Finance company Freddie Mac plans to provide tens of millions of dollars in financing or loan guarantees to smaller firms that buy single-family homes and operate them as what it considers affordable-housing rentals.

Share story

When the government-controlled mortgage-finance giant Fannie Mae agreed this year to guarantee a $1 billion financing deal for one of the biggest private-equity-backed landlords in the United States, the move prompted an outcry.

Housing advocates and legislators questioned why the landlord, Invitation Homes, which is controlled by the Blackstone Group, needed such low-cost financing, especially on the eve of an initial public offering through which Invitation Homes raised $1.7 billion in net proceeds.

Now, Freddie Mac, a rival government-controlled mortgage-finance company, is gearing up for its own financing deal. But it is targeting a much different slice of the single-family home-rental market.

Freddie Mac wants to provide tens of millions of dollars in financing to midsize landlords, not to giants like Invitation Homes, which operates nearly 50,000 rental homes in 13 markets.

In all, Freddie Mac could provide as much as $1 billion in financing or loan guarantees to smaller firms that buy single-family homes and operate them as what it considers affordable-housing rentals, a company official said in an interview. Some nonprofit housing groups might also be eligible for financing.

“It is, first and foremost, affordable,” said the official, David D. Leopold, a Freddie Mac vice president for targeted affordable sales and investments. “The size of the sponsor is less important than affordability.”

Freddie Mac is hashing out the details, but Leopold said the company hoped to announce the first deal within 90 days.

The Federal Housing Finance Agency, which regulates Freddie Mac and Fannie Mae, has approved the financing effort on a trial basis. The agency’s view of the single-family rental market has changed since 2012, when it balked at a Freddie Mac plan to provide financing to some buyers of foreclosed homes because of concerns that low-cost loans would hurt banks and might also encourage home-flipping.

Still, any specific Freddie Mac transaction would need the agency’s approval, just as Fannie Mae’s deal with Invitation Homes did.

The approach being taken by Freddie Mac is in part a response to criticism of Fannie Mae’s deal to provide a guarantee to investors in the 10-year, $1 billion loan that Wells Fargo provided to Invitation Homes and will securitize. The loan is backed by about 7,000 rental homes.

But the strategy also stems from a growing consensus among housing policymakers and landlords that both Freddie Mac and Fannie Mae should play roles in providing financing to single-family home operators. The market has grown since the collapse of housing prices a decade ago touched off the worst financial crisis since the Great Depression and led to more than 6 million completed foreclosures.

There are now about 17 million homes being rented, up from 11 million in 2007. About 300,000 of those rentals are operated by Invitation Homes and other big Wall Street-backed firms that sprouted up after the crisis like American Homes 4 Rent, Colony Starwood Homes and Pretium Partners.

The vast majority of rentals are managed by mom-and-pop operators who own a small number of homes. And Fannie Mae and Freddie Mac have long provided financing to small investors. But financing has been hard to come by for nonprofit housing groups and midsize investor landlords who have had to rely mainly on private-equity-backed firms for financing.

After the financial crisis, most banks have tended to avoid lending to smaller landlords out of concern that such firms have scant operating histories and that the homes posted as collateral are not sufficient to secure the loans. But the hope is that with loan guarantees from the government-controlled mortgage-finance companies, more traditional lenders may be willing to venture into that part of the market.

“There is no doubt they want to be in this space, and I think they should be in this space,” said Julia Gordon, the executive director of the National Community Stabilization Trust, which oversees a program that helps housing organizations across the country get the first chance at buying foreclosed homes from banks.

“Freddie seems to want to distinguish itself from Fannie,” she added.

The push into single-rental housing by Freddie Mac and Fannie Mae comes amid a debate over the future of the two companies, which the federal government bailed out in 2008 and placed in a government conservatorship at the height of the crisis. The main mission of both is to maintain the viability of the 30-year mortgage by ensuring such loans against default and then packaging them into mortgage-backed securities.

The Federal Housing Finance Agency is also prodding the two mortgage-finance giants to do more to support the rental market for single-family homes. Laurie Goodman, a director of housing-finance policy for the Urban Institute, said that “there is a huge hole in the middle market” that Fannie Mae and Freddie Mac could fill.