such a policy would be most applicable to the predicament that the East 61st Street tenants now face, says Dagan Bayliss, SAJE’s organizing director.

If supervisors are feeling the heat from tenant groups in East and South Los Angeles, they are also getting pressure from landlords, who argue that rent control will make the housing crisis worse by providing a disincentive for new investment in housing. (Rent control proponents counter that there is no evidence that rent stabilization laws—which typically exempt new construction—have that effect.)

A sign of the landlords’ sway might be found in the board’s recent decision to delay a vote on an interim rent cap proposed by Kuehl and Solis. Concerned that rents were beginning to “spiral upward” while the working group met over a period of months, the two county supervisors had introduced a stop-gap motion in late June to direct staff to draft a six-month ordinance to limit rent hikes to three percent. That vote was scheduled for late July but never took place, to the disappointment of East 61st Street tenants who staged a brief protest in the supervisors’ auditorium. The California Apartment Association had put out a call to action on its website in late June to rally opposition to the proposal.

When asked in mid-August about the temporary rent cap, supervisor Mark Ridley-Thomas, who represents the Florence-Firestone neighborhood, told Capital & Main in an email that, while he understood “the pressures are particularly acute for tenants,” he “would like the opportunity to be informed by the working group’s perspective before taking up any elements of this agenda.” Board meetings will resume after Labor Day.

This local activity is part of a larger battle swirling around a state ballot measure, Proposition 10, which would repeal the Costa-Hawkins Act, a 23-year-old law that restricts rent control policies from being applied to buildings constructed after 1995, and to multifamily dwellings.

That ballot initiative has also drawn opposition from real estate interests, which have raised more than $20 million to defeat the measure, and more than $12 million in support — the vast majority from the AIDS Healthcare Foundation.

Not all the East 61st Street tenants are joining the lawsuit or activities surrounding a proposed county rent stabilization ordinance.

Less than a year ago Judien Langshaw, who is 33, moved into one of the building’s remodeled apartments that includes a fresh coat of paint and new-looking countertops, although a flimsily constructed sink cabinet door hangs on by a single hinge.

Langshaw squats down to show me how she’s fending off rodents with glue traps and an empty water bottle wrapped in duct tape that she uses to plug a hole under her sink. Her 4-year-old daughter is absorbed in play with two action figures from the Incredibles movie.

She pays a monthly rent of $983, significantly more than Nuñez. But the owner, after all, operates “like any business,” she says.

Langshaw recognizes her luck at having housing at all. “From here, you’re going into homelessness,” she says.


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Labor & Economy

Home, Shared Home: Renters Watch as Their Buildings Become Apartels

The displacement of renters by large-scale operators who turn apartment buildings into de facto hotels has hit urban areas like Greater Los Angeles hard.

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Bobbi Murray

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The Ellison Suites' courtyard. (Photo: Bruce Kijewski)

Apartment Renter: Short-term guests begin lining up around 11 a.m., spilling out onto the street as other guests check out.


Home-sharing. This cozy phrase once conjured images of a homeowner generously opening up a room to out-of-towners—while the fee charged by the owner helped him with mortgage payments. Or perhaps we pictured an apartment dweller who left for the weekend and made a little extra cash letting someone else use the premises.

But the present reality of home-sharing is not so cozy for single-family residential neighborhoods, where out-of-town guests may feel no social pressure to allow the neighbors a peaceful night’s sleep or to not trash the rental home.

To see today’s home-sharing up close, visit the Ellison Suites in coastal Venice, just a block from the famed Venice Boardwalk. Built in 1913 and covered with gigantic murals of Jim Morrison, Marilyn Monroe, John Hurt and Lana Del Rey, it boasts 58 units—but only 12 apartments are occupied by permanent tenants, according to one resident.


“We used to have neighbors for 20 years—now we have them for 20 hours.”


Photo: Bobbi Murray

Beyond the Ellison’s courtyard, people bump wheeled suitcases up the building’s front steps and, on Fridays, signs advertise the night’s upcoming party. It might offer a fire dancer, but most parties will at least include free beer and wine — and music that reverberates up through the courtyard.

“We used to have neighbors for 20 years—now we have them for 20 hours,” said Bruce Kijewski, one of the remaining tenants, who has lived here since 1977. In the summer, he said, guests begin lining up around 11 a.m., spilling out onto Paloma Avenue as other guests check out.

An online search for The Ellison Suites yields a number of home-sharing and lodging platforms—Booking.com and Expedia among them–advertising its amenities as a short-term beachside rental. The building’s own website promotes it as a vacation destination, extolling Jonas Never’s murals as “Venice Masterpieces.”

The displacement of tenants by large-scale operators who turn their buildings into de facto hotels hit hard in urban areas like Greater Los Angeles, which is plagued by a nearly three percent rental vacancy rate.

Photo: Bobbi Murray

While mom and pop are in on some of the home-sharing, today its booming business model most benefits commercial operators who can make more on short-term rentals (STRs) than on permanent residents.

