Wall Street's Single-Family Home Grab, Phoenix — Part 5

For three years, Francine McCumber lived in a single-family rental in Phoenix owned by Invitation Homes and, in that time, paid thousands of dollars in allegedly illegal late-rent fees to her corporate landlord, according to federal court filings.

By January 2021, McCumber had become the name plaintiff in a putative class action that sought the restitution of the fees to her and an estimated thousands of other tenants across 10 states, including Arizona, Nevada and Texas, which, the complaint alleged, barred such fees.

"These [late-rent penalty] policies are enforced if defendant received the rent as little as one hour late (past any applicable grace period)," the tenants claimed in their second amended complaint from June 2022. "Moreover, defendant's policy and practice is to stack penalties where possible."

The booming single-family rental industry has a countrywide footprint with even deeper roots in global financial markets, but it impacts Americans at the local level, down to the home where they live. This has enabled the industry to fall through the regulatory, policy and legal cracks between the very large and the very small, the nation and the block.

Law360 has reported over the past week how Phoenix is at the forefront of the rolling transformation of tens of thousands of single-family homes into corporate rentals.

As the issue gains national prominence through news coverage, grassroots activism and congressional scrutiny — and amid scant action from local and state officials, at least in Arizona — many tenants, the organizations and attorneys that represent them, and other housing industry insiders, are looking to the federal government and courts for answers.

The White House said that the U.S. Department of Housing and Urban Development will convene experts to discuss the topic in a virtual public forum on Dec. 6.

"There are really no national tenant protections, so it really comes down to the luck of the draw of where you happen to work, where your family lives, where you were born, and that's a fundamentally unfair way of treating housing," said Sofia Lopez, deputy campaign director for housing at the Action Center on Race and the Economy.

"Obviously we've been embroiled in a national housing crisis for well over a decade now and we absolutely need to see solutions that protect tenants coming from the federal government," Lopez said.

It's Happening

McCumber, the other lead plaintiffs and Invitation Homes — the largest corporate landlord in Phoenix by Law360's count — reached a tentative settlement over the allegedly "arbitrary" late-rent fees on Sept. 21.

Counsel for the plaintiffs declined to comment for this story. A spokesperson for Invitation Homes told Law360 via email the company has "always believed this suit was without merit, and we settled without an admission of liability to avoid more protracted litigation."

According to Thomas Silverstein, associate director of the Fair Housing & Community Development Project at the Lawyers' Committee for Civil Rights Under Law, there has been some litigation around the corporate single-family rental phenomenon but it's still somewhat limited, given its actual scope.

Silverstein noted that his own team has yet to file any cases in this space but that they are "exploring the possible legal strategies" and "trying to monitor the field."

In early March, Barry Sewall of Bloomington, Minnesota, filed a suit in the Northern District of Illinois on behalf of himself and a proposed class of tenants against Chicago-based Home Partners of America and its Texas-based subsidiary Pathlight Property Management.

The putative class action accused the firms of illegally saddling clients of their lease-to-purchase program with maintenance and repair costs that are a landlord's responsibility. The program is designed to allow tenants to eventually buy the home they are renting, which Home Partners has purchased on their behalf.

Home Partners/Pathlight Property Management is the No. 12 corporate single-family home rental operator in Phoenix, Law360 found.

"Defendants' lease-to-purchase program is an elaborate ruse designed to induce and convince prospective customers that they are renting a specially chosen, 'qualified' home … and then to convince consumers to agree to take on substantial homecare burdens foisted on tenants by defendants' adhesive form leases," Sewall alleged.

The suit was voluntarily dismissed without prejudice in May, but a parallel putative class action is moving forward in Minnesota state court. Another putative class action against Home Partners/Pathlight that revisits similar issues was filed in the Western District of Washington on Sept. 21.

Attorneys for Sewall declined to comment.

A spokesperson for Home Partners of America told Law360 via email that the company's "100% resident-led, lease with a right to purchase model ensures we only purchase homes that potential residents have chosen as their future home, and we provide residents with complete transparency into their rent amounts and future purchase right prices."

