Freddie Mac Follows Fannie Mae to Rental Market, With Affordability as Goal

When the government-controlled mortgage finance giant Fannie Mae agreed this year to guarantee a $1 billion financing deal for one of the biggest private-equity-backed landlords in the United States, the move prompted an outcry. Housing advocates and legislators questioned why the landlord, Invitation Homes, which is controlled by the Blackstone Group, needed such low-cost financing, especially on the eve of an initial public offering through which Invitation Homes raised $1.7 billion in net proceeds.

          By MATTHEW GOLDSTEIN | NY Times |

Now, Freddie Mac, a rival government-controlled mortgage finance company, is gearing up for its own financing deal. But it is targeting a much different slice of the single-family home-rental market. Freddie Mac wants to provide tens of millions of dollars in financing to midsize landlords, not to giants like Invitation Homes, which operates nearly 50,000 rental homes in 13 markets.

In all, Freddie Mac could provide up to $1 billion in financing or loan guarantees to smaller firms that buy single-family homes and operate them as what it considers affordable-housing rentals, a company official said in an interview. Some nonprofit housing groups might also be eligible for financing.

“It is, first and foremost, affordable,” said the official, David D. Leopold, a Freddie Mac vice president for targeted affordable sales and investments. “The size of the sponsor is less important than affordability.”

Freddie Mac is still hashing out many of the details of the plan, but Mr. Leopold said the company hoped to announce the first deal within 90 days. The Federal Housing Finance Agency, which regulates Freddie Mac and Fannie Mae, has approved the financing effort on a trial basis. The agency’s view of the single-family rental market has changed since 2012, when it balked at a Freddie Mac plan to provide financing to some buyers of foreclosed homes because of concerns that low-cost loans would hurt banks and might also encourage home-flipping.

Still, any specific Freddie Mac transaction would need the agency’s approval, just as Fannie Mae’s deal with Invitation Homes did. The approach being taken by Freddie Mac is in part a response to criticism of Fannie Mae’s deal to provide a guarantee to investors in the 10-year, $1 billion loan that Wells Fargo provided to Invitation Homes and will securitize. The loan is backed by about 7,000 rental homes.

But the strategy also stems from a growing consensus among housing policy makers and landlords that both Freddie Mac and Fannie Mae should play roles in providing financing to single-family home operators. The market has grown since the collapse of housing prices a decade ago touched off the worst financial crisis since the Great Depression and led to more than six million completed foreclosures.

There are now about 17 million homes being rented, up from 11 million in 2007. About 300,000 of those rentals are operated by Invitation Homes and other big Wall Street-backed firms that sprouted up after the crisis like American Homes 4 Rent, Colony Starwood Homes and Pretium Partners.

The vast majority of rentals are still managed by mom-and-pop operators who own a small number of homes. And Fannie Mae and Freddie Mac have long provided financing to small investors. But financing has been hard to come by for nonprofit housing groups and midsize investor landlords who have had to rely mainly on private-equity-backed firms for financing.

In the wake of the financial crisis, most banks have tended to avoid lending to smaller landlords out of concern that such firms have scant operating histories and that the homes posted as collateral are not sufficient to secure the loans. But the hope is that with loan guarantees from the government-controlled mortgage finance companies, more traditional lenders may be willing to venture into that part of the market.

“There is no doubt they want to be in this space, and I think they should be in this space,” said Julia Gordon, the executive director of the National Community Stabilization Trust, which oversees a program that helps housing organizations across the country get the first chance at buying foreclosed homes from banks. “Freddie seems to want to distinguish itself from Fannie,” she added.

The push into single-rental housing by Freddie Mac and Fannie Mae comes amid a debate over the future of the two companies, which the federal government bailed out in 2008 and placed in a government conservatorship at the height of the crisis. The main mission of both is to maintain the viability of the 30-year mortgage by ensuring such loans against default and then packaging them into mortgage-backed securities.

The Federal Housing Finance Agency is also prodding the two mortgage finance giants to do more to actively support the rental market for single-family homes. “F.H.F.A. has authorized both Fannie Mae and Freddie Mac to explore single-family rental transactions on a very limited basis,” Corinne Russell, an agency spokeswoman, said. “These transactions will help the enterprises test, and learn about, the market.”

The agency held an invitation-only conference in Washington last month to discuss challenges related to the single-family rental industry. Representatives from Fannie Mae and Freddie Mac, as well as from for-profit and nonprofit landlords, participated.

Laurie Goodman, a director of housing-finance policy for the Urban Institute, who spoke at the conference, said that “there is a huge hole in the middle market” that Fannie Mae and Freddie Mac could fill. Unlike others, she was less critical of Fannie Mae’s decision to guarantee the loan to Invitation Homes, saying the deal was a “very valuable learning experience.”

Fannie Mae declined to comment. Claire Parker, an Invitation Homes spokeswoman, said the loan was consistent with Fannie Mae’s mission to promote rental housing. “The reality is that housing needs are evolving, and single-family leasing can very often represent a better and more affordable option for families,” Ms. Parker said.

John O’Callaghan, the president of the Atlanta Neighborhood Development Partnership, which has rehabilitated homes in the Atlanta area, said he would prefer that Fannie Mae and Freddie Mac provide financing to organizations like his that work to create affordable rentals and, sometimes, to resell those homes to local families.

“Our No. 1 goal is to allow neighborhoods that have had homeownership stripped out of them to have it returned,” said Mr. O’Callaghan, who also participated in the housing finance agency conference.