STRs are promoted by a slew of home-sharing platforms, including Airbnb, now valued at $31 billion as it moves toward being publicly traded; and HomeAway and subsidiary VRBO, valued around $3 billion in 2015. The platforms profit by collecting a percentage on every rental offered on their sites by home-sharers.

Local municipalities are scrambling to figure out and ameliorate STR impacts on their neighborhoods and housing stock. In May, a Los Angeles City Council measure was sent to the city attorney’s office for language changes and is expected to go before the city planning commission in September. The proposed ordinance would set up a permitting system for short-term rentals and establish a 120-day yearly limit for home-sharing. Two nuisance violations—enforced by a city agency—could get an operator’s permit revoked.

The Ellison Suites, zoned as a rent-stabilized apartment building, in effect operates as a hotel.

The lowest nightly rate listed on the website is $149. That apartment, when rented to vacationers, could yield $4,470 monthly.

With the Ellison’s current rent-stabilized protections, it’s hard to straight-up evict someone, but there are ways of persuading them to flee their apartments to make them available for tourists and other visitors.

Michael and Susanne Detto, Ellison residents for 14 years, rented their apartment for $2,000 a month before they moved out in May. All-night parties in the courtyard below their apartment made it impossible to sleep—both work 12-hour shifts as nurses. “It was so loud we couldn’t even talk to each other,” Susanne Detto said.

Photo: Bruce Kijewski

Breakdowns in maintenance–power outages, faulty plumbing, leaking ceilings—plus an altercation with management during one of the raucous parties were all part of what the Dettos claim drove them out.

“Especially in summer, he makes three times the money if he rents out every day,” Michael Detto said of the Ellison’s landlord.

Kijewski and other Ellison tenants say landlord investment goes into creating a hotel entertainment experience rather than supporting habitable apartments. Residents have filed dozens of complaints with the city against building owner Lance Jay Robbins’ Paloma Partnership LLC, citing bad plumbing, inadequate water supply, construction without permits and change of use/occupancy without a building permit. (Multiple attempts to get a response from Robbins for this story were unsuccessful.)


Michael spoke wistfully of a community where neighbors once shared poetry readings, art discussions and fundraisers in the courtyard now occupied by high-octane weekend parties.


The company appealed the building’s status to Los Angeles’ Building and Safety Commission, arguing that short-term rentals should be allowed because the city’s initial certificate of occupancy designating the Ellison a residential apartment was in error and that the building is a hotel.

The company lost. Another appeal is headed for the city planning department.

Meanwhile the Ellison continues to advertise online as a hotel.

With today’s lucrative rates of return, it’s easy to see why, for large-scale operators, short-term stays make for a more attractive business model than permanent housing. Customers staying for a few nights might do some hating online, but won’t be there to press on long-playing maintenance issues.

Tenants at the Metropolitan in Hollywood experience the same push-out climate as Ellison residents, according to Susan Hunter, a case worker with the LA Tenants Union, which is part of a coalition that includes representatives from Los Angeles’ hotel industry, labor unions and community groups.

Hunter counts a dozen permanent residents remaining in the sleek, 12-story high-rise that boasts sweeping views of Hollywood and sits within walking distance of Hollywood Boulevard sites.

The website for Apartments.com says there are no apartments presently available.

Zoned as a residential building, the 52-unit Sunset Boulevard property owned by the Harridge Development Group is advertised online as an “apartel.” Tenants approached for this story didn’t want to speak, they said, for fear of retaliation, but they have complained to Hunter of loud parties, with fighting in the halls and kicked-in doors.

Apart from creating chaotic conditions for tenants sharing space with STRs, the home-sharing model leaves an even larger social footprint. The incentive for large-scale operators everywhere to acquire units—including entire homes — and move them off the permanent housing market places upward price pressure on housing.

From Seattle to New Orleans to Barcelona and beyond, housing advocates are assessing the effects of short-term rentals on housing markets and figuring out how to respond.

In New York City, short-term rentals have resulted in a loss of as many as 13,500 rental housing units, according to a January 2018 report from the School of Urban Planning at McGill University. (The study was commissioned by a labor group opposed to home-sharing.) New York has passed legislation requiring registration and other monitoring measures.

A 2015 San Francisco Board of Supervisors Budget and Legislative Analyst report estimated that Airbnb short-term rentals alone had removed between 925 and 1,960 units from the city’s housing market. These, along with 8,000 units already being used for short-term rentals, add up to an 11 percent reduction in rental housing.

Like other cities, San Francisco has aimed to define and enforce the number of nights STRs are permitted. Studies based on data from insideairbnb.com show that, in Los Angeles, renting out a property as a short-term rental for 83 nights or more annually produces more profit than the property could earn as a long-term rental.

In San Francisco, the cradle of Airbnb and adjacent to tech hubs, municipal leaders face an affordable housing shortage and a vacancy rate below three percent, and have established a registration process for short-term rental hosts. Regulations set a cap of 90 days per year for hosts that don’t live on the property. Violators are subject to stiff fines.

