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Although the multifamily mortgage market tops $1.2 trillion in outstanding debt, the total of securitized single-family rental oans held by institutional investors barely tops $20 billion. Owners of single-family rental (SFR) properties have been forced
to resort to high-cost hard money loans, full-recourse personal loans or pure
equity to acquire and manage their assets.
Institutional lenders in the SFR space started to emerge in 2014, following
the wave of well-established, opportunistic investors purchasing portfolios of
foreclosed homes and financing them with Wall Street capital. These major
players — including Invitation Homes, American Homes 4 Rent, Progress
Residential and others — amassed enormous portfolios of homes but still only
account for about 1 percent of the total SFR market.
The other 99 percent of investors are not being afforded the same access
to capital. So, a multi-borrower SFR market has emerged that is composed
primarily of small and midsize owners of residential rental properties, a market
opportunity estimated to be as large as $6 trillion.
Single-family rental properties provide an excellent housing opportunity for
working-class families. They offer safe neighborhoods and access to good
schools, as well as more living space and outdoor space than apartments.
More often than not, they also are affordable. The traditional mom-and-pop
owners of SFR properties are highly focused on maintaining occupancy and
tend to keep rents low to avoid turnover. And the larger aggregators of SFR
portfolios, which can range from 10 to 1,000 units or more, are finding the best
returns in properties valued below $200,000.
These are the target borrowers for private lenders that focus on providing
mortgage capital to the SFR space. Some 78 percent of the properties included
in a 2016 SFR securitization, for example, were deemed affordable for residents
earning 80 percent of their area’s median income, or AMI. In addition to being
large and underserved, the small-balance SFR market is predominantly affordable.
It’s no surprise, therefore, that the SFR market has caught the attention of Fannie
Mae and Freddie Mac. The two government-sponsored enterprises (GSEs) have a
stated goal of increasing the availability of affordable housing across the country.
Historically, this has been accomplished through the purchase of residential
mortgages as a way to lower the cost of capital for homeowners. More recently,
both Fannie and Freddie became active purchasers of multifamily mortgages,
expanding their influence into the rental-housing sector.
Now, as the single-family rental market has matured, the Federal Housing
Finance Agency (FHFA), which oversees both Fannie and Freddie, has paved
the way for the GSEs to be more active in SFR financing. Both agencies have
recently sponsored securitizations of single-family rental loans, and Freddie
has launched a pilot program to purchase SFR loans from approved sellers
A 1998 study by the U.S. Department of Housing and Urban Development
reported that 83 percent of single-family rental units qualified for the GSEs’
low- to moderate-income housing goals, compared to 35 percent of single-family
owner-occupied properties. The same study said SFR mortgage purchases by
the two GSEs totaled $11.6 billion, or about 3 percent to 4 percent of their overall
Those figures have certainly increased in the two decades since, given the
estimated $6 trillion market for small and midsize owners. Becoming more
involved in the SFR market is a logical strategy for the GSEs to meet their affordability goals. Given the fragmented nature of both ownership and financing of
SFRs, however, their tactics to expand market penetration are varied.
In April 2017, Fannie Mae completed the first GSE securitization of SFR properties
by guaranteeing 95 percent of a $1 billion loan made by Wells Fargo to Invitation
Homes. The transaction was groundbreaking for the SFR industry and allowed
Fannie Mae to partner on a low-risk basis with a best-in-class rental operator
backed by the Blackstone Group. The transaction drew criticism, however,
because of the perception that Fannie Mae was using taxpayer dollars to enhance
the returns of an already successful private-equity behemoth. Further, only
67 percent of the assets owned by Invitation Homes are classified as affordable
“The larger aggregators
of SFR portfolios … are
finding the best returns in
properties valued below