The Federal Housing Finance Agency has decided to go forward with a pilot program for turning government owned homes into rental properties. The program announced today was widely anticipated, but is limited in size and scope. There are no new arguments for or against a federal rental program—the same message that the program will be fundamentally unfair, will yield itself to cronyism, will pick winners and losers, and will likely be poorly managed all still apply. But since FHFA is going ahead with the REO-to-rental plan, at least we'll have some measurable outcomes to discuss and critique before a full blown project is launched.
Some background on the issue:
Why launch a pilot program—Since the government took over Fannie Mae and Freddie Mac, Uncle Sam has accumulated a large number of properties. Fannie and Freddie have foreclosed on thousands of properties (since the borrowers stopped paying their mortgages), and since the housing market is not exactly sell properties at warp speed, the GSEs have 122,000 properties that they now own. Since they can't sell the homes fast (and it costs money to upkeep those vacant homes), the GSE regulator FHFA has decided to rent
What is the pilot program—FHFA will take 2,490 properties located in Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and a handful of cities in Florida and put them up for bid to pre-qualified rental managers. If you have money, experience, and a good plan for renting the units, you can buy a bulk of homes them from the government's selected pool and rent the homes out. Individuals will not qualify under this program to buy one or two properties, since they want to sell large batches of homes. And the price for the home will be distorted since only the select few will be able to bid on the properties.
What is the trade off—If you measure this pilot program against just the status quo, it does not sound like a terrible idea. Yes, only insider cronies are going to be able to bid on the properties and the process will thus be unfair. But the properties can not be unloaded to just anyone, since the taxpayer would be liable for any re-foreclosure costs. And at least the government is not trying to set up a landlord agency. So the net benefit of getting these properties off the government books could seem like a positive.
BUT, we are not measuring against the status quo if we are being honest evaluators. We'd want to measure this idea against alternatives. Really, this rental program is a trade off from letting housing prices fall to where homeowners are willing to buy them. FHFA could be lowering conforming loan limits and raising the G-fee to increase the cost of a mortgage and put downward pressure on home prices. FHFA could publicly encourage the Fed to let interest rates rise to their natural market level (also putting downward pressure on home prices). FHFA could have urged HUD to reject the mortgage settlement that just keeps the foreclosure process clogged up. All of that would allow for the GSEs to sell their properties to homebuyers looking for the real market price. That is the trade off that this rental program should be measured against
Also see what we wrote back in August 2011 when this idea was first being floated.