Seattle, headquarters of several tech giants, took an approach that attacks the short-term rental issue as part of the affordable housing problem. The city defines a short-term rental as a maximum stay of 29 nights and sets up a licensing system.

Using a wider lens on the affordable housing crunch, the city council in May approved an “Amazon tax” that charges the larger employers such as Groupon and Amazon $275 per worker annually to support housing and homeless services. (The city council repealed the tax in August.) Seattle comes in third, behind only New York and Los Angeles, in the numbers of homeless, while boasting only a fraction of those cities’ total populations.

Joan Ling, an urban policy analyst who has worked in affordable housing and mixed-use development for over 30 years, supports short-term rental regulation but sees it as only a piece of the larger question of creating affordable housing to support working families. Los Angeles, she said, “has a ways to go . . . Anything is better than nothing. What [regulation] can do is reduce the harm that can be done [by] removing units. The affordability crisis is so pervasive, so deep—we need a huge number of policies to address the crisis.”

Michael and Susanne Detto are happy living in their new apartment in Santa Monica—no all-night parties, the plumbing works and it’s a 10-minute walk to work. But before the Ellison got pieced out for short term-rentals, the couple also liked their Venice home.

Michael spoke wistfully of the community where neighbors once shared poetry readings, art discussions and fundraisers in the courtyard now occupied by high-octane weekend parties.

Susanne likes where the couple landed, but reflected on the overall cost as tenants got pushed out by the STR model.

“We lost a lot. We lost a lot of our neighbors. We’re still kind of recovering.”


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Labor & Economy

California Protects Low-Income Access to Farmers Markets

Food deserts and food swamps have limited poor people’s ability to obtain fresh produce. Allowing SNAP use at farmers markets ensures that the markets are accessible to low-income people and are not the sole domain of the rich and well-off suburbanites. 

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Kalena Thomhave

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This story first appeared in The American Prospect. Capital & Main is co-publishing it in partnership with the Prospect.


 

Last month, a complex government contracting decision created tumult in the farmers market world by threatening the ability of nearly 2,000 markets across the country to accept Supplemental Nutrition Assistance Program (SNAP) benefits, formerly known as food stamps. However, thanks to a resilient state program, only one of those markets was in California.

The U.S. Department of Agriculture runs a program in which private contractors provide software and Electronic Benefit Transfer (EBT) processing equipment to farmers markets. But as the Prospect reported last month, the federal government abruptly changed its contract, forcing one major software company to announce it was going out of business during prime market season. The nonprofit Farmers Market Coalition began to crowdfund for markets to buy new equipment, and the National Association of Farmers Market Nutrition Programs and the state of New York hashed out plans to fund the software company, Novo Dia, so it could continue to operate for the rest of the summer season.

Through it all, however, farmers markets in California remained almost entirely insulated from this problem. In some states, farmers markets can choose a state program instead of the federal one to help pay for SNAP/EBT processing equipment, as this equipment can be expensive for farmers markets that often operate on slim budgets. While some states with their own equipment programs provide a limited amount of funding, California’s program pays all associated costs and fees for such transactions and provides free equipment to all approved markets. Nearly all of the state’s markets choose to work with the state program, which is run by the California Department of Social Services (CDSS).

Ever since EBT gained popularity two decades ago, California has been committed to making farmers markets accessible to people who use SNAP benefits to buy groceries, says Carle Brinkman, the food and farming program director at the Ecology Center, a sustainability nonprofit in Berkeley. In 2003, as paper food stamps were becoming obsolete in favor of EBT software, CDSS funded a project with the Ecology Center to pilot wireless point-of-sale devices that helped cement SNAP/EBT access at farmers markets. Since 2008, California has negotiated with its statewide EBT-processing vendor to include such equipment in the vendor contract itself.

“This mean[s] that the individual farmers market vendors or managers [do] not have to research which terminal to purchase, worry about coming up with the money for the terminal, or have to learn how to set it up on their own,” Michael Weston, CDSS’s deputy director of public affairs and outreach, told The American Prospect in an email. “The free wireless terminals have supported the farmers markets and direct farmers and have proven to be a real success in California,” he says.

There are 588 farmers markets, individual farmers and community-supported agriculture projects that accept California’s SNAP benefit, CalFresh. In 2017 alone, more than $4 million in CalFresh benefits were redeemed through farmers and farmers markets.

The free equipment, says Brinkman, is just a “regular old card reader” that she and colleagues refer to as “the brick” because of its clunkiness and its durability. Brinkman and the Ecology Center provide guidance and resources to farmers markets, such as assistance in applying for approval to accept SNAP, as well as connecting them with CDSS’s equipment program.

A history of crop subsidies for the ingredients in processed food has long made unhealthy foods both cheap and widely available, and food deserts and food swamps have limited poor people’s access to fresh produce. Allowing SNAP use at markets is key to ensuring that markets are accessible to low-income people and are not bastions of the rich and well-off suburbanites, as is commonly perceived.

