Freddie Mac, the huge government housing-finance company, is reviewing whether it inadvertently lent support to a company that specializes in a type of rent-to-own program that critics call predatory.
Freddie Mac said it was examining a loan it effectively guaranteed under a pilot program meant to bolster the market for single-family rental homes. The review began after a housing advocacy group filed a lawsuit on April 12 in federal court, contending that an Indianapolis investor group was selling rundown homes through a rent-to-own arrangement that’s prohibited by the program.
Chris Spina, a spokesman for Freddie, said the company “is reviewing the transactions referenced in the complaint” by the Fair Housing Center of Central Indiana against an investor group operating under the name Casas Baratas Aqui — or “Cheap Homes Here” in Spanish.
The lawsuit alleges that the group has violated the federal Fair Housing Act by targeting Latino buyers. As part of its lawsuit, the housing advocacy organization said Casas Baratas Aqui had acquired nearly 1,000 formerly foreclosed homes and recently began selling some of those houses in rent-to-own transactions.
The investor group received a roughly $13 million loan that was one of dozens included in the $161 million bond issued by CoreVest Finance. Freddie provided a financial guarantee that protects investors against the risk that the bond defaults.
Freddie is providing that guarantee as part of a program it announced last year. The intention is to make it easier and cheaper for investors to get the money they need to buy homes that they can then rent out on affordable terms. The loans in this particular bond involved more than 2,000 homes in multiple states.
But the pilot program specifically excluded loans to investors that engage in rent-to-own or contract-for-deed arrangements. The finance firms that made the loans were supposed to vet the landlords to make sure they were not seeking to sell homes through either of those structures.
Rent-to-own and contract-for-deed deals have drawn criticism from housing advocates and regulators because they often lack basic consumer protections. The homes often need major repairs, and the long-term financing deals carry high interest rates. Evictions are common.
The 2008 financial crisis created a boom in such products. There was a ready supply of cheap foreclosed homes for investors to buy and a large population of consumers unable to get traditional mortgages.
Officials in Ohio, Wisconsin and New York have cracked down on investment firms that peddle rundown homes in such deals. The Consumer Financial Protection Bureau also opened an investigation.
Neither Freddie nor CoreVest, which specializes in providing loans to investors in single-family homes, were named as defendants in the lawsuit by the Fair Housing Center of Central Indiana. A spokesman for CoreVest, previously known as Colony American Finance, declined to comment. Representatives for Casas Baratas Aqui did not return requests for comment.
Fannie Mae, another government-controlled mortgage finance firm, last year instructed firms selling its foreclosed homes to make sure that investors buying those homes were not seeking to resell them through either a contract-for-deed or a rent-to-own deal.
Fannie imposed the restrictions after The New York Times revealed in a series of articles that at least 17,000 homes had been sold by Fannie to firms selling homes in either of those arrangements.