Scoring Fannie Mae’s ‘Rehab-to-Rent’ Pilots

Monitoring and Assessment Should Be a Focus as Program Moves Ahead

The program is off to a promising start, but Alon Cohen and John Griffith are keeping an eye on affordable housing and responsible oversight.

A foreclosure sign sits atop a for sale sign in front of a single-family home tops the for sale sign in Denver. The government-controlled mortgage giant Fannie Mae and its regulator, the Federal Housing Finance Agency, last week announced pilot programs as the first step in a major strategy to convert foreclosed homes to rentals. (AP/David Zalubowski)
A foreclosure sign sits atop a for sale sign in front of a single-family home tops the for sale sign in Denver. The government-controlled mortgage giant Fannie Mae and its regulator, the Federal Housing Finance Agency, last week announced pilot programs as the first step in a major strategy to convert foreclosed homes to rentals. (AP/David Zalubowski)

The government-controlled mortgage giant Fannie Mae and its regulator, the Federal Housing Finance Agency, last week announced pilot programs as the first step in a major strategy to convert foreclosed homes to rentals. The pilot offers pools of Fannie-repossessed homes—most of which are already occupied with tenants, who will remain in the properties—to eligible investors looking to rent them out for a period of time.

The Center for American Progress has long called for converting some government-owned foreclosed properties to affordable rental housing, a process we’ve called “Rehab-to-Rent.” The CAP housing team initially proposed a similar program more than two years ago, and last month we laid out six benchmarks on which any such program should be measured.

If done well, Rehab-to-Rent can help stabilize communities by taking excess inventory off the for-sale market while providing affordable rental units at a time of rising rental demand. But if done poorly, Rehab-to-Rent could hand significant numbers of properties to hapless landlords, leaving families with substandard housing that continues to be a drag on the local community. CAP’s benchmarks offer measures to help keep the program on the right track.

Last week’s announcement is a critical first step toward getting Rehab-to-Rent off the ground. Let’s see how the pilots stack up so far:

rehab-to-rent scorecard

Below we review these benchmarks in more detail and offer recommendations for some aspects of the program that need attention going forward.

Benchmark 1: Tailor strategy to the specific needs and market conditions of the community. Status: GOOD.

Fannie has offered about 2,500 properties for sale in eight markets, all of which we identified last month as either “high-priority communities” or “other communities to consider” for Rehab-to-Rent pilots. Our initial analysis was based on the number of government-owned foreclosed properties on the market and the strength of the local rental market, among other factors.

communities selected for rehab-to-rent

Only two cities on our “high priority” list were not included in the pilot: Sacramento, California, and Minneapolis-St. Paul, Minnesota. Still, Fannie and the Federal Housing Finance Agency appear to have chosen appropriate locations for the pilots.

Based on the information released so far it appears as though all properties in each market will go to a single winning bidder. Ideally, we’d like to see smaller bundles of properties for the first wave of pilots so that hard-hit neighborhoods can be targeted for investment. But we also expect certain buyers to eventually own several hundred properties or more in a large city as the program fully ramps up. The key is that the bundles are organized to have maximum impact on specific neighborhoods.

No matter how the properties are bundled and sold, the disposition process—another word for “sales process” where some of the transfers will be sales and some will be transactions that have Fannie partnering with organizations to share revenue—must focus on the specific needs of each community. That often means partnering with local organizations and governments to provide new tenants and surrounding neighborhoods with essential services such as improvements to public spaces, housing counseling, shared equity programs, and rent-to-own opportunities. The pilots have not indicated the extent to which community groups will be involved in the process, though the qualifying application does ask bidders to set out any plans to engage community groups for informational purposes. We plan to continue monitoring this aspect of the program closely.

Benchmark 2: Ensure bidders have a track record and viable plans to rehabilitate and rent the units. Status: GOOD.