California’s state equipment program “has been incredibly successful in taking a major step to make sure that farmers markets are for all people,” says Brinkman. Many markets nationwide, including hundreds in California, offer incentive programs that can double the value of a shopper’s SNAP benefit at the market, increasing the amount of produce they can put in their shopping bags. California’s Market Match program, which the Ecology Center manages, has served hundreds of thousands of shoppers since it began in 2009. According to a 2013 survey, the vast majority of low-income people reported that such incentive programs helped draw them to their farmers market. Brinkman says that these programs are one way to draw farmers markets to low-income communities, too.

California’s program is “allowing greater access to the farmers markets as a community resource,” says Brinkman. Entire communities can participate in “a sort of alternative local food system” where both farmers and the local community benefit. Many markets offer activities, Brinkman points out, like Zumba or reading programs for kids. More than a collection of healthy food stands, they can become community gathering spaces. But for that to happen, markets need to be supported with the resources to operate.


 

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Trump’s Treasury Department Hands Banks a Windfall

Co-published by Splinter
The Treasury Department not only sided with banking lobbyists’ definition of “financial services,” but its new rule’s fine print echoed their interpretations of the 2017 federal tax law.

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David Sirota

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Treasury Department photo: AgnosticPreachersKid

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Do “financial services” include banking? Not according to the Trump administration, whose new rule, issued Wednesday by the Treasury Department, argues there is a difference — and then cites the alleged difference as a means of extending lucrative tax breaks to the banking industry. The new rule represents more than semantic hairsplitting and hands a huge windfall to the banking industry.

At issue is the Trump tax bill’s treatment of so-called pass-through income — or income that is gleaned from partnerships, LLCs and S corporations. The 2017 Republican tax legislation dramatically slashed tax rates on income from such entities, generating a firestorm of criticism that it was a giveaway to real estate moguls like Trump, U.S. Senator Bob Corker (R-TN) and other Republican backers of the legislation who have such entities in their personal portfolios. (The criticism became known as the “Corker Kickback” scandal.)

To reduce some of the cost of the overall tax cut bill — and to mute some of the specific criticism of the pass-through sections — GOP lawmakers included provisions prohibiting certain kinds of businesses from qualifying for the pass-through tax cut. One such business was “financial services,” and its removal countered assertions that the bill could enrich big banks.

However, less than a year after passage of the tax legislation, the Treasury Department, headed by former banker Steve Mnuchin, issued the proposed rule whose fine print asserts that “financial services” actually do not include banking. If that interpretation of the tax bill stands, hundreds of banks operating as S corporations — as well as their owners — could claim the tax cut.

“This is illustrative of the rigged process behind the bill, which was rushed through Congress without a single public hearing,” the Center for American Progress’ Seth Hanlon told Capital & Main. Hanlon served on President Obama’s National Economic Council. “How many members of Congress, let alone members of the public, understood that ‘financial services’ didn’t mean banking, and therefore that bankers would get a massive tax cut? This is the opposite of real tax reform.”

Banking industry lobbyists pushed for the interpretation — acknowledging that the bill generally blocked pass-through tax cuts for businesses in financial services, but arguing that “financial services are, however, clearly something other than banking.”

“We had extensive discussions with Congressional staff and various members in both the House and Senate,” wrote the American Bankers Association, Independent Community Bankers of America and Subchapter S Bank Association in a letter to the Treasury Department. “In the course of these discussions, we were assured repeatedly that S Banks would qualify for the lower tax rate for pass-through businesses.”

The Trump Treasury Department not only sided with the lobbyists, but in the fine print of its new rule, which is now subject to a public comment period before it goes into force, echoed their views.

“Commenters requested guidance as to whether financial services includes banking,” the Treasury Department said, referring to the banking industry. “The Treasury Department and the IRS agree with such commenters [that] financial services should be more narrowly interpreted here.”

The department then concluded that its interpretation “limits the definition of financial services to services typically performed by financial advisers and investment bankers…This includes services provided by financial advisers, investment bankers, wealth planners, and retirement advisers and other similar professionals, but does not include taking deposits or making loans.”

Tax attorney David Miller of the Proskauer law firm told Capital & Main: “The interpretation is consistent with denying the flow-through deduction only to labor-intensive industries. Banks tend to be capital, and not labor, intensive.”

“Treasury’s decision delivers a benefit to roughly 2,000 banks around the country that qualify as S corporations,” said University of Chicago tax law professor Daniel Hemel. “It’s a safe bet that most of the S corporation shareholders benefited by today’s decision will fall into the upper reaches of the top one percent — not many middle-class folks own a bank. The notion that ‘financial services’ excludes banking should be quite a surprise to members of the House Financial Services Committee, which thought that it had jurisdiction over banking.”

Hemel calculated that banks would end up reaping a big payout from the interpretation.

“If you assume a return on assets of around one percent and S corporation bank assets in the range of $400 billion, then the move reduces the total tax liability of S corporation bank shareholders by $300 million per year for 2018 through 2025,” he said. “We’re talking about something like $2.5 billion total. Small in comparison to the magnitude of the rest of the December 2017 giveaway, but $2.5 billion isn’t chump change.”

