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«reNtal HousiNg Policy iN tHe uNited states Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development | Office of Policy ...»

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More than 80 percent of these households (29 million) rent housing in the private market from landlords who receive no government subsidy. The subsidized privately owned rental stock houses about 5 million households; public housing provides homes for 1.3 million poor households.

The rental housing stock is quite diverse. In 2005, 25 percent of the rental units were single-family detached homes, 25 percent were in two- to four-unit buildings, and 11.4 percent of rental units were in structures with 50 or more units. The rental housing stock is distributed across the country, with 43 percent of rental units in central cities, 40 percent in suburban communities, and 17 percent

in rural areas (U.S. Census Bureau, 2005b). A significant portion of the rental housing stock is old:

34 percent of rental units were built before 1960, and only 18.7 percent of rental units were built since 1990 (U.S. Census Bureau, 2005a).

The primary problem facing renters over the past few decades has been affordability. Much of the current research on rental housing demonstrates that low-income households spend larger fractions of their incomes on rent over time. DiPasquale and Murray (2008) showed that, between 2000 and 2005, real rents rose about 9 percent across 20 large metropolitan areas. During the same period, renter household income fell about 5 percent. The boom in homeownership during those years accounts for some of this income decline among renters as large numbers of higher income renters moved into the homeowner market (DiPasquale and Murray, 2008). Entering the recession, the real price of rental housing services was at its highest recorded level, while renters’ incomes were lower than in 1970. Rent-to-income ratios were higher than they had been since the early 1930s.

The rental housing market is experiencing historic vacancy rates and declining real rents in most markets. In 2009, the rental vacancy rate peaked at 10.6 percent. In 2010, the rental vacancy rate was 10.2 percent. As shown in exhibit 1, high vacancy rates persist throughout the rent distribution,

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except for units that rent for less than $300 per month; the vacancy rate for these units is 3.6 percent.

For units with rents between $300 and $350, the vacancy rate jumps to 9.1 percent; for units with rents between $350 and $400, the vacancy rate soars to 13.5 percent. The declines in real rents observed during the recession translate into increased cash flow problems for landlords. For many renters, declines in rents have been outstripped by drops in income, making their already historically bad situation even worse.

The Foreclosure Crisis in the Rental Market The current foreclosure crisis has significant impacts on the rental housing market. Large numbers of rental housing units are in buildings that have foreclosed or are at risk of foreclosure. The Joint Center for Housing Studies estimated that investor-owned one- to four-unit properties account for 20 percent of properties in foreclosure nationally (Joint Center for Housing Studies, 2008).

Structures with one to four units are financed by single-family mortgages. About one-half of the renters in the United States live in one- to four-unit buildings.

Although data on the performance of single family mortgage investments are available, far less data are available on the performance of multifamily mortgages (mortgages on structures with five or more units). Those data that are available show considerable variation in the performance of multifamily mortgage loans. The Fannie Mae and Freddie Mac multifamily mortgage business has performed considerably better than their single-family mortgage business. In 2010, Fannie Mae reported a multifamily serious delinquency rate (60+ days delinquent) of 0.71 percent, up from

0.3 percent in 2008. Freddie Mac reported a multifamily serious delinquency rate of 0.26 percent, up from 0.05 percent in 2008. In 2010, the Fannie Mae and Freddie Mac single-family serious delinquency rates were 4.48 and 3.84 percent, respectively (Fannie Mae, 2011; Freddie Mac, 2011).

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The Fannie Mae and Freddie Mac multifamily delinquency rates are substantially better than those for the multifamily CMBS. In 2010, the serious delinquency rate for multifamily CMBS reported by Trepp, LLC, was an astounding 13.6 percent.1 Although their multifamily investments are performing relatively well, both Fannie Mae and Freddie Mac have expressed concerns about this business going forward. In Fannie Mae’s 10K filing for their 2009 fiscal year, they note that their 2007 multifamily loan acquisitions are showing signs of stress, which they attribute to the fact that the loans were acquired at the peak of multifamily property values.

