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This article originally appeared at TomDispatch.com. To stay on top of important articles like these, sign up to receive the latest updates from TomDispatch.com. Ad Policy

Things are heating up inside Wall Street’s new rental empire.

Over the last few years, giant private equity firms have bet big on the housing market, buying up more than 200,000 cheap homes across the country. Their plan is to rent the houses back to families—sometimes the very same people who were displaced during the foreclosure crisis—while waiting for the home values to rise. But it wouldn’t be Wall Street not to have a short-term trick up its sleeve, so the private equity firms are partnering with big banks to bundle the mortgages on these rental homes into a new financial product known as “rental-backed securities.” (Remember that toxic “mortgage-backed securities” are widely blamed for crashing the global economy in 2007-2008.)

All this got me thinking: Have private equity firms gambled with rental housing somewhere else before? If so, what happened?

It turns out that the real estate market in my New York City backyard has been a private equity playground for the last decade, and the result, unsurprisingly, has been a disaster for tenants and the market alike.

“They’re Warm Wherever They Are”

In the Bronx, Benjamin Warren fears that he and other residents could burn to death in a fire because management has blocked both sides of the passageways between buildings designed to offer ways out of the massive apartment complex. (Warren has called the city and management multiple times to complain, but the routes remain shut.) Nearby, Liza Ash found herself intimidated by nearly a dozen hired men when she and other residents of her building, which had heat or hot water only sporadically this past winter, attempted to organize a tenants’ meeting in the lobby. A little farther south, Khamoni Cooper and her neighbors receive a constant stream of fake eviction notices ordering them to vacate their apartments within five days, even though all of them have paid their rent.

These three tenants—and nearly 1,600 more families in forty-two buildings—are living through one of the largest single foreclosures to hit New York City since the financial crisis began seven years ago. But here’s the twist. The owner of these buildings is far from a traditional landlord. It’s actually a conglomerate of private equity firms that bet it would be able to squeeze more money out of these buildings than it ultimately could—and ended up unable to pay back the $133 million mortgage.

The problem is that, when things go bust, the tenants, far more than these private equity owners, end up shouldering the costs.

“They don’t care if we freeze,” said Khamoni Cooper, speaking of the owners, Normandy Real Estate Partners, Vantage Properties, Westbrook Partners and Colonial Management, who have consistently failed to pay for even basic necessities, including heat and hot water, throughout the winter. Cooper had just learned from a neighbor that management cut off all the water in her building, a move she and others believed was retaliation for a protest they had helped to organize at City Hall earlier that day. “They’re warm wherever they are,” she added bitterly.

Around 2005, private equity firms began amassing real estate mini-empires across the city, chasing outlandish projections of future profit. And when these deals started to fall apart, it was tenants, public pension funds, or the city that took the hit, while the private equity owners sometimes succeeded in walking away from the financial wreckage with cash in hand. The story of how those private equity players bet so wrong on housing in New York City is one that, despite the quirks of real estate in the Big Apple, is important to understand now that private equity has taken its rental market show on the road nationwide, and may soon be coming to a town near you.

The Buying Frenzy

Today, private equity firms like the Blackstone Group, now the largest owner of single-family rental homes in the nation, believe the money to be made in the housing market lies in snapping up cheap homes in the cities where housing prices crashed most spectacularly. Back in the early 2000s, in the eyes of private equity, New York City’s comparable corner of the market was “affordable housing.”

In that city, hundreds of thousands of apartment units were still designated as “rent regulated,” meaning that landlords were prohibited from dramatically raising the rent. The only significant way around that constraint for a landlord was to wait for a long-time tenant to move out. Then the rent could be raised to whatever the market would bear.

To private equity firms, this dynamic seemed to offer a profit opportunity. All they had to do was buy up rent-regulated buildings and replace the current tenants with higher paying ones. (In industry-speak, this was called “transitioning” the building.) About a decade ago, private equity firms or private equity-backed developers began gobbling up rent-regulated buildings across the city at extraordinarily overvalued prices. One of the most aggressive players in the game was the private equity-backed firm Vantage. Between 2006 and 2007, it spent about $2 billion buying 125 buildings city-wide, including a share of the forty-two-building portfolio in which Khamoni Cooper, Lisa Warren, and Benjamin Ash live. Within three years, private equity firms or developers backed by private equity money had scarfed up 90,000 rent-regulated apartments, a full 10 percent of the total stock, according to the Association for Neighborhood and Housing Development.

In their spreadsheets, everything looked good. The buildings were saddled with huge mortgages, but the companies also calculated big rental income increases once they were “transitioned.” In some cases, the projections reported on corporate filings were downright extraordinary. In 2005, for instance, the Rockpoint Group, a private equity real estate firm, bought a complex of apartment buildings in Harlem known as the Riverton Houses. To justify the whopping $225 million mortgage, the company projected that it would be able to more than triple the rental income from $5.2 million to $23.6 million by forcing out half of the rent-regulated tenants within five years.