Steve Rosenthal of the Urban Institute said that while the Treasury Department fine print explicitly solidifies the tax cut for bankers, he said he believes the interpretation does not contradict congressional intent.

“I thought Congress gave away the house in the legislation, and I spoke to Hill staffers who said subchapter S banks are going to get a 20 percent deduction, and so I don’t think the new Treasury rule runs contrary to what Congress wanted,” he told Capital & Main. “This is definitely a huge giveaway — I just think it was Congress that did the original giveaway.”


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Betsy DeVos

Forget Old Glory — Why Betsy DeVos’s Family Yacht and Others Fly Foreign Flags

Co-published by Newsweek
When the DeVoses’ 164-foot yacht was untied from a Huron, Ohio dock, it was flying a flag of the Cayman Islands.

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David Sirota

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Why would an American billionaire’s floating mansion moored at a northern Ohio dock be registered in an exotic Caribbean archipelago?


Co-published by Newsweek

When someone untied a yacht owned by U.S. Secretary of Education Betsy DeVos’s family, Fox News portrayed the episode as an illustration of uncouth anti-Trump sentiment. The yacht’s foreign flag, though, was an illustration of how an allegedly “America First” administration is chock-full of moguls who have eagerly stashed their wealth offshore — as long as doing so means avoiding taxes, regulations, transparency requirements and domestic employment laws.

We already know that Transportation Secretary Elaine Chao’s family shipping consortium routes its business through the Marshall Islands — a notoriously secretive tax haven. Federal records also detail how Trump’s Commerce Secretary Wilbur Ross, Securities and Exchange Commission Chairman Jay Clayton and Federal Reserve board appointee Randal Quarles held parts of their personal fortunes in investments based in the Cayman Islands, which are not necessarily required to adhere to America’s domestic financial regulations.

Now there’s Betsy DeVos, one of the heirs of Amway’s multi-level marketing empire. When her family’s 164-foot yacht was untied from a Huron, Ohio dock, it was flying a flag of the Cayman Islands, where VesselTracker says the yacht is registered. According to federal records, the yacht is owned by RDV International Marine, which is an affiliate of the company that controls the DeVos family’s fortune.


A “flag of convenience” allows American yacht owners to effectively characterize themselves as foreigners for tax purposes.


Betsy DeVos did not respond to Capital & Main’s questions about her family’s Cayman-registered yacht — and the larger question about foreign yachts was never deeply explored during the 2012 kerfuffle over the foreign flags on Mitt Romney’s boat. Interviews with maritime attorneys suggest it is a scheme that allows wealthy Americans to feign foreign status — and glean the lucrative benefits offered by offshore tax havens.

When buying a vessel or cruising in U.S. waters, American yacht owners like the DeVoses could face state sales or use taxes. However, registering a yacht in a locale like the Caymans — under what has come to be known as a “flag of convenience” — allows those American yacht owners to effectively characterize themselves as foreigners for tax purposes, thereby avoiding the obligation of paying the standard sales and use levies, while enjoying police and Coast Guard services during times their vessels are untied.

“If you want to come in and use the waters of a given state of the United States, the question is, how can you insulate yourself from getting hit for the use tax?” maritime attorney Michael T. Moore told Capital & Main. “The answer is close and register offshore. If you close and register offshore, you aren’t subject to either a sales or a use tax. You are simply visiting the United States, and you are visiting under a privilege that is granted to certain countries in the world under what is called a cruising permit. Those countries grant the privilege to U.S. flagged vessels, and the United States offers that reciprocal right to vessels flagged by those countries. In practice, it means the permit allows you to go from port to port in different states without having to officially make entry and pay taxes to the states of the ports you visit.”


Other incentives for yacht owners to register offshore include lower labor costs and the potential to avoid stricter inspection and safety standards required for U.S.-registered vessels.


DeVos’s yacht, the SeaQuest, is reportedly one of 10 in the family’s fleet and worth $40 million. If the vessel were registered in, say, Grand Rapids, Michigan — the state where RDV is located and that has in the past made an effort to compel yacht owners to pay use taxes — the SeaQuest would likely be subject to Michigan’s six percent use tax. That would require the DeVos empire to cough up about $2.4 million — public revenues that help finance the kind of police services that the DeVos yacht crew called when the boat was untied. And yet with the Cayman flag fluttering on its deck, the family can avoid the levy even as it cruises the Great Lakes.

Another incentive for yacht owners to register offshore is the potential to avoid stricter inspection and safety standards required for U.S.-registered vessels of a certain size.

“If someone is buying a boat that is above 300 gross tons but below 500 gross tons, getting registered offshore means they can avoid being subject to U.S. Coast Guard inspection and certification requirements as either a ‘seagoing motor vessel’ or a ‘passenger vessel,’” said maritime attorney Mark J. Buhler. “The most commonly used offshore yacht registries have comprehensive large yacht safety codes that were specifically developed for large yachts, whereas the U.S. Coast Guard regulations and inspection requirements applicable to ‘seagoing motor vessels’ or ‘passenger vessels’ were created many years ago, principally for vessels engaged in trade, and not really having large yachts in mind. Those requirements do not translate well to yachts, and most yachts are simply not designed or built to those particular standards.”

