Single-family rental securitization remains one of the most talked about new asset classes.
That is for good reason. Large investors have shown an appetite for this asset class. And there's certainly plenty of opportunity for these investors—which control less than 1% of the single-family rental market—to expand their influence.
Some industry professionals predict $5 billion or more in issuance this year stemming from five or more deals. Obviously, this is a negligible amount compared to the overall mortgage-backed securities market, even with the steep decline in MBS volumes this year.
Whether institutional demand for single-family rental securitizations becomes appealing to smaller investors in multi-borrower deals remains to be seen. If smaller players opt to pool their properties into multi-borrower securitizations, the SFR securitization market could materially grow.
Three institutional players have recently formed lending arms to provide financing to smaller investors—a move that some believe could eventually lead to multi-borrower SFR securitizations.
Still, there are headwinds. Institutional purchases of single-family homes have declined as home prices have risen. Metro areas that still have large concentrations of distressed property tied up in lengthy foreclosure proceedings could offer opportunities down the line, however.
The Center for American Progress estimates that roughly 200,000 homes have been quietly acquired and converted into rentals by institutional investors since the housing crisis.
With that many homes, the prospects for more securitizations remain strong. Each of the four transactions to date has had between 3,000 and 6,500 homes tied to it.
In the most recent deal, Morningstar, Kroll and Moody's gave provisional, presale AAA ratings to $483 million of a $1 billion securitization from Invitation Homes, a Blackstone subsidiary. The deal—Invitation Home's second SFR securitization—is collateralized by a single loan secured by mortgages on 6,537 single-family homes.
Those three agencies also provided final ratings recently on a $481 million securitization of 3,871 residential mortgages by American Homes 4 Rent, the company's first rental securitization. The agencies gave the AAA rating to $270 million of the deal.
The same group of ratings agencies also put the AAA stamp on $291 million of a $514 million Colony American Homes securitization of 3,399 single-family residential mortgages.
"Both mortgages and pledges of the borrower's equity secure the loan that backs the transaction," Moody's said of the Colony American deal. "Moody's was therefore able to assign high investment grade ratings to the senior certificates."
Moody's analysis of single-family rental securitizations is largely based on an approach it applies to large-loan commercial mortgage-backed securities secured by multifamily housing. This approach analyzes expenses "incurred from and cash flows generated by the underlying properties." It also assesses the probability of the loan's default and stresses the recovery value from refinancing or liquidation.
Skeptics remain, however, including among the rating agencies. In February, Standard & Poor's issued a report in which it said it "has yet to see an SFR transaction with the level of credit enhancement and other risk-mitigating features that warrants the highest investment-grade rating."
"Our primary reservations revolve around the industry's operational infancy, historical performance, the current business model's ability to withstand extreme economic conditions, and the ultimate liquidation values of the underlying properties, given the risks associated with short liquidation periods," S&P said.
Rental houses in these securitizations will be spread out geographically and will have unique characteristics that won't lend them to a one-size-fits-all maintenance approach, S&P said. The properties are likely to be rented out multiple times during the course of a given securitization's term, adding a further layer of complexity, the agency said.
Indeed, single-family rental investment is not a risk-free proposition. There is the potential for another housing downturn. Demand for single-family rentals could drop, giving rise to vacancies. Or the big players might prove themselves less capable at management of the portfolios.
Certainly, a longer track record would help provide comfort that the ratings agencies assigning AAA ratings are on the right track.
Shifting economic winds have played a major part in the rise of this new asset class. Mortgage defaults rose during the financial crisis and former homeowners became renters. Rising interest rates, climbing home prices, high student debt and tight credit conditions have limited opportunities for would-be homebuyers. Elevated unemployment and depressed incomes have contributed to the nation's homeownership decline. These lingering economic factors suggest large players will remain involved in the single-family rental market.
While I cannot say for sure that this asset class will materially grow, early indications are that there is upside potential to single-family rental securitization, especially if it attracts smaller investors.
Alex Kangelaris is the CEO and managing partner at Wall Street Emprises LLC. He has more than 25 years of mortgage industry and capital markets experience.