A client note from Moody’s Investors Service warns that a steep drop in home prices would reduce liquidation recoveries in single-family rental securitizations if the transactions must sell properties to repay bondholders, but the risk that a transaction sponsor’s failure to refinance its loan would itself trigger a widespread property price decline that would in turn harm the transaction’s recoveries is low.
“Even with the limited geographic diversity of the properties underlying the transactions, a sponsor’s failure to refinance wouldn’t result in a forced sell-off of homes that would create a glut of available housing in the biggest SFR markets,” analysts at Moody’s say.
They note there are two key reasons why the failure of a transaction sponsor would not create a downward SFR property price spiral:
1) The properties underlying the securitizations comprise only small percentages of the housing markets with the most securitized SFR properties, which means that even if an SFR operator were to fail, the impact on selling prices will not be large, and
2) A securitized portfolio of SFR properties would likely not hit the market all at once, because the transaction’s special servicer would explore options to maximize revenue from the properties before the bonds mature.
“The risk of a negative impact on home prices will increase, though, if SFR operators sponsor more securitizations, thereby increasing the securitizations’ share of the associated areas’ housing markets, or if a sponsor’s failure to refinance a loan were coupled with that operator’s need to sell a high volume of properties out of its unsecuritized portfolio,” Moody’s analysts say.
They say that geographic concentrations in major SFR markets are thus far small enough that a downward price spiral from a large sell-off is unlikely.