Renting Our Way Out of the Foreclosure Glut

Government-owned Foreclosed Homes Need Tenants

SOURCE: AP/Damian Dovarganes

A financing available by Fannie Mae sign is posted on a foreclosed property offered for sale in the Los Angeles.

By Sarah Rosen Wartell, David M. Abromowitz, Bracken Hendricks, Alon Cohen, Jordan Eizenga, John Griffith | September 20, 2011

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The Federal Housing Finance Agency, in consultation with the Departments of Treasury and Housing and Urban Development, last month issued a “request for information” to solicit ideas for selling or otherwise disposing of foreclosed properties owned by the Federal Housing Administration and the two mortgage finance giants Fannie Mae and Freddie Mac, both of which are under government conservatorship. The housing team at the Center for American Progress responded to FHFA’s request for information on the disposition of government-owned foreclosed homes. This is a summary of our response. (The full response letter can be downloaded here.)

FHA, Fannie Mae, and Freddie Mac own about 250,000 foreclosed homes, mostly from mortgages insured or securitized before the housing bubble burst in 2007-2008. Most of these properties are unoccupied and losing value as they deteriorate. The rest will earn greater return for taxpayers and do more to promote an efficient and resilient housing market if they are taken out of glutted for-sale markets and converted into rental units for a number of years—a process we’ll refer to as “Rehab-to-Rent” or “R2R.”

FHFA, the agency acting as conservator of Fannie Mae and Freddie Mac, recently requested suggestions from the public on what to do with foreclosed homes held by the U.S. government. In that request, FHFA identified three goals: “maximize the economic value” of these assets, help stabilize neighborhoods and local home values, and where “feasible and appropriate,” improve the supply of rental housing.

While some believe that it is FHFA’s role to “maximize the economic value” of these homes by getting the highest price for them as soon as possible, that would fulfill only half the other role assigned to FHFA by statute. The other role is to foster “liquid, efficient, competitive and resilient national housing markets.” Simply seeking the highest price for all of these 250,000 homes all at once, even if it were practical to do so, would fulfill only half of FHFA’s statutory mission as conservator of the mortgage giants.

To achieve both goals—maximizing value and improving the housing market—FHFA would be best served by preparing these homes for the rental market by rehabilitating them and retrofitting them for energy efficiency. Doing so would increase the availability of affordable housing, create jobs, and over the medium term ensure Fannie and Freddie reap the most they can for taxpayers from these foreclosed homes. This makes economic sense for Fannie Mae, Freddie Mac, and FHA, all of which are seeking better returns on these homes, and would help support the broader economic recovery necessary to stabilize the housing markets where these homes are located. We believe that any strategy for dealing with government-owned foreclosed homes prioritizes these factors.

Expanding affordable housing makes renting these foreclosed homes viable

The troubled economy and housing markets mean there is greater rental demand, which makes renting out single-family homes more attractive. Filling these vacant housing units with renters increases both the value of the government’s inventory of foreclosed homes and the price of neighboring homes. It also helps stabilize housing prices and rents by reducing the supply of homes for sale and tempering rising rents by increasing the supply of rental units. A strategy that provides affordable rental housing now, when roughly 100 million American households are “rent impoverished”—spending more than a third of their income on housing, contributes directly to neighborhood stabilization and the economic recovery.

A deep rehab and retrofit also makes financial sense

Nearly all vacant government-owned foreclosed houses will require some rehabilitation prior to rental. So the choice facing FHFA and the Obama administration is how much to invest—or require buyers to invest—in rehabilitation and improvement. Maximizing the long-term value of these assets means considering the total cost of owning these properties.

Energy efficiency retrofits with proven off-the-shelf technology do precisely that, reducing the average American family’s annual energy costs by 20 to 40 percent. Controlling operating costs increases the profitability of a property without raising rents.

Supporting jobs creates renters and homeowners

Finally, we should not lose sight of one of the main reasons that Rehab-to-Rent can be successful in stabilizing the housing market and contributing to the broader economic recovery—R2R is a jobs engine. There are short- to medium-term jobs inherent in the rehabilitation and retrofitting of homes, and long-term jobs in property management, operation, and maintenance. Thus, any sale of government-owned foreclosed homes should seek to maximize the effect on job creation.

A plan for action

Next month the Center for American Progress will release a detailed plan for Rehab-to-Rent. This will include possible ways the federal government or private investors could rehab, retrofit, lease, and maintain currently vacant properties that blight many of our nation’s single-family neighborhoods. The report will also lay out financing options to ensure a reasonable return to taxpayers for these assets.

To be sure, the Rehab-to-Rent proposal will not work everywhere, but by focusing on communities with a high concentration of government-owned foreclosed homes and a strong demand for affordable rental housing, the federal government can dispose of these properties responsibly, expanding affordable housing options for thousands of Americans, and create new jobs in the process.

Sarah Wartell, David Abromowitz, Bracken Hendricks, Alon Cohen, Jordan Eizenga, and John Griffith are all members of the housing team at the Center for American Progress.