There was only one big miscalculation, not just in the Riverton deal, but in almost all of them. Inside the apartment buildings were actual, live tenants who didn’t want to be “transitioned” out and fought like hell to stay.

Complete Criminality

Big money and cutthroat landlords have never been strangers to New York’s real estate market. But the descent of private equity firms on the city in the early years of this century was so striking that housing advocates dubbed the practice “predatory equity.” The name refers to the tactics these companies resorted to once it became clear that longtime tenants weren’t going to leave.

Generally, the average turnover rate for rent-regulated apartments is close to 5 percent a year. Landlords whose business plan depends on tripling that figure soon find themselves orchestrating a host of harassment tactics, some of them quite illegal, to get people to move, including mailing fake eviction notices, cutting off the heat or water, and allowing vermin infestations to take hold.

“You don’t get 30 percent of tenants to move out without harassing them and committing some type of fraud,” explained Desiree Fields, an assistant professor of urban studies at Queens College. As an example, she points out how Vantage sent out so many fake eviction notices to the tenants at a collection of buildings in Queens that the borough court gave the company its own day on the housing court docket. Vantage was later sued by the New York Attorney General’s office for illegally harassing tenants in what The New York Times called “a systematic effort to force their departure to create vacancies for higher-paying tenants.”

For tenants, these private equity purchases were essentially a lose-lose situation. For the deal to succeed, tenants had to be forced out. If, on the other hand, the deal failed and tenants got to stay, landlords immediately disinvested from the buildings, making the living conditions worse than ever.

The most infamous case of this type of predatory equity abuse was perpetrated by a real estate company named Ocelot Capital Group. In 2007, backed by an Israeli private equity firm, it bought twenty-five rent-regulated apartments in the Bronx. Deutsche Bank issued the $29 million in financing, later purchased by Fannie Mae. Soon after, the situation started to deteriorate. The buildings had only sporadic heat or hot water. Pipes burst. Ceilings caved in. As Ocelot realized it wasn’t going to make any money, it only withdrew further.

In a 2011 article for Shelter Force magazine, Dina Levy, former director of the Urban Homesteading Assistance Board who now works with the Attorney General’s office, described one visit to the buildings:

Organizers found a single mother caring for three small children who had been living without a working bathroom for more than three months. Her makeshift toilet consisted of a bucket and a hose she managed to connect to the leaky kitchen sink. She explained that she had not moved out because the local housing authority that provided her monthly rental assistance subsidy would not approve her for a transfer to a new apartment.

Housing advocates suggest that the aggressive level often employed by private equity players in these years has set the tone for the broader market, especially in neighborhoods where the rents are rising fastest. In February, a landlord of a rent-regulated building in the Brooklyn neighborhood of Bushwick made headlines by hiring construction workers to take sledge hammers into the bathrooms and kitchens of his tenants’ apartments and just start tearing them apart.

“It’s complete criminality,” said Adam Meyers, a lawyer with Brooklyn Legal Services Corporation A who works with the tenants at one of this landlord’s other buildings, where the boiler and pipes in the basement were recently destroyed. As far as Meyers knows, this landlord doesn’t have private equity backing, but he is typical in believing that the level of harassment reflects the entry of private equity money and manners into the rental marketplace. “You don’t have to go through many steps to see Wall Street financiers driving this process,” Meyers says.

Fantasy and Greed

As early as 2008, it became clear that there was something seriously wrong with the financial calculations underneath these private equity purchases, not just for the tenants, but for the broader market.

“The entire predatory equity enterprise is a house of cards built on a foundation of fantasy and greed,” Senator Charles Schumer (D-NY) announced in December 2008.

By that time, the private equity owner of Riverton Houses was already in danger of falling into default. Other deals would soon sour. The biggest was the unprecedented $5.4 billion purchase of two Manhattan complexes, Stuyvesant Town and Peter Cooper Village, by private equity giant BlackRock Realty and real estate company Tishman Speyer Properties in 2006. By 2010, BlackRock and Tishman had defaulted on the mortgage and walked away from the properties.

As the financial crisis set in, it became clear how significant the role lenders played in the whole predatory equity scheme had been. None of these overly aggressive deals would have been possible without the easy access private equity firms had to mortgage loans, which in turn was enabled by the process of securitization (the banks’ practice of bundling and selling off these loans to investors in order to reduce their own risk).

Looking back, nothing may be more striking than the fact that when these predatory equity purchases blow up, the private equity firms themselves rarely seemed to lose all that much. In the collapse of the Stuyvesant Town deal, for example, Black Rock lost only $112 million. In other cases, the firms appear to have made money even though the deals failed.