The DeVos yacht is 492 gross tons, according to MarineTraffic.

In a 2009 presentation to the American Bar Association, Buhler said that yacht owners who register their vessels offshore may also be seeking “a level of anonymity not available in the U.S.” — a reference to how offshore jurisdictions like the Caymans require less transparency in their corporate disclosures. Buhler noted that “some tax-free countries do not require any financial reporting” and added that such owners may also be aiming “to avoid liability for certain U.S. legal obligations to crew members.”

Offshore registration can also reduce labor costs.

“The reason otherwise red-blooded American yachts fly non-American flags has little to do with political sentiment, and a whole lot to do with tax and employment laws,” wrote Kevin Koenig, a former Goldman Sachs analyst, in a 2011 issue of Power & Motoryacht magazine. “From a tax perspective, the U.S. government views an American working as a deckhand on a U.S.-flagged megayacht cruising off of St. Tropez no differently than it views an insurance salesman plying his trade in Topeka—that is to say, a yacht flying the American flag is, essentially, U.S. soil no matter where she is located.”

Koenig added: “The financial consequences of this view can be major for owners who choose to register in America because they are constrained to account for U.S. taxes when paying the crewmember. With Social Security and unemployment taxes what they are, this often means paying an American crewmember twice as much as say, an equally qualified Australian who is exempt from U.S. taxes but who the owner could only hire were his boat registered in a more lenient, foreign-flag state.”

That sentiment was echoed by Miami maritime lawyer David Neblett.

“If you have a U.S. flag vessel, you fall under U.S. law in crewing it,” Neblett told Grand Cayman Magazine in 2015. “You have to have workers’ compensation insurance for each of them. There’s a big savings to hiring your crew outside the U.S…Tax benefits, privacy, liability, crewing requirements, all these are good reasons for our high-net-worth clients to register offshore.”

The Cayman Islands in particular is well positioned to exploit these loopholes. A 2008 Government Accountability Office report found that wealthy Americans “can minimize their U.S. tax obligations by using Cayman Islands entities to defer U.S. taxes on foreign income,” and also warned that some conduct “financial activity in the Cayman Islands in an attempt to avoid discovery and prosecution of illegal activity by the United States.”

Boosters of the Caymans have boasted that such qualities could extend to yacht owners. As Grand Cayman Magazine explained: “Being a place where wealthy foreign yacht owners register their sea-going palaces offers many of the same economic advantages to the Cayman Islands as the presence of offshore banking facilities do.”

Not surprisingly, the International Consortium of Investigative Journalists last year found, the law firm at the center of the Paradise Papers scandal “has a big business in registering yachts, particularly in the Cayman Islands, where it has set up offshore companies that claim ownership of dozens of yachts and ships.”

A case in Europe spotlighted how places like the Caymans can be used to avoid taxes: In 2012, Italian authorities charged a Formula One racing mogul for allegedly using a Cayman-based shell company and yacht as a vehicle to avoid paying required taxes.

While there hasn’t been any move in Congress to try to crack down on offshore yacht tax schemes, states have been racing to throw more money at yacht owners: In recent years New York, New Jersey and Florida have been competing to slash taxes on yacht purchases, and to incentivize purchasers to register their yachts in-state.

Proponents theorize that the benefits will ultimately trickle down to workers in the boat manufacturing industry — but considering the tax shenanigans surrounding yachts, that’s no sure thing. The only ironclad guarantee is that the big winners in a race to cut taxes will be magnates like the DeVoses, who have the financial wherewithal to buy the luxury vessels in the first place.


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Hotel Workers Back New Law Ending Secrecy in Harassment Cases

Non-disclosure agreements have become a target for #MeToo advocates, since they bar women from discussing their stories of workplace sexual harassment. Proposed California legislation could change that.

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All photos by Jessica Goodheart

Non-disclosure agreements ensure silence at the settlement stage of litigation, but mandatory arbitration agreements black out news of workplace disputes from the get-go.


 

More than a year after the settlement of a sexual harassment case against the Long Beach Renaissance Hotel, the alleged harasser, a banquet supervisor, is reportedly still employed at the 374-room downtown hotel — while the two women who brought the suit are gone, according to sources familiar with the hotel’s staffing.

It’s hard to know what caused the two women—a lobby attendant and a banquet server—to leave their jobs because they aren’t talking about it. Worker advocates believe a non-disclosure agreement is keeping them silent, and have set their sights on state legislation that would prevent employees who experience workplace harassment from having to keep quiet about their experience.

One of the two women who filed the lawsuit, Teresa Evangelista, stood mutely before a panel of lawmakers during the public comment period at a recent legislative hearing on sexual harassment held in Los Angeles. Her former co-worker, Guadalupe King, who still works as a banquet server at the hotel, appeared by her side and speculated as to the reason for her silence.

