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Wall Street’s new housing frontier: Single-family rental homes


Jennifer Paul St. Denis thought she had found the perfect landlord. A mother of two from Marietta, Georgia, St. Denis had been looking for a new home last summer after separating from her husband.


Her search didn’t take her far. After spotting an ad from a company called Waypoint, she discovered they had a “super-cute” two-story home with a yard and back porch a few blocks away. At $1,449 a month, it was even within her budget.


St. Denis loved staying in the same neighborhood, but, just as importantly, she appreciated the security that came with her new landlord. Waypoint is one of a new breed of large-scale corporate landlords heavily invested in the single-family rental market. (Waypoint has since merged with Invitation Homes. At the time St. Denis moved in, the company had a multi-state portfolio of more than 30,000 homes.)


“Being a [newly] single mom trying to find a good place for my kids, it was appealing to have a company with the staff and resources to solve problems I didn’t have time to address,” she says.


That impression quickly changed after a storm hit this spring.


Just after midnight on Friday, March 23, a severe storm uprooted a tree that crushed St. Denis’s back porch and sent a branch through the roof above her 10-year-old daughter’s room. St. Denis’s 6-year-old son, awakened by the storm, started screaming, “Mommy, our house is falling down!”


Later that morning, St. Denis called Waypoint’s national emergency line. After St. Denis explained that her porch was gone and rain was coming into her house, a company representative sent a roofer that evening to put a tarp over the gash in her home. She says that was the last significant repair completed for nearly three weeks.


Despite repeated calls (nine in total) to Waypoint asking for help, St. Denis says it took a week to get the tree removed, but there were no additional repairs.


Fed up, St. Denis called a local television station. A few days later, on April 12, a reporter filmed a segment on her story, showing a significantly damaged home. The broadcast got Waypoint’s attention, and the company quickly sent contractors to fix St. Denis’s roof and offered one month of free rent.


“We regret we didn’t fully address all the issues more quickly,” a representative for the company told Curbed. “In every instance, Invitation Homes is committed to providing residents with great service.”


How the foreclosure crisis created the single-family rental industry

The industry is composed of a small number of key players. Invitation Homes and American Homes 4 Rent, the second-biggest single-family rental company, got their start in the early 2010s by taking advantage of bargain prices on foreclosed homes by buying huge numbers of properties in bulk. Since then, other companies, like Progress Residential, Main Street Renewal, and Tricon American Homes, have formed, and the industry as a whole has amassed a cache of about 200,000 single-family homes and turned them into rental properties.


Granted, 200,000 represents a rather small slice of the 14 million units that make up the single-family rentals market in the U.S. And the bulk of landlords for these single-family homes are still small “mom-and-pop” operations, each of which owns only a few properties.





Because single-family rental companies own such a small portion of the single-family rental market, it’s unlikely anything they do could have a significant effect on the housing market as a whole. But because the homes they bought are highly concentrated in areas affected by the foreclosure crisis, these companies could have an outsize impact on individual cities and specific neighborhoods.


Rep. Mark Takano (D-CA) expressed concerns in 2014 that should one of the companies decide to pull out of a market or neighborhood by selling its homes there, it could lead to a destabilization of the housing market. As market conditions have shifted, the companies have made adjustments to their portfolios by buying and selling different properties, but they remain highly concentrated in particular local markets.


Single-family rental industry participants often tell investors that they are catering to millennials, who, they argue, prefer to rent because of a lifestyle that stresses experiences over “assets.” The implication is that the companies aren’t impeding homeownership for people whose homes were foreclosed on during the financial collapse, but are merely offering a service on the basis of evolving consumer preferences.


But that assessment of their tenants may be wrong. Maya Abood wrote her master’s thesis in urban studies at MIT on single-family rental companies and conducted a survey of 100 tenants in Los Angeles County. Rather than experience-obsessed millennials, Abood found low- and moderate-income families with children in multigenerational or nontraditional family structures. Many were people of color.


According to a recent study by the Alliance for Californians for Community Empowerment Action (ACCE), which spoke to more than 100 residents of single-family rental homes, tenants of these companies “are negatively impacted, with large annual rent increases, fee gouging, a high rate of evictions, and rampant habitability issues.”


A 2016 study by the Federal Reserve Bank of Atlanta found that large corporate owners of single-family rentals in Fulton County, Georgia, were 8 percent more likely than small landlords to file eviction notices.


The companies focus on markets where unemployment is low, higher-paying jobs are plentiful, and quality single-family homes are the primary form of housing — places like Los Angeles, Dallas, Atlanta, Florida, and Phoenix. These markets allow the companies to charge annual rent increases with the expectation that tenants can sustain them.


In aggregate, single-family rental companies charge rents comparable to market rates for any given city. In most markets, single-family rental companies charge a slightly higher average rent than estimates provided by RentRange, a third-party data-collection company that provides rental intelligence for real estate investors and landlords.


Wall Street’s new product: single-family rental securities


When the American housing market crash brought the world economy to its knees in 2008, much of the blame fell on Wall Street and the esoteric financial instruments banks used to bring loose credit to the housing market: mortgage-backed securities (MBSs).


So, naturally, when news emerges that Wall Street firms have cooked up new financial products related to housing, alarm bells go off in the news media—and the public. And so it was in 2013 when Invitation Homes bundled thousands of single-family rental units into a new type of asset-backed security, in a deal that raised just shy of $500 million for the company.


But what level of alarm does the securitization of single-family rentals really warrant? In short, not much: These securities are more like business loans in the form of bonds than the pre-crisis mortgage-backed securities that led to the 2008 financial crisis.


While the securitization chain with pre-crash mortgage-backed securities was long, the borrowers at the bottom of the chain were ultimately homebuyers. In most instances, a mortgage lender would lend a homebuyer money for their purchase and then sell that loan to Fannie Mae, Freddie Mac, or another bank. Those institutions would then bundle the mortgages into a security and sell them to investors. The proceeds from the security would be used to buy more mortgages to bundle into other securities. This chain brought global investor cash into the American housing market—and still does.


In the case of single-family rental securities, however, the borrower is a corporation. These companies bundle the rental income from the properties they own into securities to issue a bond. The companies sell the securities to investors to raise money now like a loan, and they pay the loan back over time using rent checks from their properties.


So are these new securities destined to infect the global financial system and bring it crashing down the way mortgage-backed securities did in 2008? Probably not: There are key differences. The first is that the volume of residential MBSs in 2008 (around $7 trillion) was dramatically higher than the volume of single-family rent securities today ($17.4 billion), according to the Securities Industry and Financial Markets Association.


The second is that there is a lower likelihood of these securities defaulting because, for better or worse, the single-family rental companies have the power to quickly evict tenants who can’t pay their rent, thus keeping rental payments flowing into the securities. The single-family rental securities are more akin to commercial mortgage-backed securities, in which rent from office tenants is bundled into a security.


Because each home can’t be in more than one security at a time, that limits the number of securities companies can issue on their rental properties. And a good deal of those homes are already committed to existing securities, most of which have a maximum duration of five years.


As a result, single-family rental security issuance has slowed down. According to the Securities Industry and Financial Markets Association, single-family rental security issuance peaked in 2015 at $6.9 billion and fell to $5.1 billion in 2017. For comparison, private institutions—meaning not counting Fannie Mae or Freddie Mac—issued $933.6 billion in subprime and alt-a residential MBSs in 2006.


If opportunities for company growth slow down as home prices rise, the pressure will be on to get more out of each house, which could mean higher rents, more fees, itchy eviction fingers, or cut corners on issues like maintenance.


credit to: Jeff Andrews and Patrick Sisson