FHFA Puts the U.S. Rental Market in Crosshairs

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.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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