Distressed property rental programs and new private-label mortgage originations pose new opportunities for investors, according to Bill King, chief investment officer of Carrington Holding Co.
King, speaking Tuesday at the National Mortgage News Buying and Selling Distressed Mortgage Portfolios conference in New York, outlined four opportunities for investors since the crisis: distressed nonagency MBS, nonperforming loans, single-family rentals and new nonagency lending.
Comparing the evolution of housing investment opportunities to the game of baseball, King projected that nonagency MBS opportunities are in the “seventh-inning stretch” and will run their course through 2013. Citing that the industry has worked through 40% to 50% of NPLs, that sector is in the fourth inning, though he sees the opportunity in that sector running at least until 2015.
“Because of robo-signing, state AGs and the backlog of foreclosures in the judicial states, this opportunity has been extended by two years, and could be extended another six to 12 months as we see previously modified loans redefault,” King said.
The opportunity in single-family rentals is just now emerging. “We’re in the first inning of this,” he said. “We’re just getting started. There’s a lot of capital that’s been raised and all sorts of discussion about if the investment opportunities are there.”
King believes that there’s a potential market of 10 million rental homes that will be acquired from distressed mortgages and foreclosure properties, about 8% of the existing single-family housing stock in the U.S.
To execute on its strategy, Carrington focuses its rental efforts on properties that fit a square foot range and bedroom/bathroom counts conducive to renter demands, while limiting rental inventory that requires additional maintenance, like swimming pools.
Looking ahead, King said investors will have to adapt their strategies when larger homes go through the foreclosure process and enter the rental inventory. At question is how the market will absorb larger homes, particularly given constraints on available financing.
“I think you will see higher rental appreciation pressure on larger home sizes, simply as we move through this phenomenon,” King said. “Many people who were in these homes aren’t anymore and they’re going to want to be.”
Looking to the future of the origination market, King said nonagency lending won’t pick up until 2013 at the earliest. “If single-family rentals are in the first inning, nonagency lending 2.0 is in spring training,” he said. “We’re so early that only the pitchers have been called in for spring training.”
The problem is that investors and lenders have yet to address the fundamental issues that led to many of the problems in the market downturn. The industry must rethink the relationship between the borrower, lender and investor and a successful nonagency market needs to be built on transparency and alignment of interests, King said.
He added that a future model for private-label mortgage originations should include enhanced two-way transparency. Borrowers will likely be required to consent to ongoing credit checks during the life of the loan and lenders and investors must work together to provide a more transparent and understandable origination process.
