Fannie Mae recently closed on a controversial $1 billion loan with the Blackstone subsidiary Invitation Homes. It likely won’t be the last time one of the government-sponsored enterprises (GSEs) bankrolls a loan to a major Wall Street player in the single-family rental market, analysts say.
The Invitation Homes loan has drawn controversy for several reasons. Fannie has previously only done loans in the single-family rental market involving 10 properties or fewer, and typically with small investors. Invitation Homes is one of the nation’s largest landlords, and is owned by a multinational private-equity firm, the Blackstone Group.
The loan, which was originated by Wells Fargo, covers more than 7,000 homes scattered around the country. These are properties that were bought at rock-bottom prices during the foreclosure crisis. The deal, which received a lot of negative press coverage when it first became widely known in January, closed on April 28.
Invitation Homes will use the proceeds to refinance a portion of its preexisting debt. By lowering its debt costs through Fannie’s guarantee and the ultimate backing of U.S. taxpayers, the company can potentially earn more profit from the properties. There is nothing in this deal that requires Invitation Homes to lower the rents charged on any of the properties.
Another controversial aspect of this deal is that the rentals tend to be located in more affluent areas than Fannie’s typical single-family rental deals. On most previous GSE deals with investors in single-family rental properties, the rents on the majority of properties were affordable to people earning 100 percent of the median income in that area. In the Invitation Homes deal, the median monthly rent for the properties was $1,470, the Urban Institute estimated in a recent analysis of the deal. Just 67 percent of the 7,204 properties would be affordable to people earning the median wage, according to that study.
Fannie Mae executives say the Invitation Homes deal is a test case. Larger investors entered the market for single-family rentals only recently in 2011. Single-family rentals are also a growing part of the overall rental market. The share of single-family rentals has risen to 57 percent, up from 51 percent in 2005, according to the Urban Institute study.
“This market traditionally has been very fragmented, made up of mostly mom-and-pop investors,” Fannie Mae Chief Executive Officer Tim Mayopoulos said this month during his first-quarter earnings call with the media. “And here was an opportunity to work with a large and sophisticated investor in this space because we really want to learn more about how we could, you know – what the opportunities were to better support the market.”
Push back from Realtors
Realtors hate this deal, however. The powerful real estate lobby, the National Association of Realtors (NAR), says it makes no sense from a public policy standpoint. During a time when home inventories are extremely tight, NAR says Fannie has infused $1 billion into the market to subsidize Blackstone’s rental profits.
“Realtors have no issue with institutional investors making moves in the single-family market,” said NAR President William Brown in a prepared statement for Scotsman Guide News. “What’s more perplexing to us is Fannie Mae’s support.”
Brown questioned why Wall Street investors need a break on their financing, when it is homebuyers who could benefit from lower loan costs. “Instead of helping big investors compete with average consumers and taking inventory off the market in the process, the GSEs should maintain their focus on broadening access to credit by lowering fees and helping prospective buyers become homeowners,” Brown said.
In a brief published this month, however, the Urban Institute said it was appropriate for Fannie to test the market. Other institutional investors that bought up distressed properties during the downturn will likely try to refinance to increase their targeted yields, said Karan Kaul, a research associate with the Urban Institute. Kaul noted that it will be harder for investors in rental properties to earn yields in the single-family market. Increasingly these companies will look to boost their profits through leverage.
“Regardless of the missteps that the financial sector and Wall Street engaged in during the crisis, these guys came in and they bought these properties at a time when house prices were in a free fall,” Kaul said. “They took a risk and they have been rewarded handsomely for that, and now they own these properties and, as an industry, are just trying to create a viable, long-term business in this market.”
Despite snapping up 300,000 homes during the last downturn, institutional Investors still only control around 1.7 percent of the entire single-family rental market, Kaul said. Fannie and Freddie could potentially have more impact through deals with mid-sized private investors that have fewer financing options.
Fannie is guaranteeing 95 percent of the loan. Ultimately taxpayers will be on the hook should it fail. Regarding loan risk, however, the underwriting was conservative, and there was more than sufficient rental revenues and value in the properties to support the debt, according to the Urban Institute analysis. Fannie has also transferred a portion of the risk.
Apart from purely business considerations, Kaul said GSE deals with large Wall Street investors, as well as mid-sized investors, can make sense from a public-policy standpoint, if the financing subsidy helps address rental shortages and control rent costs. Kaul said that if Fannie and Freddie plan to do more of these deals, guidelines are needed to ensure a percentage of the rentals remain affordable.
“That is what we think needs to be straightened out moving forward, and the policy focus ought to be not whether this kind of financing should exist or not,” Kaul said. “It is how we make sure the benefits of this financing flow to the renters.”