Toomey was the only Republican lawmaker to participate in the hearings. But Tobias Peter of the conservative American Enterprise Institute and Joel Griffith of the equally conservative Institute for Economic Freedom and Opportunity at The Heritage Foundation also appeared. And here’s where the secondary mortgage market comes in.
All three agreed that Fannie Mae and Freddie Mac’s increased participation in the multifamily sector made it too easy and inexpensive for investors to put their money into rental housing. “This is a simple issue of supply and demand,” Toomey said. “Institutional investors are the ones with the deepest pockets, the ones with the most capital available to invest in building new housing stock.” Their remarks were aimed at all of Fannie and Freddie's multi-family purchases. They do not now support SFRs. At one time, Freddie Mac was involved in a SFR pilot program, but that short-lived initiative ended in 2018. That effort focused on middle-tier and very small investors with properties affordable to tenants who earned 80 percent of the median for the location. The key takeaways from that pilot can be found in a 30-page white paper.
Peter, who is assistant director of research at AEI’s Housing Center, said big money landlords are using the taxpayer guarantees and other advantages offered through GSE funding “to greatly expand their businesses while crowding out private investors … (The GSEs) tout that they are supporting affordable rental housing, but in reality they create government profit-seeking.”
“The housing market is changing and the real culprit is a massive house price boom fueled by federal housing and monetary policies, which is increasingly crowding lower-income Americans out of the housing market,” the AEI economist argued. “Institutional landlords, particularly on the multifamily side, are taking advantage of more liberal credit terms provided by Fannie Mae and Freddie Mac than the private sector, which is a violation of their charters.”
“They use their taxpayer guarantee and other advantages to greatly expand their business, while crowding out multifamily private investors,” he continued. “Since 2014 outstanding multifamily mortgage debt has doubled, with the GSEs accounting for most of the growth.”
Peter also warned the funding situation may become worse before it gets better. The Federal Housing Finance Agency, Fannie and Freddie’s government conservator for more than a dozen years now, recently made policy changes that increases GSE competition with the private sector, he said. Moreover, the GSEs affordable housing goals may be increased, he added. Even the Federal Housing Administration is considering changes that will increase its competition with the GSEs. This, he said, “does not bode well.”
Claiming that institutional owners of rental properties were being “scapegoated” for increased housing costs and rental prices, Griffith of the Heritage Foundation pointed out that they own a scant 0.2% of all the country’s single-family rentals and just 1% of all rentals. “Not in a single state do institutional investors own more than 1 in 100 of all available housing in the state,” he testified.
Griffith maintained that the primary drivers of rising prices nationally are government subsidies, the Federal Reserve, and local building regulations. Specifically, he said, Fannie and Freddie “continue to dominate the mortgage market.” And the Fed has driven down mortgage interest rates and fueled a rise in housing costs by purchasing $1.2 trillion of Fannie-Freddie securities.
But neither Toomey nor the two think-tank witnesses addressed the complaints of tenants, of which there were many, or those of legislators on the Democratic side of the aisle. Those voices maintained that “deep pocket” investors were buying up rental properties of all ilk, raising rents while making few improvements, failing to maintain their properties and evicting long-time tenants because they couldn’t pay higher rents, sometimes for reasons beyond their control.
“Unlike Mom and Pop landlords, they have little empathy” for their residents, Sally Martin, director of building And housing for city of Cleveland, testified. “Rents go up, sometimes by 50% or more, and maintenance goes down.” Added Michael Waller, executive director of the Georgia Appleseed Center for Law and Justice: Residents who choose to move rather than pay higher rents often are “hit with termination fees, sometimes three times their rent.”
Another frequent complaint is the lack of transparency in finding the true owner of a rental property. Often, owners stand behind limited liability corporations and/or property management companies. “We see this all the time,” Brooklyn, N.Y., tenant Aneta Molenda told the committee. “It’s very convoluted trying to investigate who owns what.” Cleveland’s Martin agreed. “It’s almost impossible to track them down,” she said of owners. “They hide.”