Tag Archives: rental market

Securitizing Single-Family Rentals

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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.

The Long Wait for Home

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The most recent issue of Housing Spotlight from the National Low Income Housing Coalition is titled The Long Wait for a Home. The Executive Summary reads,

The Public Housing and Housing Choice Voucher (HCV) programs provide essential affordable housing to some of the nation’s most financially vulnerable households. Forty percent of new public housing admissions and 75% of new voucher holders each year are required to be extremely low income (ELI) households, who earn no more than 30% of their area’s median income (AMI) or the federal poverty guideline, whichever is higher. Seventy-one percent of the nearly 1.1 million public housing households and 74% of the 2.2 million HCV recipient households are ELI (HUD, 2015).

The housing resources available to ELI renters however are insufficient. The private and subsidized rental markets make available only 3.2 million affordable homes for the nation’s 10.4 million ELI renter households, resulting in a national shortage of 7.2 million rental homes (NLIHC, 2016). ELI households face a long wait for housing assistance. Unable to find affordable housing, 75% of ELI renter households are severely cost burdened, spending more than 50% of their income on housing costs and leaving little money for other necessities (NLIHC, 2016).

The last nationwide survey of Public Housing Agencies (PHAs) regarding their public housing and voucher waiting lists was conducted in 2012. Since then, rental affordability has worsened, squeezing ELI renters even further out of the private market. To document the current state of waiting lists, NLIHC surveyed PHAs in the Fall of 2015 and Winter of 2016. Three hundred twenty PHAs responded with complete surveys, representing a diversity of size, location, and metropolitan status.

Survey data paint a bleak picture of waiting lists closed to new applicants and long waits for housing assistance. Key findings include: „

  • Fifty-three percent of HCV waiting lists were closed to new applicants for housing assistance. Sixty-five percent of HCV waiting lists closed to the general public had been closed for at least one year. „
  • Eleven percent of public housing waiting lists were closed to new applicants. Thirty-seven percent of public housing waiting lists closed to the general public had been closed for at least one year. „
  • The median HCV waiting list had a wait time of 1.5 years. Twenty-five percent of HCV waiting lists had a wait time of 3 years or longer. „
  • The median public housing waiting list had a wait time of 9 months. Twenty-five percent of public housing waiting lists had a wait time of 1.5 years or longer. „
  • ELI households accounted for nearly 74% of households on the average HCV waiting list and more than 67% of households on the typical public housing waiting list.
  • Families with children accounted for 60% of households on the average HCV waiting list and 46% of households on the typical public housing waiting list. „
  • Seniors comprised the most common type of household on 15% of the public housing waiting lists for which these data were provided.

Closed waiting lists and long waits for housing assistance make clear that we must expand housing resources for our nation’s lowest income renters. Legislation introduced in the 114th Congress would increase investments in vouchers, public housing, and other housing programs.

*     *      *

These policy changes, and others like them, could end housing poverty and homelessness once and for all by providing the resources necessary for every low income family to afford a home.

This report rightly brings attention to the big problems facing extremely low income households and federal affordable housing programs. Whether anything is done for them depends completely on the outcome of the election.

Plunging Minority Homeownership Rates

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Construction Dive quoted me in Why Minority Homeownership Rates Plunged After the Housing Crash — and How to Reverse The Trend. It opens,

The recovery from the 2007 U.S. housing crash is still underway, with the ramifications of foreclosures and subprime mortgages still playing out for many current and potential American homeowners. Northeastern markets are still struggling to clear out crisis-era inventory, largely due to foreclosure laws, and members of Generation X — one of the hardest hit groups during the crash — are just now building up the required financial strength and confidence to claw their way back to homeownership.

While the Census Bureau Housing Vacancy Survey indicated that U.S. homeownership overall was 63.5% in the first quarter of 2016 — down significantly from a 25-year average of 66.2% — the groups encountering the most difficulties snapping back from the housing crisis are the black and Hispanic populations.

