Rent-to-Ow!

Bait and Switch

Insider quoted me in Private Equity Sold Them a Dream of Home Ownership. They Got Evicted Instead. It reads, in part,

Erica Hines-Denson had no idea how bad the odds against her were.

Student loans and a recent divorce had dinged her credit score. But she and her new husband, Elquinton Denson, were building a blended family and they dreamed of buying a home in the greater Atlanta area. After lenders turned them down for a traditional mortgage, a realtor told her there might be another way. Something called a lease-purchase, or rent-to-own, agreement.

“This was our way to own a home finally,” Hines-Denson said. “It was like we found a loophole.”

It took just a weekend of house hunting to find a house they loved: a stately four-bedroom, 30 miles southeast of Atlanta, with a built-in bar in the basement where they pictured hosting family and friends. Listed at $275,000, it was in their price range.

There was a catch. The couple wouldn’t be buying. Instead, a Chicago-based company called Home Partners of America would make a cash offer and rent the house back to them, with an option to buy within five years.

Home Partners supplied a lengthy agreement detailing the terms, including built-in annual increases to their rent and to the eventual purchase price. The document was more than 50 pages long; Hines-Denson said the company gave them just 24 hours to review it and sign. But the opportunity seemed too good to pass up. “You’re like, ‘Oh Lord, this is my chance,'” she said. “So you’re moving quick.”

The deal quickly turned sour. The company locked her out of the online payment portal after she missed a single month’s rent, adding hefty fees that made it impossible to catch up. After she missed a second month, the company swiftly filed for an eviction.

While a judge stayed her legal case under the federal COVID-19 eviction moratorium, the company’s management agency continued to call, Hines-Denson said, threatening to remove her belongings. In a final insult, the company kept their two-month security deposit when she and her family finally moved out.

Private Equity Moves In

Home Partners, which launched in 2012, now owns more than 28,000 homes nationwide. It is the largest of a handful of new companies promising “a clear path to homeownership” for families not yet ready or able to buy.

The company’s success has inspired startup competitors such as the New York-based company Landis, which boasts of investments from entertainers Will Smith and Jay-Z. Once dominated by fly-by-night operators, rent-to-own is now attracting some of the biggest players from Wall Street and Silicon Valley. Andreessen Horowitz led a Series A funding round for a rent-to-own competitor, Divvy Homes, in 2018. BlackRock and KKR purchased a majority stake in Home Partners by 2014, before private-equity giant Blackstone Group bought the company in 2021 for $6 billion.

In its marketing, Home Partners emphasizes that it offers “flexibility, choice and transparency,” providing the opportunity to “rent your dream home” without making a long-term commitment. “Home Partners has created a path to home ownership for tens of thousands of people who may not otherwise have had one,” a company spokesperson told Insider. “We are tremendously proud of our business.”

Yet Home Partners tenants, in interviews and court documents, say they got stuck in barely livable dwellings, with leaking sewage, broken air conditioners, filthy carpets, or nonworking electrical outlets. They describe being blocked from seeing home-inspection reports and facing swift eviction filings for a single late payment. One tenant filed a lawsuit claiming she suffered injuries when the ceiling of her home collapsed.

Hines-Denson said she felt like she’d been “set up to fail.”

More than 4,000 Home Partners tenants have purchased their homes over the past decade, according to a July 2022 paper from Moody’s Analytics, coauthored by an advisor to the company. But over the same time, nearly four times as many tenants — roughly 15,000 — moved out without buying.

An analysis of contracts and sales and eviction data shows that rent-to-own tenants are often left with the worst of all worlds. They have to shoulder many of the costs and responsibilities of homeownership, and the financial odds are stacked against them to end up as owners. Meanwhile, many are paying above-market rent.

“I’m very sympathetic when someone says they’ve identified a large segment of the population not being served by the current housing and mortgage landscape,” said David Reiss, the research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.

