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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Investments

Deutsche Bank says REO-to-Rental securitization proves market evolution

November 5, 2013
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Capitalism solves all money problems great and small. Problem is, as recent years show, the financial ideology also causes those same economic problems. But where there is hope, is in the ability of financial firms to keep evolving.

There is some serious give and take of course. The markets that gave us CLOs and ARMs, after all, also gave us subprime and ABS CDOs.

And so, at the end of the last week, the secondary markets finally unveiled the much awaited, inaugural REO-to-Rental securitization. Three credit ratings agencies gave the deal, Invitation Homes 2013-SFR1 from Blackstone (BX), a great risk mitigation foothold, awarding $278.7 million in triple-A ratings, in what is by far the largest tranche in the deal.

Bear in mind the inaugural wording. However, the news did lead KBW analysts to put out a report saying that when assuming a 70% LTV on the properties in such deals, a capture rate of 35% – and the addition of $40 billion in annual production over the course of six years – the REO-to-Rental securitization marketplace is nearing $920 billion in potential opportunities.

That's nearly $1 trillion in market potential.

Regular readers of HousingWire magazine will be well aware of the challenges for financing such a deal. Our features repeatedly pointed to establishing a multifamily type approach. And in the end,as predicted, the market was able to evolve into that solution, according to Deutsche Bank (DB) analysts.

"At the transaction level, IH is effectively a carbon copy of a CMBS deal," write analysts Doug Bendt, Ying Shen and Harris Trifon.

"The mechanics of the servicing are the same; the holder of controlling class has the right to replace the special servicer subject to a quorum, should there be losses they are distributed reverse sequentially and principal and interest sequentially," they add.

As the analysts point out, this should come as no surprise. Blackstone is active in the CMBS market and subsidiary Invitation Homes is active in the single-family rental investments space since it launched two years ago. It should be natural for the two to meet halfway, when the markets are moving forward.

But will it provide a benchmark for Silver Bay or Colony Financial to do the same? We need not even go that far. The IH securitization represents less than 10% of the Blackstone portfolio, according to Deutsche Bank, so there will likely be more securitizations to come.

It's the way the market is evolving.