The Census Bureau found that 41.5% of black households and 45.3% of Hispanic households are currently homeowners, compared to 72.1% of white households. And last year, while the Urban Institute projected that Hispanic homeownership would rise over the next 15 years, it also predicted that black homeownership would drop to 40%.

The stagnant and declining minority homeownership numbers are clear, but experts have varying views regarding why this situation is occurring and what can be done to reverse the trend.

 *     *     *

In Newark, NJ, for example, entire minority neighborhoods were targeted with home renovation schemes, which ended in high-interest home equity loans for the consumer, according to David Reiss, professor of law and academic program director for urban business entrepreneurship at Brooklyn Law School. “You would see entire streets with home improvement projects through the same company,” he said.

A study by University of Buffalo professor Gregory Sharp and Cornell University professor Matthew Hall found that “race was the leading explanation for why people lost homes they owned and turned back to rentals.” Sharp and Hall said that minorities were “exploited” by the mortgage lending system, which led to blacks being 50% more likely than whites to lose their homes and enter the rental market.

After the housing market crash, there weren’t enough educational resources and financial literacy programs available to minority groups to help them navigate the “new normal” of adjustable-rate mortgages and increases to their monthly payments, according to Franky Bonilla, with Churchill Mortgage in Houston. “Without access to even the most basic information, such as how to save money or properly document income, many borrowers were unequipped to overcome (these problems), and, as a result, many owners walked away from their homes,” he said.

How to boost homeownership among minorities

So with minority homeownership rates lagging — and in some cases sinking — since the housing crisis, what’s the answer to reverse the trend?

Bonilla, who is also a member of the National Association of Hispanic Real Estate Professionals (NAHREP), said approximately 60% of his business comes from minority homeowners and that this group in particular could benefit from borrower education and outreach, such as bilingual employees, as well as workshops and seminars.

“Lenders with more cultural diversity have an advantage because they can relate and communicate more effectively with individuals who might otherwise feel disadvantaged or intimidated by the mortgage process,” Bonilla said. “In turn, this creates an opportunity to establish a relationship at a personal level and determine which mortgage options are the best fit for each borrower’s unique financial situation.”

Another possible solution to increasing minority homeownership rates, along with homeownership among those who don’t meet the credit requirements for prime loans, is an overhaul of lending criteria for mortgages.

Reiss said there has been a move by some housing advocates to have credit for mortgage purposes reflect factors more indicative of future success as a homeowner. One of the critical issues, however, is to try to determine exactly how much credit is the right amount of credit. “You want to make credit available to people without having excessive default rates,” Reiss said. “Clearly the amount of credit we had in the early 2000s was too much credit, and it ended poorly for many people.”

Reiss added that home lending has always involved a careful balance between underwriting and available credit. “I think everyone would agree that the ‘Wild West’ days of lending were not good for American households in general,” he said.

The State of the Union’s Housing in 2016

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The Joint Center for Housing Studies of Harvard University has released its excellent annual report, The State of the Nation’s Housing for 2016. It finds,

With household growth finally picking up, housing should help boost the economy. Although homeownership rates are still falling, the bottom may be in sight as the lingering effects of the housing crash continue to dissipate. Meanwhile, rental demand is driving the housing recovery, and tight markets have added to already pressing affordability challenges. Local governments are working to develop new revenue sources to expand the affordable housing supply, but without greater federal assistance, these efforts will fall far short of need. (1)

Its specific findings include,

  • nominal home prices were back within 6 percent of their previous peak in early 2016, although still down nearly 20 percent in real terms. The uptick in nominal prices helped to reduce the number of homeowners underwater on their mortgages from 12.1 million at the end of 2011 to 4.3 million at the end of 2015. Delinquency rates also receded, with the share of loans entering foreclosure down sharply as well. (1)
  • The US homeownership rate has tumbled to its lowest level in nearly a half-century. . . . But a closer look at the forces driving this trend suggests that the weakness in homeownership should moderate over the next few years. (2)
  • The rental market continues to drive the housing recovery, with over 36 percent of US households opting to rent in 2015—the largest share since the late 1960s. Indeed, the number of renters increased by 9 million over the past decade, the largest 10-year gain on record. Rental demand has risen across all age groups, income levels, and household types, with large increases among older renters and families with children. (3)

There is a lot more of value in the report, but I will leave it to readers to locate what is relevant to their own interests in the housing industry.

