Center for American Progress

Give the Rehab-to-Rent Pilot Program in California a Chance

Give the Rehab-to-Rent Pilot Program in California a Chance

State’s Congressional Delegation Overreacting to the Pilot Announcement

Alon Cohen explains why California representatives in Congress are wrong to prematurely condemn what is designed to be a pilot program.

A bank-owned home for sale in Sacramento, California, in 2008. The Rehab-to-Rent pilot program in California could lessen the impact of the foreclosure crisis by making housing affordable and stabilizing housing market prices.
  (AP/Rich Pedroncelli)
A bank-owned home for sale in Sacramento, California, in 2008. The Rehab-to-Rent pilot program in California could lessen the impact of the foreclosure crisis by making housing affordable and stabilizing housing market prices.   (AP/Rich Pedroncelli)

See also: Inching Toward Principal Write-Downs at Fannie and Freddie by John Griffith and Daniel Molitor; Latinos Bearing the Brunt of the Foreclosure Crisis by Jennifer Rokosa

Nineteen members of California’s congressional delegation in Washington, D.C., jumped the gun earlier this month when they asked the Federal Housing Finance Agency to scrap a pilot program to rent out foreclosed homes held by Fannie Mae in California. Their complaint, spelled out in a letter to the agency’s Acting Director Edward DeMarco, noted that the inventory of foreclosed homes in California is low, and demand is high—which they argue demonstrates there is no need to hold more foreclosed homes off the for-sale market as rental properties. The California Association of Realtors was quick to support the contents of the letter, pointing out that sellers of foreclosed homes were receiving multiple purchase offers.

These opponents are overreacting to a limited pilot program designed to answer precisely the questions they raise. To grasp why the pilot program deserves time to see if it works as anticipated, let’s first look at what it is designed to do. Full disclosure here: The pilot is part of larger initiative originally conceived by the Center for American Progress several years ago and recently dubbed “Rehab-to-Rent,” in which government-controlled entities holding foreclosed homes—chief among them the two mortgage finance giants Fannie Mae and Freddie Mac—convert those homes into rentals to provide affordable workforce housing, while at the same time helping to stabilize home prices by keeping excess inventory off the market and reducing vacancies.

In our January 2012 report, we identified both Los Angeles and Riverside, California, as “high priority communities” for Rehab-to-Rent pilot programs because of their high rental demand and the number of available foreclosed homes. The Federal Housing Finance Agency released a request for information for such a program in August 2011, and then in late February 2012, Fannie Mae and its conservator, the Federal Housing Finance Agency, announced a pilot sale of around 2,500 foreclosed properties in eight hard-hit markets nationwide. The eight pilot markets are Atlanta, Chicago, three regions in Florida, Las Vegas, Los Angeles, Riverside, California, and Phoenix. Pilot bids were due in mid-April, but HousingWire now reports that the deadline has been extended by a month, and that interest among bidders is strong.

Considering the size of the pilot program, the California legislators and realtors are overreacting. At issue are 663 units, including a mix of condos and detached and semidetached homes, concentrated in Los Angeles and Riverside counties —not the entire state from which they drew their conclusions about housing market conditions in California.

To put the sale of only 663 properties owned by Fannie Mae in these two communities into perspective, as of April 2012 there were 23,000 properties for sale in Riverside and 29,000 properties for sale in Los Angeles—even that is overstating it. Most of the 663 properties have tenants already living in them, so the units are suitable for purchase by landlords, which is what Fannie and the Federal Housing Finance Agency are proposing would happen. There are just 150 vacant properties that could be suitable for families seeking to buy a home for themselves—0.2 percent of the current inventory.

In fact, Fannie, Freddie, and the Federal Housing Agency together held just 3,700 foreclosed properties in those two counties as of December 2011, according to a Federal Housing Finance Agency spreadsheet. So even if all government-controlled foreclosed properties were to be converted into rentals, they would represent just 7 percent of the market.

Nobody within or outside of the Federal Housing Finance Agency or Fannie Mae and Freddie Mac is proposing to convert 100 percent of the two finance giants’ foreclosed properties into rentals. We at the Center for American Progress and others have noted that the program would likely represent just a portion of the portfolio, and that reducing supply by a modest percentage in this way should serve only to boost local sales prices.

The overreaction is also premature. The California legislators complain that Fannie Mae will net less by selling properties in bulk than it will by selling these properties one by one. In fact, the stated reason to sell the properties in bulk as rental houses is exactly the opposite, to “improve loss recoveries compared to individual retail REO sales.” (REO stands for real estate owned, a realty term meaning a home is owned by the financial institution that foreclosed upon it.) This is a pilot program created in part to test this very question.

The Center for American Progress previously noted that it is far from clear that bulk disposition of these government-owned foreclosed homes will net lower overall returns than their individual sale. DeMarco made clear in the announcement of the pilot programs that recovering value was a key concern. “This is another milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace,” he explained.

The bottom line: DeMarco, Congress, and the American people won’t be able to gauge the benefits of these Rehab-to-Rent pilot programs unless they are allowed to run their course. The Federal Housing Finance Agency won’t know the true price of the foreclosed assets until it begins to engage in transactions, which is precisely what the pilots allow it to do on a small scale. Initial signs from the pilot Rehab-to-Rent efforts have been positive, so we should not derail this pilot before it has a chance to prove or disprove its worth, using a small fraction of Fannie Mae’s total number of foreclosed-upon homes.

Alon Cohen is a consultant for the Center for American Progress on housing issues.

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Alon Cohen