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Investments

Moody’s readies criteria for single-family rental securitization ratings

The investor's guide to ratings

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Investors and issuers now have an official rubric to help ensure their single-family rental securitizations meet certain rating levels.

Moody’s Investors Service released its criteria for rating the emerging market of single-family rental securitizations.

In November, Moody’s rated the first deal in this sector, Invitation Homes, awarding $278.7 million in triple-A ratings for the largest tranche of the deal.

“In all, $479.1 million in MBS is classified into four classes of certificates backed by one floating rate loan secured by mortgages on single-family rental properties,” HousingWire noted back in November.

“We believe the participation of several ratings agencies will add institutional credibility to the sector. Additionally, we believe the size of the deal is a positive as this is larger than we believe some industry participants had expected," KBW analysts wrote. "This might suggest potentially strong demand. Finally, we believe a successful deal could pave the way for future offerings with improved execution and help address some long-term questions about the sector’s capitalization."

Now, several months later, Moody’s is preparing for a projected increase in single-family home rentals based on a number of fundamental economic trends and an increase in the investment in these properties by institutional buyers.

“A slowly improving economy will boost the demand for both rentals and owned homes,” says Moody’s Managing Director Navneet Agarwal. “But rising interest rates and housing prices will make buying a home less affordable, increasing the attractiveness of rentals. Borrowers with a checkered credit history also find it more difficult to obtain mortgages.”

Since the market is still very unchartered, Moody’s is trying to buffer for various risks given limited amount of historical information.

“To account for a scenario in which the securitization trust must sell all or a substantial portion of the portfolio in a distressed market, we apply a substantial home price depreciation factor, considering historical price movements, forecasts of future prices, the diversity of the pool, and the expertise of the manager,” Agarwal said.

A typical single family rental securitization would be backed by one or a few loans to a sponsor that has bought a large pool of homes and leased them out, Moody’s explained.  

The debt is designed to be repaid by the cash flows from the rentals, mostly to cover the interest payments, and the proceeds from the ultimate sale of the properties, to repay principal.

“The sponsor and the property manager are both in positions to preserve the value of the collateral,” says Agarwal. “We will evaluate the sponsor’s financial capacity and flexibility, as well as the property manager’s expertise in managing single-family properties.”

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