Qualification is critical at this early stage. Fannie and the Federal Housing Finance Agency need to be sure they’re selling these properties to organizations that can both pay for them and manage them responsibly. That’s why Fannie and FHFA will limit bidding to prequalified buyers, as we recommended in our report. And they’re certainly asking many of the right questions: The lengthy qualifying application requires information on funding, experience of key personnel, company track record, and specific plans for the properties in question. What is not clear is how much weight Fannie and FHFA will lend to each of the elements when qualifying the bidders and, just as important, when assessing their eventual bids.

In another indication that Fannie and the Federal Housing Finance Agency understand the complexities of Rehab-to-Rent, the application also asks these questions across several partners in the project—lead bidder, investors, and asset managers. But Fannie and FHFA would be wise to pay more attention to property management in the application process. Bidders must show a plan for property management, but they don’t have to provide details for a particular property manager. While it is true that one can obtain the property first and hire a manager later, property managers will likely have the most direct contact with the properties and tenants. So it seems that they, too, deserve a high level of scrutiny.

Further, as Fannie moves from this pilot of largely tenanted properties to one where most of the properties are vacant, greater attention should be paid to the type and quality of proposed rehabilitation. The current application only includes rehab plans as part of the broader asset and property management capabilities.

Benchmark 3: Acquire properties for Rehab-to-Rent in a manner that will maximize long-term returns to taxpayers and stabilize housing markets. Status: GOOD.

In our paper we were agnostic as to the manner in which potential landlords acquire properties. Buyers could buy the properties outright or enter into a joint venture, where the government maintains an ownership stake, lets another organization manage the properties for several years, and shares the revenues from rent and possibly the eventual sale. Fannie and the Federal Housing Finance Agency have taken the same approach, permitting bidders to propose either an outright sale or joint venture whereby Fannie would continue to hold an interest in the properties.

We are interested in understanding how Fannie and FHFA will compare two bids for the same bundle—one proposing a sale and another proposing a joint venture. The simplest way appears to be an assessment of so-called net present value, comparing the current sale price to the value of future rent revenues, expenses, and eventual sale revenues from the joint venture. While by no means simple, a net present value assessment should permit joint ventures and outright sales to coexist.

Going beyond price, it is also not clear how bids will be evaluated to balance the Federal Housing Finance Agency’s dual missions of maximizing return on these assets and stabilizing the broader housing market. For instance, how will FHFA weigh bids that offer equal or less cash but include services that improve the overall financial well-being of tenants and the surrounding community, say financial counseling or rent-to-own options? We understand that it is important not to hinder Rehab-to-Rent, but these considerations are essential to the program’s long-term success, so they should figure in the assessment of bids.

Benchmark 4: Expand the affordable rental housing market. Status: WATCH.

Representatives from Fannie Mae and the Federal Housing Finance Agency often voice support for providing affordable homes through Rehab-to-Rent. But Fannie’s application does not require bidders to set out plans for affordable housing. Once more, the pilot focuses on properties that are already occupied and so does little to expand the availability of affordable rentals.

This approach may be reasonable at this stage, if only in the interest of getting the pilot off the ground quickly. It is admittedly tough to require specific affordability benchmarks when the number, type, price, and locations of these properties vary so widely.

On the other hand, at a time when more than one in four renters pay more than half of their monthly income on rent, the need for affordable rentals is so great that we hope to see it given greater attention in the bidding process. Going forward, Fannie Mae and the Federal Housing Finance Agency should consider setting an explicit affordability standard—say, that a certain percentage of the units be affordable to a person of average income in that community over the entire required holding period.

Ensuring affordability also often means engaging local community-based nonprofits. As mentioned above, the qualifying application makes only passing references to these groups, asking questions on “community relations” and partnerships with community groups. At this moment it’s unclear how Fannie or the Federal Housing Finance Agency will weigh these factors in the bidding process, but we hope they have been added to the application for more than informational purposes.

We are not saying that affordability and community relations must be present just to qualify as a bidder for Rehab-to-Rent. Rather, those that provide for it explicitly should be given credit for it through first-look, financing, or pricing vehicles. This factor should be more clearly spelled out in future deals where there are not current occupants.