“I have to assume that there is a silence clause in the settlement agreement” [between Evangelista and the Renaissance], said King, 55, who has worked at the hotel for 19 years. King said she would like to see a ban on such clauses.

King is not alone. Non-disclosure agreements have become a target for #MeToo advocates, including former Fox News anchor Gretchen Carlson, who settled confidentially with the network’s parent company after accusing the cable news channel’s late chair and CEO, Roger Ailes, of sexual harassment.

While much of the media attention has been focused on the Weinsteins, Moonveses and others who allegedly preyed on professional women, low-wage service workers like Evangelista are especially vulnerable to harassment, say advocates. Many hospitality workers are immigrants and have limited English, and they often work in isolation cleaning hotel rooms. Indeed, almost 60 percent say they have experienced harassment by hotel guests, according to a 2016 survey of about 500 hotel and casino workers, conducted by UNITE-HERE Local 1, a large Chicago hospitality union.

Michael Morrison, Evangelista’s attorney, would not confirm whether his client had signed a non-disclosure agreement. But he said he supports a bill, sponsored by California state Senator Connie Leyva (D-Chino), which would ban non-disclosure agreements that prevent harassment victims from talking about the facts of their case. Senate Bill 820, which passed through the State Assembly’s judiciary committee in early July, would apply to cases of sexual assault, sex discrimination and sexual harassment. The bill requires approval by the full Assembly and Senate, along with the governor’s signature, according to an aide to Leyva.

Jeffrey W. Cowan, a Los Angeles attorney who represents plaintiffs in sexual harassment cases, calls non-disclosure agreements that gag harassment victims “a blight on the legal system” that often interferes with his ability to gather evidence for cases.

Such a bill “will go a long way toward ensuring that trials and discrimination claims are an effective search for truth, and that there is accountability for victims of unlawful discrimination in the workplace,” he said. The law would allow settlement amounts to remain confidential.

The California Chamber of Commerce sees the law differently. Removing confidentiality provisions from settlement agreements will “expose employers to a public presumption of guilt” regardless of the merits of a particular case, according to a letter the Chamber and nine other employer organizations sent to the Assembly judiciary committee on June 26. “SB 820 will drive employers to fight these cases in court instead of resulting in an early resolution.” The League of California Cities also signed the letter opposing the law, which would cover public employers, as well as private ones.

While non-disclosure agreements ensure silence at the settlement stage, mandatory arbitration agreements guarantee confidentiality about workplace disputes from the get-go, and are consequently even more problematic, according to Morrison.

“In terms of sexual harassment, nothing has been more devastating to getting information out about harassers than arbitration clauses,” Morrison said. (Another measure under consideration by the California legislature, Assembly Bill 3080, would prohibit employers altogether from requiring workers to sign agreements that force employment disputes into private arbitration proceedings.)

Neither Evangelista, nor her co-plaintiff in the case, Luz Cuevas, signed arbitration agreements and, for that reason, the details of their complaint against the hotel are in the public court documents; some were reported on in the Long Beach Post when the suit was filed two years ago.

In that complaint, Evangelista alleges banquet supervisor David Flores pestered her for dates and subjected her to such demeaning remarks as, “When are we going to go out so I can remove those ‘cobwebs’ that your husband doesn’t remove for you?” She found her sweater on the floor of the men’s restroom covered with semen and was met with laughter and told to forget about it when she told a supervisor, according to the lawsuit.

The case was settled last march and the allegations against Flores and the hotel were never tried in court. The attorneys for the Renaissance, and for Flores, were both reached for this story but declined to comment on behalf of their clients. Flores could not be reached for comment.

Evangelista, a former lobby attendant, also reported being assaulted in 2012, by a hotel engineer who lured her into a remote storage room “by pretending that he needed help retrieving furniture,” according to the complaint. After she reported the incident to a human resources representative, she was told to stay away from her alleged assailant, according to the complaint.

Co-plaintiff Luz Cuevas – also known as Maria Ruiz – accuses Flores in the lawsuit of having repeatedly pressured her for sex. Cuevas reported Flores’ actions to human resources but, according to the complaint filed with the court, no action was taken against him.

Both women obtained temporary restraining orders against Flores several months prior to filing the 2016 lawsuit in court. “The fact that our legal action may embarrass him and may end up costing him his job could bring him to rage. I fear for my personal safety,” Cuevas stated in a request for a restraining order that was filed with the Los Angeles Superior Court in 2016.

The Renaissance is owned by Sunstone Hotel Investors Inc., a Maryland-based real estate investment trust, and managed by Marriott International Inc.

Last week, after working a brunch at the hotel and still in her black uniform, Guadalupe King sat down in a union hall to talk about why she decided to speak about the settled lawsuit at the Renaissance, which is the target of a union organizing drive by UNITE HERE. (Disclosure: The union local is a financial supporter of this website.) She said she was upset that her former co-workers had left the hotel while the alleged harasser—who sometimes acts as her supervisor—remains.

She also wanted to see policy changes that would affect hotel workers more broadly. King compared the imposition of non-disclosure agreements on sexual harassment victims to a parent’s silencing of a child with a piece of candy after she has been sexually assaulted by a family member. “Everybody should be free to speak about their experience,” she said.