Since 2007, falling property values and rents have adversely impacted the financial viability of some of these properties. For Fannie Mae, 2007 vintage multifamily loans represent 24 percent of their 2009 multifamily guarantee business and 48 percent of their delinquencies (Fannie Mae, 2009a: 165). In their 2010 10K filings, both Fannie Mae and Freddie Mac indicate that they expect continued increases in nonperforming multifamily loans into 2011, despite some signs of stabilization in the national rental market. Both firms cite continued weakness in the overall economy; high unemployment; and the ongoing tough housing market conditions in some regions of the country (Fannie Mae, 2010: 6; Freddie Mac, 2010: 68). Arizona, Florida, Georgia, and Ohio account for only 10 percent of Fannie Mae’s multifamily book of business, but 39 percent of their serious multifamily delinquencies (Fannie Mae, 2010: 170).

Shilling (2010) assembled new data on the financial condition of rental housing in Chicago and provides a detailed analysis of the impact of foreclosures on the rental stock in buildings with two or more units. The results of Shilling’s analysis are certainly consistent with Fannie Mae’s description of the national market and suggest continued increases in the number of rental properties in foreclosure. By the end of 2009, in Cook County, IL, foreclosed rental properties with two or more units contained about 32,000 rental units, a unit count which is similar to the 38,000 single-family homes that were in foreclosure. Shilling’s data show that rental foreclosures are highly concentrated in low- and moderate-income neighborhoods.2 In 2009, foreclosure rates on properties with two to six units range from 13.9 percent in low-income neighborhoods, to 10.8 percent in moderate-income neighborhoods, to 4.2 percent in high-income neighborhoods—up considerably from rates of 4.7, 2.3, and 0.5 percent, respectively, in 2005. In properties with seven or more units, 2009 foreclosure rates were 7.8 percent in low-income neighborhoods, 4.3 percent in moderate-income neighborhoods, and 2.1 in high-income neighborhoods, up from 2.3, 0.5, and 0.0 percent, respectively, in 2005.

Perhaps the most troubling result in Shilling’s report is the significant decline in rental property values during the past few years. For larger properties with seven or more units, values have declined 26 percent since 2006; values of two- to six-unit properties have plummeted 46 percent since 2007. Shilling estimates that these declines in property values result in 30 percent of outstanding mortgages on rental properties being at risk of default. In addition, some portion of the foreclosed owner-occupied housing stock will be converted to rental housing, which will put additional downward pressure on rental property values.

Trepp, LLC, provided the author with data on CMBS multifamily serious delinquency rates.

Low-income neighborhoods are defined as census tracts where median household income is less than 150 percent of the poverty level of a family of four in the 2000 Census. Moderate-income tracts have median incomes between 150 and 300 percent of the poverty level and high-income tracts have median incomes above 300 percent of the poverty level.

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Shilling’s results are based on only one county and, therefore, are difficult to generalize to the rest of the country. Widespread declines in rental property values, such as those found in Cook County, could substantially impact the rental housing market for many years to come. To increase the understanding of the state of the multifamily housing markets nationally, similar data collection efforts in more local markets are needed.

Credit Crisis in the Multifamily Mortgage Market The credit crisis is significantly affecting the multifamily mortgage market, which is defined as the market for mortgages on structures with five or more units. Banks have retreated from this market.

In 2006 and 2007, Wachovia and Washington Mutual, Inc., were the top two multifamily mortgage originators nationally (together accounting for more than 18 percent of the market in 2006);

both have been acquired by other institutions and have largely exited the market. The Mortgage Bankers Association reported a 67-percent decline in multifamily mortgage originations from a peak in the fourth quarter of 2006 to the fourth quarter of 2009. In 2008, conduits for CMBS had virtually disappeared from the market and currently show few signs of returning to the market (MBA, 2010).