In 2006, Vantage and its financial partner AREA Property Partners bought a complex of seven buildings in Manhattan called Delano Village for $175 million. (Its current name is Savoy Park.) Most of the price was covered by a $128.7 million mortgage. The following year, Vantage refinanced it, securing $367.5 million in new loans. While the bank bundled the majority of this loan into a security and sold it off to investors, Vantage used the financing to pay off the first mortgage, repaid itself for the original investment, and put aside some money for reserves. At the end of the day, however, Vantage and AREA Property Partners were left holding about $105 million in cash, according to The New York Times. What they did with that money, no one is quite sure. By 2010, the loan was delinquent. In 2012, Vantage sold off the complex for enough to pay off the outstanding mortgage.

Writing in the Times in 2011, a year before Vantage unloaded the complex to cover the outstanding mortgage, Charles Bagli summarized the Delano Village deal and another similar one: “In each case, they have not exactly suffered: despite plunging the buildings into financial despair, each has been able to take tens of millions of dollars in cash out of the properties.”

But that doesn’t mean some players didn’t lose big, even if these aren’t always the high-flying, risk-taking investors that you might expect. In the Stuyvesant Town deal, for instance, the California public employees’ pension fund lost more than $500 million. The California teacher’s retirement fund lost $100 million, and a Florida pension fund lost $250 million.

To Kerri White, director of organizing and policy at the non-profit housing organization the Urban Homesteading Assistance Board, what’s questionable about public pension funds investing in these types of doomed deals is not just the losses they suffer. It’s also the fact that these pension funds are sometimes actively financing deals that will fuel the possible displacement of some of their own members from their apartments.

She remembers the first time she and her co-workers ran across a predatory equity scheme. Tenants were complaining of harassment and abuse at a collection of buildings in upper Manhattan that had long been part of the city’s Mitchell-Lama affordable housing program. In 2007, at the height of the bubble, a management company backed by a Morgan Stanley-created investment firm bought the buildings for $918 million, one of the largest Manhattan real estate deals in history. Following the purchase, the management company sent out a barrage of eviction notices—633 in one building alone.

But what really caused controversy was that both the city and state pension funds had money wrapped up in the deal, and city workers were often residents of Mitchell-Lama-designated buildings. “Their own pension funds were going to finance deals that were hoping to push them out,” says White.

Things Fall Apart

Today, private equity firms are playing a different game in the national single-family rental market. But some housing advocates believe that private equity’s disastrous decade in New York can offer a test case of what might happen across the country. In both cases, aggressive Wall Street investors quickly buy up an enormous number of rental properties with projections of short-term profits that, to economists and housing advocates, seem more than a little optimistic. In New York, they assumed that they could flip rent-regulated buildings. Nationally, they’re betting that they can profit off buying and renting out homes in cities hardest hit by the housing crisis—a plan that relies on their ability to repair, manage and lease tens of thousands of houses nationwide and on a scale far larger than anyone or any company has ever attempted in the United States. In both cases, if projected profit margins aren’t met, the deals collapse, threatening the stability of tenants’ lives and the success of complex financial products that impact the broader market (even if the private equity firms are able to escape with relatively little of their own money lost).

There are already signs of storm clouds on the horizon for these new rental empires. The private equity giant Blackstone, the leader of the new industry, saw its collected rents decrease 7.6 percent in the last quarter of 2013. As with the predatory equity deals in New York City, the key for Blackstone is being able to collect the necessary amount of rent. Otherwise, the whole plan crumbles.

Back in the Bronx, Khamoni Cooper is continuing to pay her monthly $1,300 rent check, even as her group of private equity owners is being foreclosed on and her building falls apart. Her neighbors say that they can’t drink the tap water because the pipes are so old that the water sometimes comes out black. Others report thick, black mold or mushrooms growing in their bathrooms. Cooper herself is glad to have hers working at all. This winter, management destroyed her bathroom, while tearing up her floors. For two months, she had to use a bathroom in a vacant apartment and greeted her downstairs neighbors each morning by simply waving through the gaps in her kitchen floor.

“They use us like we’re an ATM machine” is how she describes it. Like tens of thousands of other New Yorkers living in rent-regulated buildings controlled by Wall Street investors, she insists that she’d leave if she could, but has found nowhere else to go.

“It feels like I’m being punished,” she says and wonders about her building’s owners: “What did I ever do to you people?”

To Kerim Odekon, who spent seven years working as a policy analyst for New York’s Department for Housing Preservation and Development, Cooper’s is the type of story he heard about inside the agency on almost a daily basis.

“It’s a crisis,” he says. “There should be a truth and reconciliation commission for the tenants of New York.”