While the REO-to-rental (Real-Estate Owned to rental) market has had literally just one securitization, it was a hot topic throughout the Structured Finance Industry Group and Information Management Network’s ABS Vegas 2014 conference.
That one securitization, a $479 million deal by Invitation Homes, a subsidiary Blackstone Group (BX), earned triple-A ratings from Kroll, Moody’s and Morningstar. This has sparked belief among a significant portion of the some 5,300 in attendance that this is not, as first thought, a short-term investment but rather an asset class with legs.
There are a large number of abandoned homes and a large class of renters, but even when the housing market settles out and people’s credit is repaired over time, REO to rental is a growth area and potentially a permanent asset class, investors think.
There is a slate of new single-family home rental securitizations already planned, analysts at ABS Vegas 2014 said. Colony American Homes, American Homes 4 Rent, and American Residential Properties have deals in the works.
James Grady, director and bond manager for Deutsche Bank Asset Management, discussed REO-to-Rental opportunities during the ABS Vegas conference.
"The street is looking for another product to sell. Back in the day we had the CDO machine, and I think that they’re looking to replicate something along those lines," Grady said. "The odd thing about this is you see regulators, analysts and academics pushing for this, and it’s at odds with some of the populist tone about income inequality. They see it as a way to get home prices up."
Vincent Fiorillo, global sales manger at Doubleline Group, said pricing in 2013 was off, but he sees better prospects in 2014.
"I think prices will get more in line with what the market should bear," Fiorillo said.
The first securitization of a REO-to-rental deal was Blackstone packaging rental income from single-family homes into a pass-through security, which is functionally not unlike a mortgaged-backed security.
Analysts from Moody’s and Standard & Poor’s in Las Vegas said off the record they are highly motivated and anxious to see what happens to REO-to-rental.
On the operational and political side of REO-to-rental, a common refrain is that the technology is there for institutionalized management of rental homes. Right now the 14-million-home rental market is geographically fragmented, with a few exceptions where buyers have gone in and bought up entire tracts in neighborhoods.
Kruti Muni, analyst with Moody’s, said while there are similarities between multifamily commercial mortgage-backed securities, REO to rental is very different and a new frontier where it will take a lot for analysts to get comfortable with the class.
It will require property managers and owners, Muni said, to cater to investors with corporate communications and reporting, and they will need to incorporate remote technologies so that property managers aren’t literally driving all over a metro area fixing leaky pipes and collecting rent checks.
Another aside was the acknowledgement that many renters in this situation are people with otherwise good histories hit hard by the financial crisis.
"There’s going to be a push for rental payments to be counted towards people’s credit scores," one source said.
Landlords are already collecting credit information on renters, but this would be new for reporting agencies to count regular rental payments as a positive on a credit report.
Michael Doherty, senior vice president of TransUnion’s rental screening solutions group, noted that, "We noticed that the improvements in credit risk and the rise in rental payments was not a regional trend, rather most markets experienced similar improvements."
This may or may not factor into how viable a long-term asset class REO-to-rental is.
Another question – REO-to-rental investments are expected to slow in 2014. If so, what happens to housing prices, which were in good measure buoyed by institutional purchases?