Research assistance provided by Jake Conran


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Labor & Economy

Hearing Shines a Light on Sexual Harassment in the Service Industry

The recent media spotlight on sexual harassment in Sacramento and Hollywood has created an opportunity to address the plight of low-wage workers.

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Assemblywoman Lorena Gonzalez Fletcher, center. (Photo: Joanne Kim)

Assembly Bill 3081 is one of several #MeToo-inspired laws proposed by California legislators.


 

Sandra Pezqueda has racked up some victories recently, but she is not resting easy.

She made the unlikely journey from dishwasher to Time magazine cover story, which featured Pezqueda in Time‘s 2017 Person of the Year issue for her role in fighting sexual harassment at the Terranea Resort, a luxury seaside hotel in Rancho Palos Verdes. In April she settled a lawsuit  for $250,000 against Excellent Maintenance Service, the staffing agency that placed her in the Terranea’s kitchen.

Pezqueda, who is 38 and a native of Mexico, spent Monday evening at a legislative committee hearing in Los Angeles, advocating for a law that would hold companies like the Terranea accountable for the actions of their contractors and temporary workers.


“Many women who work in the hotel industry do not have a voice at all. When they experience something bad, they are afraid to speak up because they might be blamed.”


“I am proud that I can continue to advocate on behalf of other women,” said the poised Pezqueda in Spanish through an interpreter. She described “one of the worst experiences of her life” – a male supervisor who worked for the staffing agency tried to kiss Pezqueda and pressure her for sex. Unlike the vast majority of women who face harassment in the workplace, Pezqueda took action. But her complaint to hotel management led to her firing in 2016, she said.

A sympathetic group of seven California state Assembly members listened to Pezqueda’s testimony and that of three other service industry workers who spoke about some of the barriers that keep many sexual harassment victims in an industry largely staffed by immigrant workers from speaking out.

The chair of the California State Select Committee on Women in the Workforce, Assemblywoman Lorena Gonzalez Fletcher, has been combating sexual harassment since long before the #MeToo movement gained steam. The San Diego-based legislator spearheaded a 2016 bill to address sexual violence against janitorial workers after viewing a 2015 Frontline documentary, “Rape on the Night Shift,” that she says shocked her into action.

The recent media spotlight on harassment in Sacramento and Hollywood has created an opportunity to address “what happens every single day for low-wage workers who, in many ways, are in a more precarious situation” than their counterparts in higher-paid occupations, Gonzalez Fletcher said after the packed hearing, which was held in the basement of the union hall belonging to UNITE HERE Local 11. (Disclosure: The union is a financial supporter of this website.)

Juana Melara and Sandra Pezqueda. (Photo: Joanne Kim)

Assembly Bill 3081, sponsored by Fletcher Gonzalez, would hold companies like the Terranea responsible for sexual harassment of contract workers, and is one of a series of #MeToo-inspired bills in the California legislature this year, some of which have drawn strong opposition from business groups.

The Terranea’s management told the Los Angeles Times that Pezqueda’s lawsuit and allegations “have nothing to do with” the resort. Excellent Maintenance Service reached a settlement with Pezqueda, but has denied wrongdoing.

Gonzalez Fletcher, the daughter of a former farmworker and a nurse, introduced another controversial bill earlier this year, Assembly Bill 3080, which would prohibit employers from requiring workers to sign agreements that force employment disputes into private arbitration proceedings. Mandatory arbitration agreements have proliferated over the last two decades and now cover 60 million workers nationwide, according to a study by the Economic Policy Institute.

The California Chamber of Commerce has labeled the bill banning forced arbitration a “job killer” that could “significantly expand employment litigation.”

The Chamber has also opposed AB 3081, which labor advocates are calling “Sandra’s Law,” arguing that the liability for sexual harassment should rest with the contractor and not with the employer.

Companies already share in civil liability when their labor contractors fail to compensate workers or provide workers’ compensation insurance.

A larger theme underscored the two-hour Monday hearing, which is the powerlessness of women workers in the service industry that, the hearing’s participants said, could be remedied by unionization and diversity in hiring at all levels of companies.

“Only when we have gender balance at every level with every organization will we see sexual harassment really begin to disappear,” said the Feminist Majority Foundation’s executive director, Kathy Spillar, who was one of several experts to speak at the hearing.

Juana Melara, a Westin Long Beach housekeeper who was also featured in the Time magazine 2017 Person of the Year issue for speaking up about sexual harassment, addressed a similar issue. “Many women who work in the hotel industry do not have a voice at all,” she said. “When they experience something bad, they are afraid to speak up because they might be blamed.”

Melara recently helped negotiate a yet-to-be-ratified, first union contract with the Westin Long Beach that will provide “panic buttons” to housekeepers who often work in isolation while cleaning rooms. A legislative requirement that hotels throughout the state provide such buttons to their housekeeping staff members to protect them from sexual assault was also the subject of discussion on Monday.


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