The new pilot program by housing finance giant Fannie Mae to convert foreclosed homes into rentals is a promising first step toward revitalizing neighborhoods and stabilizing local housing markets—providing homeowners and renters alike with much-needed help. That said, details are scarce about the new program, which President Barack Obama unveiled yesterday at a speech in Falls Church, Virginia. But so far we are encouraged by the care Fannie Mae is taking in screening potential participants given the impact this program will have in affected communities.
Certainly the president got it right yesterday. "We’re working to turn more foreclosed homes into rental housing,” the president said, adding, “Because as a lot of families know, that empty house or for sale sign down the block can bring down prices for an entire neighborhood.”
Going forward, though, we urge policymakers to structure the program around four key principles:
- Maximizing long-term returns to taxpayers
- Expanding affordable housing
- Rehabilitating homes responsibly
- Reviving communities hit hardest by the foreclosure crisis
We detail how to do this in our recent paper, “Rehab-to-Rent Can Help Hard-Hit Communities and Our Economy.”
Here’s what we know so far about the president’s new plan. Fannie Mae, now under government conservatorship, and its conservator—the Federal Housing Finance Agency, or FHFA—released information yesterday about a new pilot program to convert foreclosed homes to rentals. Fannie Mae and FHFA will put a variety of assets up for sale, including rental properties, vacant homes, and delinquent loans. The transactions will be either bulk sales, in which the assets are bundled and sold as a pool to investors, or joint ventures, in which Fannie maintains partial ownership of the property and contracts out management responsibilities to a private enterprise.
As CAP recommended in its paper, Fannie Mae will “prequalify” all bidders to ensure that, at the very least, they have the necessary capital to participate effectively in the pilot. Organizations, whether private or nonprofit, must have $5 million in total assets to qualify and individuals must have at least $1 million in net worth or at least $200,000 in income for the past two years.
The pilot program will target communities that were “hardest hit” by the foreclosure crisis. The Wall Street Journal reports that the program will initially cover six areas: Southern California, Las Vegas, Chicago, Phoenix, Atlanta, and parts of Florida. We identified each of these cities as targets for “Rehab-to-Rent” pilots in our report.
While a meaningful step in the right direction, yesterday’s announcement did not address how a Rehab-to-Rent program will expand affordable housing, enable the participation of community organizations by providing reasonable financial support for their bids, or ensure that minimum rehabilitation standards are met. Let’s consider each of these potential shortfalls in turn.
At a time of rising rents, high unemployment, and stagnant middle-class wages, affordable housing is critical to our economic recovery. One way to encourage affordable housing is by bringing to the bidding table mission-driven organizations with local experience rehabilitating and managing affordable rental properties. We believe it is important to provide low-cost seller financing to these mission-driven organizations to ensure they can participate. This is particularly important in our hardest-hit communities, where residents need not just a home but also the structure and services that many of these nonprofits provide.
Second, the sheer number of vacant and foreclosed homes on the market presents a rare opportunity to improve the housing stock at a relatively low cost. Improving the quality of these homes will help the new owner, further stabilize the prices of neighborhood homes, and buoy the market. In some cases, especially when the federal government maintains some financial stake in the property through a joint venture, rehabilitation standards provide an opportunity to reduce the total cost of ownership through economically justifiable, energy-efficient retrofits. If a new owner of these properties, for example, is already replacing windows or heating systems, energy savings can be achieved for little additional cost by installing higher-quality materials and mechanical systems.
Third, FHFA and the administration will need to monitor the Rehab-to-Rent program. Every state and local jurisdiction has housing codes and enforcement mechanisms for basic safety and habitability standards, but the federal government will need to monitor aspects unique to the Rehab-to-Rent program to ensure that:
- Properties to be held for rent for a certain period are not sold prematurely
- Housing rehabilitations meet certain standards
- Program participants in violation of the rules are identified and penalized
We’re confident these considerations will be addressed as more details of the pilot program are announced.
That’s why we applaud the administration, FHFA, and Fannie Mae for moving forward with this important initiative. If successfully implemented, it can help promote a more resilient, affordable, and energy-efficient stock of rental housing; protect taxpayers from financial loss; and create well-paying jobs and economic activity in the process.
John Griffith is a Research Associate with the housing team at the Center for American Progress. Alon Cohen is a consultant on housing for the Center. Jordan Eizenga is a Policy Analyst with the Center’s housing team.