"At every stage of the process, we provide residents with full transparency, optionality, and flexibility," the spokesperson noted. "While we do not comment on ongoing litigation, the well-being and living experiences of our residents are our top priority."

A July 2022 study from Moody's Analytics authored by Michael Stegman — a fellow at the Urban Institute and adviser to Home Partners who served in a senior housing policy role in the Obama White House — and two others called lease-to-own programs a potentially crucial tool in boosting homeownership rates in communities of color contingent on the "appropriate disclosures, household protections, and support from federal housing agencies."

Down the Pike

Silverstein told Law360 that areas that could be especially ripe for litigation and enforcement going forward are discriminatory practices under the Fair Housing Act and unfair and deceptive practices, like the imposition of "arbitrary, unfair or nontransparent" fees or price-gouging, under the Federal Trade Commission Act.

"If one particular outfit … uses more predatory or disadvantageous terms in the leases they're entering into in Black neighborhoods than in white neighborhoods, that's something where you could see the potential for a disparate impact lawsuit or intentional discrimination lawsuit under the FHA," Silverstein said.

A congressional report from July could also spell legal and regulatory troubles for at least three of the largest players in the SFR space, Invitation Homes, Progress Residential and Front Yard Residential.

The 41-page staff report by the House Select Subcommittee on the Coronavirus Crisis found that the three companies, as well as a large multifamily landlord, engaged in "abusive" eviction tactics during the pandemic amid enhanced tenant protections.

Subcommittee Chairman James E. Clyburn, D-S.C., urged the FTC and Consumer Financial Protection Bureau to "prioritize" going after such practices going forward.

In answer to several questions from Law360, the CFPB noted in an email it "has a role in ensuring that all landlords adhere to relevant laws" and pointed to various guidance covering tenant background and credit screening.

According to Tara Raghuveer, director for the national Homes Guarantee campaign, the CFPB has a clear mandate to intervene on behalf of victims of predatory mortgages but is still struggling to define what role exactly it can have in the home rental business.

"Our lawyers have tried to get the argument across to them that you could think of a residential lease as a financial product and tenants as its consumers," Raghuveer told Law360. "That argument hasn't gotten us very far so far. The way they think of their jurisdiction as it relates to tenants mostly has to do with tenant screening and debt collection and to us that feels a little bit marginal to the big problem."

The FTC declined to comment for this story. In testimony before the Senate in April 2021, the commission's then-acting director for consumer protection, Daniel Kaufman, said the agency was "monitoring and investigating conduct by multistate landlords that may violate the FTC Act or other laws if they evict tenants in violation of national, state or local eviction moratoriums."

After issuing the corporate landlord eviction report in July, Clyburn referred Invitation Homes in particular to Fannie Mae for further "investigation and potential enforcement" for allegedly deceiving the government-sponsored enterprise, or GSE, about the number of tenants it had kicked out of their homes.

The Federal Housing Finance Authority, which supervises Fannie Mae and Freddie Mac, said to Law360 through a spokesperson that it "has asked Fannie Mae to look into the practices identified in congressional reports and, if applicable, enforce the terms of the loan agreement between Invitation Homes and the Fannie Mae lender to comply with all federal, state, and local law."

"FHFA and Fannie Mae do not have the authority to intervene in the landlord/tenant relationship," the spokesperson said via email. "Fannie Mae does have the authority to enforce the terms of the loan agreement between its multifamily lender and the borrower (i.e. Invitation Homes)."

Fannie Mae confirmed to Law360 that it has "engaged with Invitation Homes as recommended by Rep. Clyburn."

"If Fannie Mae learns of any allegations of noncompliance in its portfolio, we take action to determine if the allegations are valid and, if necessary, require the borrower or property be brought back into compliance with applicable law," the agency said through an email.

A spokesperson for Invitation Homes told Law360 that they engaged "transparently and in good faith" with the subcommittee's "multiple requests over the past year."

The company said it has helped more than 33,000 tenants "who were in need of extra time or financial assistance" remain in their homes since the start of the pandemic, to the tune of nearly $175 million, and supported 10,000 residents in securing more than $94 million in combined rental assistance.

