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S&P: 3 reasons REO-to-rental bonds are not triple-A

Disagrees with Moody's, Kroll, Morningstar

Standard & Poor's disagrees with its peers.

The credit rating agency said in a release that it would not award triple-A ratings to REO-to-rental securitizations.

Moody's Investor Services, Kroll Bond Ratings and Morningstar all gave triple-A to the biggest trance of the $278.7 million Invitation Homes 2013-SFR1 deal, an REO-to-rental securitization. The ratings help successfully sell the deal to institutional investors, but S&P isn't sure it merits this accolade.

"Our primary reservations regarding the sector… 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," the company said in a statement.

Here are three solid reasons S&P would not give REO-to-rental bonds a triple-A rating.

1. Operational risk

"The continuity of net cash flows from the underlying properties depends heavily on the ability of their owners to manage large numbers of single-family homes, which are often geographically dispersed and uniquely constructed."

2. Size and depth of property manager pool

"The largest institutional owners of single-family rental properties have demonstrated an initial ability to scale their property management across very large pools, but none have a track record of managing such a large pool through an extreme economic downturn. Should incumbent property management fail, there is no guarantee that an adequate replacement with sufficient experience to oversee a large portfolio of such properties could be found."

3. No historical data

"In some cases, multifamily rental and vacancy rates may be used as reference points in the absence of historical information on SFR properties. However, Standard & Poor's doesn't view these as sufficient proxies to fully gauge the predictability of rental payments for SFR securitizations without further data."

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