Benchmark 5: Provide incentives to property owners to properly renovate properties and undertake economically justifiable retrofits. Status: Pending.

Perhaps the most interesting aspect of these pilots is that the properties in question are almost all tenanted. Of the 2,854 units in these properties, 85 percent have someone living in them today.

This offers two key advantages: simplicity and speed. New owners will not have to spend time and resources finding a tenant, and because the property is not vacant, rehabilitation needs are likely very low. Again, this helps the pilot get off the ground quickly and helps focus on the sale and management of these properties.

But there are disadvantages, too. First, since most of these properties are tenanted, it’s unclear what impact these pilots will have on neighborhood stabilization. After all, even if all vacant properties up for sale are filled with tenants, we are only talking about 429 units spread out across eight markets.

Second, selling tenanted properties makes it difficult to test essential components of the Rehab-to-Rent model, namely what it takes to assess and bundle vacant properties, how they should be priced, or what the rehabilitation needs and costs will be. Indeed, these are the aspects of the program that are truly new and untested. Scattered site property management—property management for rental homes that are not all located in a single development but are instead scattered across a geographic area—on the other hand, is being done today by multiple smaller investors and some larger property managers who service vacant foreclosures for lenders and mortgage servicers.

Because this pilot does not test all of the key aspects of Rehab-to-Rent, it is important that this first pilot period be relatively short—just enough to get a sense that it works, continue monitoring, and move on to the next pilot to test a “full” version of Rehab-to-Rent as soon as possible—one that includes vacant properties.

Benchmark 6: Ensure sufficient measures are in place to monitor compliance. Status: Pending.

Finally, since this is a pilot, one would assume that monitoring and assessment are critical considerations. But based on the details released so far, we simply don’t know.

In any event, monitoring must be a part of any Rehab-to-Rent program to ensure that investors and landlords meet program requirements for rehabilitation, affordability, and hold periods. During the hold period a buyer/partner must hold the properties for rent before selling them. Again, this is an area on which we will focus as the pilot progresses.

Key elements of Rehab-to-Rent that require attention

In addition to the benchmarks set out above, there are key elements of Rehab-to-Rent that require attention in the near term:

  • Hold period: Any Rehab-to-Rent program has to be in place for at least a few years to have any meaningful impact on neighborhoods and local housing markets. The details released last week did not include any mandatory hold period, though representatives from the Federal Housing Finance Agency have indicated an expected period of at least three years.
  • Transparency: The pilots were announced without a clear explanation of the disposition process. Going forward, transparency will be paramount for Rehab-to-Rent to be successful. It will be important to know who the bidders are, where bundles of properties are located, the condition of the homes, and so on. Transparency will ensure that Fannie receives the best price for the properties, all eligible bidders get a fair shake, and the program’s performance is assessed in a fair and timely manner both by internal and external observers.
  • Seller financing: While some potential bidders have large cash reserves and do not need financing, for others—especially mission-driven organizations and other nonprofits—financing is a key to participation. These organizations bring with them a lower required return on investment, potentially resulting in higher offer prices. They also tend to offer a host of services not associated with private investors, including affordability provisions, housing and credit counseling, and rent-to-own options. Seller financing should be made available to these mission-driven organizations and nonprofits. We hope to see terms for this financing emerge in the near future.

To be sure, these Fannie Mae pilots will not make a meaningful dent in the overhang of foreclosed properties on the market today, nor will they address all of the problems plaguing hard-hit communities. But they will give Fannie and the Federal Housing Finance Agency the chance to test the mechanics of Rehab-to-Rent, monitor what works and what doesn’t, and tweak the approach along the way. When the model is ready to be brought to scale, we hope affordability, transparency, and accountability are top priorities.

Alon Cohen is a Consultant on housing for the Center for American Progress. John Griffith is a Policy Analyst with the Center’s Housing team.

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Alon Cohen


John Griffith

Policy Analyst