Recently, initial public offering documents for Invitation Homes disclosed that it had reached an agreement with Fannie Mae for a $1 billion debt guarantee for its single-family rental portfolio. Invitation Homes is a subsidiary of one of the world's largest private equity funds, the Blackstone Group, which currently manages $367 billion in assets. Instead of backing private equity giants with no strings attached, Fannie Mae should instead target its efforts to make the single-family-rental market safer and more affordable for America's families.
To understand what's at issue here, it's important to note that more than half of all renters reside in single-family homes (defined as properties with one to four living units). The market has grown dramatically since the foreclosure crisis, as it appears many families who lost their homes during the crisis moved into another single-family home rather than an apartment.
But the single-family rental market is not just large; it is also troubled. Current record-high rents and a shortage of units enable investors to rent out distressed properties without any market pressure to repair them. In some instances, owners of distressed properties pass off their responsibility to maintain rental units onto the tenants under the guise of predatory products such as "rent-to-own" schemes or land installment contracts. Unscrupulous investors are further aided by online auction sites, which enable people around the globe to source low-value properties on the cheap, either collecting rent payments until the home falls apart or simply waiting until home values rise to flip them.
Like many other single-family rental companies, Invitation Homes got its start after the foreclosure crisis caused national home values to crash. It was created as a vehicle for Blackstone to buy up thousands of homes at bargain-basement prices, often crowding out aspiring owner-occupants by paying in cash. Among other sources of financing, the company has pioneered the securitization of single-family rental homes. Invitation Homes currently owns close to 50,000 homes, most of which it rents out, and it has pioneered the securitization of rental homes.
Given its ready access to inexpensive capital and its track record of purchasing thousands upon thousands of homes, Invitation Homes hardly needs the taxpayer subsidy that is baked into any guarantee from a government-sponsored enterprise. With that in mind, Fannie Mae should consider taking the following three steps to make the single-family market safer and more affordable.
First, Fannie Mae and Freddie Mac should make it their first priority to help finance those single-family rental operators whose core organizational mission is to provide affordable housing and advance community development.
The National Community Stabilization Trust works with hundreds of mission-based nonprofits and developers who purchase and rehabilitate distressed properties. Like potential homebuyers, these groups lose properties to cash investors who do not work to improve either the house or neighborhood. But more to the point, these groups also would like to scale up their work in the single-family rental market — but only if they can access capital at a price that makes their good work achievable.
Additionally, Fannie Mae should include conditions regarding responsible market behavior alongside any support for investors in single-family rental portfolios. Deals should prohibit predatory products such as land contracts or sham "rent-to-own" arrangements and require landlords to accept housing vouchers from families fortunate enough to have them, as well as other provide other protections.
For example, in its recently finalized Duty-to-Serve rule, the Federal Housing Finance Agency, offered credit conditionally under the rule ensuring appropriate tenant protections when guaranteeing blanket loans on manufactured home communities and on individual chattel loans — categories notorious for consumer abuses. A similar approach should be taken here.
Finally, Fannie Mae should limit its involvement in the single-family rental market to deals that will provide affordable rental housing to the low- and moderate-income people who need it the most. While rents are high across the board, with about half of all renters paying more than the 30% of their income for rent that is typically considered "affordable," the situation is far worse for lower-income families, the majority of which spend more than half of their income on rent.
Fannie Mae should not double down on strategies that funnel wealth straight from Main Street to Wall Street. Instead, the GSEs should help support mission-based organizations working to strengthen neighborhoods, set standards for the vast single-family rental sector, and enable new opportunities for America’s families to find affordable housing. The FHFA should step in immediately to ensure that additional involvement in this market is appropriately targeted and all consequences are fully considered.
Julia Gordon is the executive vice president of National Community Stabilization Trust.