"In a time when the focus should be on adding much-needed supply to the country's housing market, it's disappointing that the committee chose instead to pursue a fault-finding mission," the spokesperson noted in an email. "These outcomes matter, and we will keep our heads held high and continue to focus on delivering a best-in-class experience to our residents."

Questions Abound

Many of the housing activists and industry insiders who spoke to Law360 for this story said the FHFA, Fannie Mae and Freddie Mac, as well as HUD and its Federal Housing Administration, all have a role to play.

According to Ezra Bronstein, who directed the FHFA's Office of Inspector General whistleblower operations before joining Mehri & Skalet PLLC in 2018, the agency has far-reaching authority to set standards for the government-sponsored enterprises and the rental properties they finance under the terms of their 14-year-old conservatorship.

The OIG itself certainly has leeway to conduct an "evaluation or audit" of Fannie's and Freddie's involvement in the single-family rental market and the FHFA's oversight responsibilities, Bronstein told Law360.

An OIG spokesperson told Law30 via email that they "monitor information in this area but have no current plan to do an audit directly on this issue," but that, "should circumstances change and risks develop, we will look more deeply" into it.

The extent to which Fannie and Freddie — which buy mortgages from lenders on the secondary market, turn them into securities and sell those to investors — currently backstop corporate SFRs is hard to quantify, experts told Law360.

There is little doubt, however, that the FHFA and HUD were instrumental in sowing the seeds for the industry in the aftermath of the Great Recession and housing crash of 2008 by facilitating institutional investors' sweep of underwater mortgages and foreclosed properties.

In February 2012, Fannie began selling thousands of foreclosed single-family homes to private investors for conversion to rentals. Phoenix was one of the six "hardest-hit metropolitan areas" covered by the first tranche of the experiment.

By 2017, the FHFA had expanded Fannie's and Freddie's participation in transactions linked to corporate SFRs through another pilot project, which yielded a controversial $1 billion guarantee from Fannie to Invitation Homes.

The FHFA shut down the program a year later and terminated the GSEs' involvement in the space outside "their previously existing investor programs — Fannie Mae's Multiple Financed Properties and Freddie Mac's Investment Property Mortgages."

"Fannie and Freddie could end their support for Wall Street landlords, especially if there's evidence of those landlords engaging in abusive practices," said Amee Chew, senior research analyst at the Center for Popular Democracy, which is organizing thousands of SFR tenants in Arizona and other states through a national campaign called Renters Rising.

"They have a mandate where they're supposed to have a duty to serve affordability and tenant protection requirements, so they could be held to a higher standard of actually following that," Chew said.

Fannie Mae told Law360 it is "not providing financing to institutional investors in single-family residential properties and does not currently have financing relationships with institutional owners of single-family rentals, except for legacy arrangements with Invitation Homes."

Freddie Mac declined to comment for this story. In a December 2018 white paper assessing the results of the 2017-2018 pilot projects, the agency found "limited" opportunities for the secondary market to provide liquidity and stability to this industry.

HUD's FHA, which insures higher-risk home loans made by approved lenders, similarly auctioned off more than 104,000 "severely delinquent" mortgages to third parties from 2010 to 2016, 98% of which ended up in the hands of institutional investors, according to a report the department published in October 2016.

In 2019, HUD expanded the FHA's ability to provide financing to qualified borrowers looking to purchase individual units inside condominiums comprising attached, detached, semi-detached or manufactured housing that are not agency-approved as a whole. The new regulations require that such condominiums have a minimum owner-occupancy threshold ranging from 30% to 75%, depending on market conditions, for any individual unit to be eligible for FHA loans.

According to Dennis Legere, principal advocate for the Arizona Homeowners Coalition, applying that same approach to planned single-family home communities governed by a homeowners association would enable said association to match the FHA limit of ownership concentration.

"The associations would thus be empowered to establish criteria that prevents an investor to come in once the threshold is reached, such as 'At 49% nonowner occupants, we will stop all sales of homes to nonresidents,'" Legere said. "That is legitimate and enforceable under common law because the association is trying to protect the individual homeowners' ability to sell their homes."

