In January 2018, Government sponsored enterprise (GSE) Freddie Mac completed its first financing deal as a part of its new single-family rental pilot program, which launched in December 2017. The goal of the pilot program is to provide millions of dollars of financing for landlords and nonprofits to offer affordable single-family rental units. This deal finances nearly $11.1 million for TrueLane Homes, an investor in affordable single-family rental homes, in the form of a 10-year, fixed-rate loan secured by 196 homes across six states. Over 90% of the homes will be affordable for families earning at or below 80% of the Area Median Income (AMI).
This landmark deal comes on the heels of Fannie Mae’s similar, yet controversial, agreement to provide $1 billion in financing to Invitation Homes, a subsidiary of the private equity firm, Blackstone Group, which was announced in January 2017. However, both of these deals mark a significant transition in the GSEs’ role in affordable rental markets, which have traditionally been limited to financing multifamily projects or small-scale single-family rental properties.
The structuring of Freddie Mac’s pilot program is perhaps partially in response to criticisms of Fannie Mae’s deal. While Fannie Mae’s $1 billion deal securitized the mortgage on a portfolio run by a large private equity firm, Freddie Mac’s pilot program will provide funding for midsize landlords, and potentially nonprofit organizations. Eventually, Freddie Mac could provide nearly $1 billion in financing or loan guarantees to firms that purchase single-family homes and operate them as affordable rentals.
The mechanics of the program simply allow a new type of housing to be eligible for Freddie Mac financing. Lenders receiving Freddie Mac’s National Single Family Rental Seller/Servicer designation are eligible to sell and service loans (secured by single-family rental properties) to Freddie Mac. These designated lenders service loans for affordable single-family portfolios that are secured by a first lien on the properties. In order to qualify for financing, 75% of the units (or more) must be affordable to renters earning no more than 80% AMI. Freddie Mac will purchase and eventually securitize the loans, and sell senior guaranteed certificates and unguaranteed subordinate certificates to investors. As of March 2018, these designated lenders include: A10 Capital; Arbor; Berkadia; CBRE; CoreVest; HFF; KeyBank; Walker & Dunlop; and Wells Fargo.
The movement towards providing significant financing for affordable single-family rentals has been met with some opposition. There is concern that the large-scale purchasing of single-family homes to create rentals has the potential to reduce the stock of housing available for homeownership, which could raise sale prices of homes and price out middle class families from homeownership opportunities. Additionally, critics of these deals suggest that in an effort to increase the stock of affordable rentals, the GSEs will be empowering corporations to outbid middle class prospective homebuyers by providing cash offers on for-sale opportunities, while a middle class family would often need to make a financed offer.
On the other hand, proponents of the pilot argue that there is unmet demand for affordable single family rentals. The single-family rental pilot program, they argue, is an opportunity to expand the type of rental housing options available and offer more control in where to locate for families who may not be able to afford homeownership. Additionally, the pilot program gives Freddie Mac an opportunity to expand liquidity in the affordable single-family rental market. After the financial crisis, many banks would not offer loans to smaller-scale landlords due to concerns with these landlords’ operating experience, and concerns that the collateralized properties would not be sufficient to secure the loans. By providing low-cost financing to investors, Freddie Mac’s pilot program is an opportunity to test the single-family affordable rental market, which may eventually convince traditional lenders to provide financing for similar deals. Should the program be fully implemented by Freddie Mac in the future, housing professionals can expect to see a significant expansion of private investment in affordable single-family rentals.
Amelie Bailey is a Master’s candidate in the UNC-Chapel Hill Department of City and Regional Planning and a Community Revitalization Fellow with Development Finance Initiative.