Tag Archives: affordable housing goals

Securitizing Single-Family Rentals

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photo by SSobachek

Laurie Goodman and Karan Kaul of the Urban Institute’ Housing Finance Policy Center have issued a a paper on GSE Financing of Single-Family Rentals. They write,

Fannie Mae recently completed the first government-sponsored enterprise (GSE) securitization of single-family rental (SFR) properties owned by an institutional investor. This securitization, Fannie Mae Grantor Trust 2017-T1, was for Invitation Homes, one of the largest institutional players in the SFR business. When this transaction was first publicly disclosed in January as part of Invitation Homes’ initial public offering, we wrote an article describing the transaction and detailing some questions it raises. Now that the deal has been completed and more details have been released, we wanted to look closely at some of its structural aspects, examine the need for this type of financing, and discuss SFR affordability. (1, citations omitted)

By way of background, the paper notes that

The 2015 American Housing Survey indicates that approximately 40 percent of the US rental housing stock is in one-unit, single-family structures, with another 17 percent in two- to four-unit structures, which are also classified as single-family. Thus, 57 percent of the US rental stock falls under the single-family classification. Although this share increased from 51 percent in 2005 to 57 percent in 2015, this increase was preceded by an almost identical decline from 56.6 percent in 1989 to 51 percent in 2005.

Most SFR properties are owned by mom and pop investors. These purchases were typically financed through the GSEs’ single-family business. Fannie Mae allowed up to 10 properties in the name of a single borrower, and Freddie Mac allowed up to six properties. Rent Range estimates that 45 percent of all single-family rentals are owned by small investors with only one property and 85 percent are owned by those who own 10 or fewer properties. So the GSEs cover 85 percent of the single-family rental market by extending loans to small investors through single-family financing. Of the remaining 15 percent, 5 percent is estimated to be owned by players with over 50 units, and just 1 percent is owned by institutional SFR investors with more than 1,000 properties.

Institutional investors, such as Invitation Homes, entered the SFR market in 2011. Entities raised funds and purchased thousands of foreclosed homes at rock-bottom prices and rented them out to meet the growing demand for rental housing. Then, they built the expertise, platforms, and infrastructure to manage scattered-site rentals. Changes in the business model have required these entities to search for financing alternatives.(1-2, citations omitted)

The paper concludes that “Invitation Homes was an important first transaction—it allowed Fannie Mae to learn about the institutional single-family rental market by partnering with an established player.” (9) It also notes a number of open questions for this growing segment of the rental market: should there be affordability requirements that apply to GSE financing of SFRs and should SFRs count toward meeting GSEs’ affordable housing goals?

That there would be an institutional SFR market sector was inconceivable before the financial crisis. The fire sale in houses during the Great Recession created an opening for institutional investors to enter the single-family rental market.  It is now a small but growing part of the overall rental market. It is important that policy makers get ahead of the curve on this issue because it is likely to effect big changes on the entire housing market.

Road to GSE Reform

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photo by Antonio Correa

A bevy of housing finance big shots have issued a white paper, A More Promising Road to GSE Reform. The main objective of the proposal

is to migrate those components of today’s system that work well into a system that is no longer impaired by the components that do not, with as little disruption as possible. To do this, our proposal would merge Fannie and Freddie to form a single government corporation, which would handle all of the operations that those two institutions perform today, providing an explicit federal guarantee on mortgage-backed securities while syndicating all noncatastrophic credit risk into the private market. This would facilitate a deep, broad and competitive primary and secondary mortgage market; limit the taxpayer’s risk to where it is absolutely necessary; ensure broad access to the system for borrowers in all communities; and ensure a level playing field for lenders of all sizes.

The government corporation, which here we will call the National Mortgage Reinsurance Corporation, or NMRC, would perform the same functions as do Fannie and Freddie today. The NMRC would purchase conforming single-family and multifamily mortgage loans from originating lenders or aggregators, and issue securities backed by these loans through a single issuing platform that the NMRC owns and operates. It would guarantee the timely payment of principal and interest on the securities and perform master servicing responsibilities on the underlying loans, including setting and enforcing servicing and loan modification policies and practices. It would ensure access to credit in historically underserved communities through compliance with existing affordable-housing goals and duty-to-serve requirements. And it would provide equal footing to all lenders, large and small, by maintaining a “cash window” for mortgage purchases.

