Washington Report | August 25, 2018

Toward the end of a season that saw extensive coverage of the financial crisis’ 10-year anniversary have come a flurry of headlines pointing to continued evolution in a market shift that the crisis produced:  the institutionalization of single-family rental (SFR) homes as a real estate asset class.

Bloomberg recently reported former Goldman Sachs partner Donald Mullen has raised “another $1 billion” to invest in SFRs through his Pretium Partners LLC and Cerberus Capital Management “is seeking to raise more than $500 million to buy single-family rental homes amid surging institutional interest in the asset class.”

Then, the Wall Street Journal last Saturday said Freddie Mac “is expanding its role in financing one of Wall Street’s post-crisis success stories:  the booming business of investing in single-family rental houses.” But just a few days later, the Federal Housing Finance Agency announced that Fannie and Freddie would no longer guarantee bonds issued by institutional SFR firms — although they will “continue to support the single-family rental market through their existing individual investor programs.”

Sophisticated real estate players began buying large numbers of foreclosed homes and non-performing mortgage loans while the embers from the financial meltdown were still hot, helping stabilize sinking home prices in some communities. “The business model ultimately evolved into a stabilized ownership model more akin to typical apartment REITs,” according to a recent investment research note.

Notwithstanding the media attention, only around 2 percent of the 16 – 17 million SFRs is institutionally owned. Ownership is only one dimension of the broader institutionalization of SFR housing, however. Technology platforms like Roofstock and OwnAmerica are offering the “mom-and-pop” landlords who still own almost all the SFR the apparent ability to buy and own rental homes in multiple parts of the country, according to Curbed.

Then there’s build-to-rent SFR. Build-to-rent starts, which exceeded 40,000 in 2008, then dropped to 12,000 in 2009, are now approaching 30,000 on an annualized basis. Longtime industry analyst John McManus notes that “today there’s an investment asset class, a data model, a business model, an infrastructure of key players in different markets, an operations model, and a construction model for single-family rental,” none of which existed in the past.

As always with innovation, attention to disruption’s downside is critical. Julia Gordon of the National Community Stabilization Trust recently argued, “Continued investor interest in single-family rentals has contributed to the current inventory shortage… and evidence is mounting that many of the new breed of investors treat tenants worse than the old-style mom-and-pop landlords.”

The stakes are high because SFRs are here to stay, and may continue to grow. As Gordon notes, more than half of all renters now live in single-family properties. Research by the Urban Institute shows “single-family rental units are affordable … and they deliver value for the money … [and] much SFR housing is in solid low-to-moderate-income neighborhoods.”

Well-established rent-to-own programs like those of Ohio HFA and Nebraska IFA and more recent efforts such as New York HCR and South Carolina SHFDA’s small rental development initiatives only hint at the innovation and creativity state HFAs are bringing, and will continue to bring, to this essential element of the country’s affordable housing inventory.

Stockton Williams | Executive Director

In This Issue

Bonita Shropshire Named New South Carolina SHFDA Executive Director

On August 15, the Board of Directors of the South Carolina State Housing Finance and Development Authority (SC Housing) named Bonita Shropshire as the agency’s new Executive Director. Shropshire had been serving as the agency’s interim Executive Director prior to her appointment. She has been with SC Housing for almost a decade, serving as Director of Executive Services, where she served in a chief of staff capacity. Prior to joining SC Housing, Shropshire worked for the U.S. Department of Justice’s National Advocacy Center at the University of South Carolina and the Office of Retired U.S. Senator Fritz Hollings, where she engaged extensively with federal and state authorities.

SEC Establishes New Disclosure Requirements for Municipal Securities

The U.S. Securities and Exchange Commission (SEC) Tuesday released a final rule that requires HFAs and other municipal bond issuers to disclose within 10 days whenever they incur a “financial obligation” or experience an action or event related to a financial obligation that “reflects financial difficulties,” such as a default, event of acceleration, termination event, or modification of terms. The rule defines a financial obligation as a debt obligation or derivative instrument related to a bond issue or other debt obligation or guarantee. This is a much narrower definition of financial obligation than was included in the version of the rule first proposed by SEC last year, which would have required disclosures for a number of additional obligations, including leases. NCSHA urged SEC to narrow its definition in our comments on the proposed rule. The rule will take effect 180 days after it is published in the Federal Register. More details on the rule are available in NCSHA’s blog.