“What you don’t want to hear next is, ‘Therefore, we can do whatever we want to them.'”

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“Rent-to-own has this really sordid history,” said Reiss. “It’s an area of the housing market that remains underregulated. That’s part of the attraction for many operators.” 

GSE Investors Propose Reform Blueprint

Moelis & Company, financial advisors to some of Fannie and Freddie investors including Paulson & Co. and Blackstone GSO Capital Partners, has release a Blueprint for Restoring Safety and Soundness to the GSEs. The blueprint is a version of a “recap and release” plan that greatly favors the interests of Fannie and Freddie’s private shareholders over the public interest. The blueprint contains the following elements:

1. Protects Taxpayers from Future Bailouts. This Blueprint protects taxpayers by restoring safety and soundness to two of the largest insurance companies in the United States, Fannie Mae and Freddie Mac. This is achieved by (a) rebuilding a substantial amount of first-loss private capital, (b) imposing rigorous new risk and leverage-based capital standards, (c) facilitating the government’s exit from ownership in both companies, and (d) providing a mechanism to substantially reduce the government’s explicit backstop commitment facility over time.

2. Promotes Homeownership and Preserves the 30-Year Mortgage. This Blueprint ensures that adequate mortgage market liquidity is maintained, the GSE debt markets continue to function without interruption, and the affordable 30-year fixed-rate conventional mortgage remains widely accessible for every eligible American.

3. Repositions the GSEs as Single-Purpose Insurers. Given the substantial reforms implemented by the Federal Housing Finance Agency (“FHFA”) since 2008, the GSEs can now be repositioned and safely operated as single-purpose insurers, bearing mortgage credit risk in exchange for guarantee fees with limited retained investment portfolios beyond that necessary for securitization “inventory” and loan purchases.

4. Enables Rebuild of Equity Capital while Winding Down the Government Backstop. The Net Worth Sweep served the purpose of dramatically accelerating the payback of Treasury’s investment in both companies. The focus must now turn to protecting taxpayers by rebuilding Fannie Mae’s and Freddie Mac’s equity capital and winding down the government’s backstop.

5. Repays the Government in Full for its Investment during the Great Recession. Treasury has retained all funds received to date during the conservatorships. The government has recouped the entire $187.5 billion that it originally invested, plus an additional $78.3 billion in profit, for total proceeds of $265.8 billion. Treasury’s profits to date on its investment in the GSEs are five times greater than the combined profit on all other investments initiated by Treasury during the financial crisis.

6. Produces an Additional $75 to $100 Billion of Profits for Taxpayers. Treasury can realize an estimated $75 to $100 billion in additional cash profits by exercising its warrants for 79.9% of each company’s common stock and subsequently selling those shares through secondary offerings. This monetization process, which follows the proven path of Treasury’s AIG and Ally Bank (GMAC) stock dispositions, could bring total government profits to $150 to $175 billion, the largest single U.S. government financial investment return in history.

7. Implements Reform Under Existing Authority. This Blueprint articulates a feasible path to achieving the Administration’s GSE reform objectives with the least amount of execution risk. It can be fully implemented during the current presidential term by FHFA in collaboration with Treasury utilizing their existing legal authorities. Congress could build on these reforms to develop an integrated national housing finance policy that accounts for the Federal Housing Administration, the Department of Veterans Affairs, and Rural Housing Service, and emphasizes (i) affordable housing, (ii) safety and soundness, and (iii) universal and fair access to mortgage credit for all Americans. (1)

As can be seen from the last paragraph, GSE investors are trying to use the logjam in the Capitol to their own advantage. They are arguing that because Congress has not been able to get real reform bill passed, it makes sense to implement a reform plan administratively. There is nothing wrong with such an approach, but this plan would benefit investors more than the public.

My takeaway from this blueprint is that the longer Fannie and Freddie remain in limbo, the more likely it is that special interests will win the day and the public interest will fall by the wayside.