Although traditional market participants retreated, Fannie Mae and Freddie Mac increased their market participation in 2008. In 2008, Fannie Mae and Freddie Mac funded $35.5 billion and $24.3 billion, respectively, of multifamily mortgages (Fannie Mae, 2009b; Freddie Mac, 2009). The government-sponsored enterprises (GSEs) funded between 20 and 30 percent of new multifamily mortgages in 2004 through 2006. GSEs funded between 80 and 90 percent of the new multifamily mortgages in 2008 and 2009. As shown in exhibit 2, as of the end of 2010, the GSEs held or guaranteed almost 39 percent of the outstanding multifamily mortgage debt, up from about 27 percent in 2006 (Board of Governors of the Federal Reserve System, 2011).

Exhibit 2 Percent of Multifamily Mortgage Debt Outstanding Held or Guaranteed by GSEs 0.4 0.3 0.2 0.1

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The lending freeze by many traditional multifamily lenders and the increasing dependence on Fannie Mae and Freddie Mac for funding multifamily mortgages raises serious concerns about the future of multifamily mortgage market. Although the recession, particularly the job losses, has resulted in a downturn in new construction, demand for multifamily mortgages continues for refinancing and for purchases of existing buildings. From 2008 through 2010, Fannie Mae and Freddie Mac largely kept the multifamily mortgage market open. Given the uncertain futures of both Fannie Mae and Freddie Mac, there is reason for concern about the availability of multifamily mortgage financing to meet future financing needs.

Raising equity for multifamily projects became considerably more difficult in 2008 and 2009.

Losses were common for apartment real estate investment trusts (REITs) and many lowered earnings expectations for 2010. The market for Low-Income Housing Tax Credits (LIHTC) had virtually disappeared in 2008 and 2009. In the early years of the LIHTC program, a diverse group of investors participated in the program. Tax credits were sold to individual investors via retail funds, and corporate participants represented a broad range of sectors of the U.S. economy. Over time, the financial services sector dominated the market for tax credits and corporate investors from other sectors of the economy decreased their participation in the market. For tax credit syndicators, financial services companies were very motivated customers. Banks could use the tax credit investments to meet Community Reinvestment Act requirements. Fannie Mae and Freddie Mac could use the tax credits to meet growing affordable housing requirements under their charters.

With banks and Fannie Mae and Freddie Mac crashing and few nonfinancial services investors left in the game, the tax credit program ground to a halt. To address this issue, the American Recovery and Reinvestment Act (ARRA) of 2009 included a provision permitting state-tax-credit allocating agencies to receive up to 40 percent of their tax credit allocations in the form of cash to help fund stalled tax credit projects.

The LIHTC program appeared to be rebounding in 2010, when significantly more LIHTC equity was raised than in 2008 or 2009. Some investors, including insurance companies and some banks, returned to the market (Petherick, 2011). This rebound, particularly for new construction, is somewhat surprising given the high vacancy rates in the rental market and the number of foreclosed owner-occupied units that may ultimately convert to rental housing. The incentives provided by the LIHTC program may encourage more development than warranted given the soft conditions in the rental market.

The LIHTC program faces significant challenges going forward. Federal budget cuts and the possibility of substantial tax reform could eliminate or substantially alter the program. Many LIHTC projects depend on federal, state, and local subsidy dollars that may become scarce with the expected federal budget cuts and the dire fiscal conditions of many state and local governments.

In addition, the uncertain role of Fannie Mae and Freddie Mac in the anticipated revamping of the nation’s housing finance system could significantly impact the LIHTC market. Some LIHTC deals use their multifamily loan programs as a source of financing. In addition, both firms have substantial LIHTC holdings that could be sold as part of the restructuring or dismantling of these firms. Sales of these LIHTC holdings would compete with new LIHTC transactions for investors.

62 Rental Housing Policy in the United States Rental Housing: Current Market Conditions and the Role of Federal Policy Rebalancing the Housing Stock and the Threat of Disinvestment Current conditions in the housing market raise important concerns about the future quality of the housing stock. The large number of homeowners losing homes to foreclosure will result in fewer homeowners, with a portion of that foreclosed stock entering the rental housing market. The foreclosed owner-occupied housing stock may provide new rental opportunities in communities that previously provided few, because of land use regulations and not in my backyard (NIMBY) concerns. Renters moving into such communities may now be preferred to the prospect of vacant, foreclosed properties.

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