Regional Home Ownership Preservation Initiative

March 1, 2013

On January 30, 2013, the Chicago Fed hosted a conference organized by the Woodstock Institute and other partners in the Regional Home Ownership Preservation Initiative (RHOPI) entitled, “Single-Family Rental Housing: Managing the Next Step of the Foreclosure Crisis”, which focused on Chicago’s affordable rental housing market (single-family to 50-unit buildings).  RHOPI, a multi-year program, was initially launched by the Chicago Fed, the Chicago Community Trust, and Neighborhood Housing Services of Chicago in early 2008.  Many organizations including Woodstock, IFF, Housing Action Illinois, the Metropolitan Mayors’ Caucus, The Metropolitan Planning Council, Chicago Metropolitan Agency for Planning among many others, have stepped forward to lead efforts to implement measures to alleviate effects of the financial and foreclosure crisis in the interim.

In all, approximately 80 organizations, comprising national and community banks; suburban, Chicago City, Cook County, Illinois state, and federal agencies; the Federal Deposit Insurance Corporation; the Office of the Comptroller of the Currency; private foundations; and many nonprofit and advocacy groups identify themselves as formal RHOPI partners. Many more have participated in on-the-ground redevelopment, housing counseling, and loss mitigation efforts for metropolitan Chicago neighborhoods that have been among the hardest hit by the crisis.

The conference agenda included housing, consumer advocacy, and (related) policy experts, among others. Terry Mazany, president and CEO of Chicago Community Trust, started by noting the location of Chicagoland’s most impacted areas during the foreclosure crisis over the past five years, and acknowledging that the rate of foreclosures is once again accelerating. He explained that foreclosed homes are not spread out like “peanut butter” across the region with one every couple blocks. Rather, they are lumped together in certain areas. This concentration of empty, foreclosed, single-family houses, coupled with a need for more affordable housing units, led to the idea of converting vacant houses into rental properties.

The volume of households that have lost homes to foreclosure has led to rapidly increasing demand for rental housing throughout the Chicago metro area; governments and many groups concerned about the rising number of vacant houses have cautiously agreed that renting vacant homes represents an elegant solution to many problems at once, acknowledging that managing a large-scale scattered-site rental operation presents its own challenges.

Alan Mallach, the keynote speaker and a renowned expert on housing policy at The Brookings Institution and the Federal Reserve Bank of Philadelphia, explained that there has always been a large number of houses for rent (approximately one-third of all rental housing). However, absentee ownership has historically been a “mom-and-pop” industry; over 90% of these rentals were owned by private individuals in the 1990s. Since the foreclosure crisis, there has been a gradual shift toward large-scale public and private rental operations. Over the past two years, as housing markets have bottomed out, large bulk purchases have become more common. Additionally, mortgages and notes are also being bought. While the sale of mortgages is hardly new, more recently the mortgages are being purchased by investors who then foreclose and rent the units.

What are the ramifications? According to Mallach, first, the trend signals less home ownership, a movement already under way as young workers seek flexibility, and the option to move to another region to accept a job if necessary. The trend also means more absentee investors and, in turn, increases in what are commonly known as “walk aways.” When a large investor purchases a portfolio, sight unseen, they may simply walk away from a property that they do not feel is worth their time to resell or rent. Since the houses that are the most undesirable tend to be in the lowest value areas, “walk aways” hurt the areas that need the most help.

Mallach suggested that a rental registration ordinance might help solve the problem by establishing accountability for a property. Some renter ordinances are ineffective, as they rely on penalties rather than incentives to encourage participation. A recent New York City study revealed that only 23% of renters lease units registered in their system.  Mallach gave a few examples of ways to make a registration ordinance successful, assuming the city or village has a Web-based property information system. When a property turns over, the city contacts the new owner, stating to provide details about the rental registration ordinance.  Owners must either provide an affidavit of home ownership, if the property is to be owner-occupied, or register and pay a fee, if the intent is to lease the property. If the city discovers later that a home ownership affidavit was signed on a rental property, it would impose a penalty on the owner. Once the rental registration ordinance is created, the city would also need to contact owners of previously unregistered rental properties. While this may add transaction costs and disincentives to a young industry, Mallach suggested that a viable alternative would be to make the registration process free, as well as, on limited basis, requirements such as inspections, to encourage compliance.  By using incentives versus penalties, cost-conscious but otherwise willing (to comply) landlords may be more inclined to register, and the city would be able concentrate more resources on problem landlords.

Additionally there were panels and breakout sessions that discussed: local issues, solutions, best practices, success stories, property management/local policy, and incentives. To close the day the 10th District County Commissioner, Bridget Gainer, discussed single-family rental housing and the Cook County Land Bank. Please view the Cook County Land Bank Proposal from 2012 to learn more about the project.

To learn more about these issues please see the Metropolitan Planning Council‘s white paper released in January 2013 ‘Managing Single-Family Rental Homes, The Next Challenge in the Foreclosure Crisis.’ In a future CDPS blog, we will discuss the Real Estate Owned (REO) to rental market in more detail.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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