I would be remiss, though, in not reiterating my criticism of this annual report: it fails to adequately disclose who funded it. The acknowledgments page says that principal funding for it comes from the Center’s Policy Advisory Board, but it does not list the members of the board.

Most such reports have greater transparency about funders, but the interested reader of this report would need to search the Center’s website for information about its funders. And there, the reader would see that the board is made up of many representatives of real estate companies including housing finance giants, Fannie Mae and Freddie Mac; national developers, like Hovnanian Enterprises and KB Homes; and major construction suppliers, such as Marvin Windows and Doors and Kohler. Nothing wrong with that, but disclosure of such ties is now to be expected from think tanks and academic centers.  The Joint Center for Housing Studies should follow suit.

The Rental Crisis and Household Formation

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The Mortgage Bankers Association has posted a Special Report: Diverted Homeowners, the Rental Crisis and Foregone Household Formation. The report’s bottom line is that people who should have been homeowners have displaced people who should have been renters. Those displaced people have been left in their original households, typically those headed by their parents.

The Report’s Executive Summary states that among the long term impacts of the Great Recession

have been the emergence of a rental housing shortage and an intensified affordability crisis in the rental market. In this report, we analyze various supply and demand factors that have led to this crisis.

In so doing, we provide detailed analysis of the shifts in homeowner and rental demand. As we note, these shifts cannot be analyzed without understanding the shifts in household formation that have occurred. We utilize data from the U.S. Census and focus the analysis on 3 distinct time periods (2000, 2006, 2012) to highlight housing epochs that are relatively normal, at the peak, and near the bottom of the market. Special attention is also placed on those younger than age 45 because they represent the households most commonly making first time decisions to form a household and to own a house.

Our primary findings:

• A sharp downturn in homeowner growth since 2006 suggests that 6.0 million would-be homeowners (the expected number compared to actual) have been shifted to renting or have left the housing market.

• These diverted homeowners triggered a cascade of adjustments throughout the rental housing sector that are measurable in different ways.

• A sizable portion (roughly a third) of the diverted homeowners likely have been absorbed into single-family rentals, especially among households aged 25 to 54.

• Although larger than expected, growth in the rental sector was too small to account for both the expected rental growth and also the large number of diverted homeowners. Before disruptions to the owner-occupied market, the rental sector had been expected to grow by 4.4 million occupied units after 2006, due to the arrival of the large Millennial generation. While diverted homeowners resulted in demand for nearly 6 million additional rental units, rental housing only grew by 5.2 million.

• New construction was crippled during the financial crisis and aftermath, slowing its response to the swelling rental demand, although multifamily construction volume nearly doubled in 2012 compared to 2010, and increased another third in 2014 compared to 2012.

• The clear inference is that slightly more than 5 million otherwise-expected renters left or never entered the housing market, their growth displaced by the diverted homeowners, and diminishing overall household growth far below expectations. (1)

• A further consequence of the resulting increase in demand and shortfall in supply in the rental market was an increase in rents, with rental affordability problems surging to record heights in 2010 and 2012. This dynamic created an increased incidence of high rental cost burdens that was remarkable for its relative uniformity across the nation.

There has been a fair amount written recently about household formation (here and here, for instance), but this Report is notable for its description of the cascading effect that the financial crisis has had on today’s housing market. We are around the fifty-year low for the homeownership rate.  If that rate has hit bottom, perhaps the trends identified in the MBA report are about to reverse course.