The NMRC would differ from Fannie and Freddie, however, in several important respects. It would be required to transfer all noncatastrophic credit risk on the securities that it issues to a broad range of private entities. Its mortgage-backed securities would be backed by the full faith and credit of the U.S. government, for which it would charge an explicit guarantee fee, or g-fee, sufficient to cover any risk that the government takes. And while the NMRC would maintain a modest portfolio with which to manage distressed loans and aggregate single- and multifamily loans for securitization, it cannot use that portfolio for investment purposes. Most importantly, as a government corporation, the NMRC would be motivated neither by profit nor market share, but by a mandate to balance broad access to credit with the safety and soundness of the mortgage market. (2-3, footnotes omitted)

The authors of the white paper are

  • Jim Parrott, former Obama Administration housing policy guru
  • Lewis Ranieri, a Wall Street godfather of the securitized mortgage market
  • Gene Sperling,  Obama Administration National Economic Advisor
  • Mark Zandi, Moody’s Analytics chief economist
  • Barry Zigas, Director of Housing Policy at Consumer Federation of America

While I think the proposal has a lot going for it, I think that the lack of former Republican government officials as co-authors is telling. Members of Congress, such as Chair of the House Financial Services Committee Jeb Hensaerling  (R-TX), have taken extreme positions that leave little room for the level of government involvement contemplated in this white paper. So, I would say that the proposal has a low likelihood of success in the current political environment.

That being said, the proposal is worth considering because we’ll have to take Fannie and Freddie out of their current state of limbo at some point in the future. The proposal builds on on current developments that have been led by Fannie and Freddie’s regulator and conservator, the Federal Housing Finance Agency. The FHFA has required Fannie and Freddie to develop a Common Securitization Platform that is a step in the direction of a merger of the two entities. Moreover, the FHFA’s mandate that Fannie and Freddie’s experiment with risk-sharing is a step in the direction of the proposal’s syndication of “all noncatastrophic credit risk.” Finally, the fact that the two companies have remained in conservatorship for so long can be taken as a sign of their ultimate nationalization.

In some ways, I read this white paper not as a proposal to spur legislative action, but rather as a prediction of where we will end up if Congress does not act and leaves the important decisions in the hands of the FHFA. And it would not be a bad result — better than what existed before the financial crisis and better than what we have now.

Tuesday’s Regulatory & Legislative Round-Up

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Housing Affordability Across The Globe

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The 11th Annual Demographia International Housing Affordability Survey: 2015 has been released. The survey provides ratings for metropolitan markets in Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the U.K. and the U.S. There are some interesting global trends:

Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices from 2.0 to 3.0 times median household incomes. However, in recent decades, house prices have been decoupled from this relationship in a number of markets, such as Vancouver, Sydney, San Francisco, London, Auckland and others. Without exception, these markets have severe land use restrictions (typically “urban containment” policies) that have been associated with higher land prices and in consequence higher house prices (as basic economics would indicate, other things being equal).
Virtually no government administering urban containment policy effectively monitors housing affordability. However, encouraging developments have been implemented at higher levels of government in New Zealand and Florida, and there are signs of potential reform elsewhere. (1-2)
These findings are consistent with Glaeser and Gyourko’s research on U.S. housing markets. Not too many local politicians seem to acknowledge the tension between land use policies that limit residential density on the one hand and housing affordability on the other. The de Blasio Administration in NYC is a refreshing exception to that general rule.
The explicit bias of the Demographia International Housing Affordability Survey “is that domestic public policy should, first and foremost be focused on improving the standard of living and reducing poverty.” (2) Those who favor policies that create more affordable housing should take to heart the call for greater density and less restrictive zoning for residential uses. Otherwise, we are left with subsidy programs that can only help a small percentage of those in need of affordable housing and a lot of empty promises about affordable housing for all. Subsidies have a place in an affordable housing agenda, but so does density.

Reiss and Lederman on Affordable Housing Goals

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Jeff Lederman and I have posted our comment to the FHFA’s proposed housing goals for Fannie Mae and Freddie Mac for 2015 through 2017.  We argue,

As the FHFA sets the housing goals for 2015-2017, it should focus on maximizing the creation and preservation of affordable housing. Less efficient proposed subgoals should be rejected unless the FHFA has explicitly identified a compelling rationale to adopt them. The FHFA has not identified one in the case of the proposed small multifamily subgoal. Thus, it should be withdrawn.

New Affordable Housing Goals Set for Fannie and Freddie

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The FHFA issued a final rule.  The summary is as follows:

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) requires the Federal Housing Finance Agency (FHFA) to establish annual housing goals for mortgages purchased by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises). FHFA previously established housing goals for the Enterprises through 2011. This final rule establishes new levels for the housing goals for 2012 through 2014, consistent with the requirements of the Safety and Soundness Act.

The new goal levels are lower than those from the last couple of years.  For a taste of the controversy surrounding affordable housing goals see this, this and this on the one hand and see this, this and this on the other.  My own take is that Wallison and Pinto make broad claims about the negative effects of affordable housing goals that attach big effects to long ago events.  Their claims have not been supported empirically and have not gone through a peer review process.  That being said, I think it is valuable to draw attention to the unintended effects of government policies.  Going forward, Congress and the FHFA should be very careful in their program design to ensure that housing policies have their desired effects — no more, no less.