In Phoenix, HOAs have thus far shown little interest in limiting corporate ownership of SFRs, Law360 found.

Enter Congress

More broadly, many housing advocates and experts want the FHFA, the GSEs, but also HUD and the U.S. Department of the Treasury, to produce a federal package of tenant protections — from things such as sudden, double-digit rent spikes and out-of-the-blue evictions — aimed at least at any corporate landlords that receive public funds through Fannie and Freddie, government vouchers and other subsidies, and programs like the Low-Income Housing Tax Credit.

The National Rental Home Council, the corporate SFR industry group, told Law360 as part of this series that rent-control mechanisms tend to be counterproductive because they make the market inefficient and ultimately discourage new housing production.

Fannie and Freddie have already taken steps in the past year to boost safeguards for owners of manufactured homes and could apply a similar blueprint to SFR tenants, several experts told Law360.

Another recent experiment that could inform future approaches, they said, stems from the Coronavirus Aid, Relief, and Economic Security Act, through which Congress largely blocked landlords that received public funding via federally backed mortgages and housing vouchers from evicting tenants at the peak of the pandemic.

Invitation Homes and the other Wall Street landlords got in trouble with the Select Subcommittee on the Coronavirus Crisis precisely because they still allegedly filed evictions against residents on arrears even while that and other federal, state and local prohibitions were in place and as Congress pumped tens of billions of dollars in rental assistance into the system.

The sources who spoke to Law360 also called for some kind of national registry of corporate landlords and a database of complaints against them.

Maricopa County, where Phoenix is located, has a landlord registry but does not differentiate corporate landlords from others, nor does it track complaints against them, according to the county assessor's office.

"At a very basic level, people don't know who their landlord is and it's hard to find out sometimes because the properties are owned by various LLCs," said Jordan Ash, director for labor-jobs and housing at Chicago-based nonprofit Private Equity Stakeholder Project.

Many of these efforts would, of course, require further congressional intervention.

In recent years, federal lawmakers have been vocal, in fact more vocal than the White House, in their concerns over the impact that corporate owners of single-family rentals might have on tenants and the larger housing market.

As early as March 2016, some 45 Democratic House members wrote to HUD and the FHFA to criticize the bulk sale of hundreds of thousands of single-family homes to the "highest bidder" without regard "to potential outcomes for homeowners, communities, and the affordable housing mission of your agencies."

This year the House Financial Services Committee and the Senate Committee on Banking, Housing and Urban Affairs held hearings on the topic.

In research released on the occasion of a June hearing, the Financial Services Committee's majority staff cited CoreLogic data that institutional investors bought nearly 40% of all single-family homes for sale in the Phoenix metropolitan area in the third quarter of 2021.

At the hearing, Democratic members slammed institutional investors' "predatory" purchases of single-family homes, while subcommittee ranking member Rep. Tom Emmer, R-Minn., warned against "demonizing" the industry for boosting the national supply of quality rental options.

Multiple pieces of draft legislation pending in the House and Senate seek to expand federal tenant protections in the single-family and multifamily spaces, while at least one House bill introduced in July would heavily tax large private investors when they buy single-family homes specifically.

Rep. Ruben Gallego, D-Ariz., whose 7th Congressional District covers a large swath of Phoenix, told Law360 that homeownership is vital to the national compact and, as such, he is "pushing" his colleagues to take action as a "handful of billion-dollar private equity firms are moving into neighborhoods across the country, including in Arizona, and standing in the way of hardworking Americans trying to achieve the American Dream."

According to Raghuveer of Homes Guarantee, Congress' effectiveness will more likely come from its oversight of the industry and executive agencies than through legislative solutions.

"We are not holding our breath about Congress. I would love to be proven wrong … but it just feels very unlikely," she said. "I think congressional actions in the form of hearings and investigations and pressure on the White House to take more decisive action through executive and agency-level authorities is critical."

--Additional reporting by Charlie Innis and Emma Whitford. Editing by Orlando Lorenzo.

For a reprint of this article, please contact reprints@law360.com.