On Wednesday, the Federal Housing Finance Agency, the U.S. Department of Housing and Urban Development (HUD), and the Treasury sent out a joint Request for Information(RFI) on ways the government might rent out the 250,000 homes that Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) currently own. The government appears to be looking for a practical way to manage a growing inventory of homes it owns (REO) that it has been trying to sell into a falling market with limited success, along with ways of “maximizing [the] value to taxpayers” of this inventory, as the accompanying press releasestates.
This is clearly an acknowledgment that the administration expects the inventory of REO by Fannie, Freddie, and the FHA to continue growing. In fact, there are another 850,000 homes in some stage of foreclosure with these agencies that will eventually wind up in this pool. Beyond that, there are another 3 million homes in default now around the country, most of which will eventually be foreclosed despite loan modification programs, and many of which will wind up with Fannie, Freddie, or the FHA.
This also appears to be an acknowledgment by the administration that it does not believe the housing markets will recover anytime soon. If the expectation were for a quick recovery, there would be little point going through the complex, cumbersome, and controversial process of creating a new program, one that will not begin until well into 2012 at the earliest.
This anticipation of a long-term housing slump, gloomy as it is, is most likely accurate. Prices are continuing to fall in most housing markets, though there are local markets where prices have stabilized and are even rising. Nor does there seem to be anything the government can do to revive the market short of stimulating the general economy and reducing unemployment, neither of which looks likely anytime soon given the budget-cutting fervor that has overtaken Washington.
So if there is going to be a long-term housing slump, is this the right move for the federal government to make? The answer to this question depends on what you think the goals of the government should be in handling what may become a million-plus inventory of single-family homes.
The RFI lists six objectives that responses to the RFI should seek to achieve:
- Decrease the REO inventory “in a cost-effective manner”;
- Reduce average loan losses relative to individual REO sales;
- Address the need to repair and rehabilitate these often deteriorated properties;
- Respond to local market conditions;
- Assist efforts to stabilize neighborhoods and home prices; and
- Suggest ways to analyze how to best dispose of individual homes, whether by selling or renting them or tearing them down.
Keep in mind that renting single-family homes is a tough business, and renting large portfolios of them is even tougher. It is expensive to fix up homes, many of which have been vacant for months and often stripped of appliances and even wires and pipes. It is also expensive to properly manage a large portfolio of homes, most of which are likely to be spread over a wide area. Keeping the grass cut, pools cleaned, trash picked up; repairing toilets and refrigerators when tenants call to complain; and failing to collect rents from deadbeats can quickly wipe out any profits.
To make a business like this profitable, rents need to be kept as high as possible. The fact that the rental market is generally strong does offer some promise that rents may be sufficient to allow such a business to be profitable in some markets. But where many of these homes are located (on the outer edges of metropolitan regions far from jobs and services or in depressed inner-city neighborhoods) frequently are not where rental markets are thriving.
The real upside potential for a business like this, of course, is on the resale of the property into a rising market. Unfortunately, it is likely to be some time before the local markets where many of these homes are located come back enough to allow the homes to be sold profitably—unless, that is, the initial acquisition costs are very low.
The RFI is focused only on large portfolio transactions—at least $50 million for sales and up to $1 billion for joint ventures. Transferring portfolios of this size to investors is likely to require significant cuts in the price or value received over what might be obtained by selling the homes one by one, given the costs of running large portfolios at a profit. It is not clear then how such transfers would reduce average loan losses relative to individual sales.
Bulk transfers should remove large inventories of homes from local for-sale markets and thus help achieve the objective of stabilizing them. But will large bulk transfers to profit-oriented investors achieve the objective of stabilizing neighborhoods? To accomplish this objective will require private investors, or the property managers working for them, to invest the time and money needed to manage the properties much as homeowners would. This requires careful screening of renters, quick response to complaints from neighbors, and the ability and willingness to kick out bad tenants (which may be difficult depending on local tenant protections laws). Absent this, the rented homes quickly may become liabilities to their neighborhoods, though perhaps a lesser liability than if they were left vacant.
Though unstated in the RFI, the accompanying press release suggests yet another objective for any program growing out of the RFI. This is “to find and promote new ways to alleviate the strain on the affordable rental market” because, as HUD Secretary Donovan states in the release, “half of all renters [are] spending more than a third of their income on housing and a quarter [are] spending more than half.” Both he and Treasury Secretary Geithner emphasize the need to “expand access to affordable rental housing,” in Geithner’s words.
Does this mean that this inventory of homes should be used to provide affordable rental housing? This could in fact be an invaluable addition to a severely limited and declining stock of housing affordable to low- and moderate-income families.
Were the government willing to use the REO inventory for this purpose, it could add well over a million new affordable rental units in the next few years, going a long way toward alleviating the shortage of this vital resource. To do this, however, would severely limit or eliminate the ability of private investors to make a profit.
So, despite the promising statements in the press release, the absence of any such objective in the RFI itself suggests that the main objective is to reduce losses for government and the taxpayers as much as possible. This will require the rents charged to be as high as possible and prices on sale to be at market rate, with no reductions for lower-income buyers. Nevertheless, it can be hoped that at least some of the inventory will find its way into the supply of affordable rental and for-sale housing.
Finally, the RFI may be an early indicator of a coming shift in U.S. housing markets. According to recent news reports, several major homebuilders are beginning to rent portfolios of homes as a new business line. This adds to the group of mostly smaller investors who have been buying homes at foreclosure sales to hold, rent, and then resell. If the federal government joins in this business, American suburbs soon will see a growing presence of rented single-family homes, a presence that is likely to grow anyway as the national homeownership rate declines. The nature of the suburbs may well be in the process of a fundamental shift and becoming no longer the sole province of the homeowner. And the implications of such a shift, if it does occur, likely will be quite far reaching.
