Fannie, Freddie will stop backing single-family rentals

Fannie Mae and Freddie Mac, the government-sponsored enterprises that help lubricate the U.S. mortgage market, will stop backing loans for single-family investment homes in a nod to the growing controversies surrounding that marketplace.

The Federal Housing Finance Agency, regulator of Fannie FNMA, -2.63% and Freddie FMCC, -2.70% , announced Tuesday that both companies would end pilot programs which were intended to “test and learn” best practices in a market that’s exploded in the aftermath of the financial crisis.

By Andrea Riquier |

“What we learned as a result of the pilots is that the larger single-family rental investor market continues to perform successfully without the liquidity provided by the Enterprises,” FHFA Director Melvin Watt said in a statement.

“I was glad to see this decision, I think it was a responsible decision and I’m looking forward to continued engagement with (Fannie and Freddie) over ways in which they might modernize traditional investor financing,” said Julia Gordon, executive director of the National Community Stabilization Trust.

Gordon and other housing observers have criticized the enterprises’ decision to get involved in a market in which investors don’t seem to have much trouble raising funds from traditional capital markets sources. The first such step was in 2017, when Fannie guaranteed a $1 billion deal for Invitation Homes INVH, +0.50% , which was then controlled by Blackstone, even as the giant asset manager was preparing an initial public offering.

“I am perplexed to see Fannie Mae place a taxpayer guarantee behind the same private interests whose risky practices led to the millions of foreclosed homes they are now buying up,” Gordon’s organization said in a statement at the time. “These investors so far have had no trouble financing the purchase of tens of thousands of homes without government support.”

But advocates have also increasingly become concerned about the business practices of the institutional investors who’ve decided to become landlords. A recent Reuters report documented extensive, chronic issues for Invitation Homes tenants.

“I think it’s becoming increasingly evident that many of the actors in the single-family rental market pose risks to anyone who’s involved with them,” Gordon told MarketWatch. “We’ve seen a number of newspaper articles and investigative reports that indicate we may need to do some hard thinking about how these landlords are operating in the marketplace. When you have that kind of reputational risk, there’s downside.”

Whether Fannie and Freddie are involved or not, the single-family rental space is likely to continue growing as a part of the housing market. Institutional investors became interested after the housing crisis, when homeowner distress left plenty of homes to be scooped up on the cheap, and when many Americans’ bruised credit or job histories kept homeownership out of reach.

But since then, other, smaller investors have followed the big players. That phenomenon was documented by MarketWatch last month.

And on Tuesday, the National Association of Home Builders noted that the market share of single-family homes built as rentals increased over the past four quarters, to 42,000 from 29,000 over the prior four quarters.

But as the builder group noted, “the primary source of single-family rental homes is not construction but the existing housing stock. In fact, from 2005 to 2015, 56% of the gains in the rental housing stock were due to increases of for-rent single-family homes.”

The National Association of Realtors on Tuesday issued a statement commending the FHFA’s decision. “By financing the purchase of thousands of single-family homes for institutional investors to use as rentals, Fannie Mae and Freddie Mac compounded on inventory shortages and affordability concerns, which are holding back prospective homebuyers across the country,” the industry group said. “NAR applauds today’s FHFA decision, and we look forward to continue working with Fannie Mae and Freddie Mac to help more Americans achieve homeownership going forward.”