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Single-family rental securitizations have sprinted out of the starting block since Invitation Homes launched the first one in October 2013. Since then, a total of 13 securitizations collateralized by loans on income-producing, single-family rental homes have been brought to market, and the trend shows no sign of slowing down.
In fact, during the last eight years more than 4.5 million homes have been bought and converted into rental properties by investors, who are now anxious to leverage those homes. Estimates put the market for these securitizations from a conservative $20 billion to as high as $1 trillion.
“Due to investor appetite, stable collateral and managed risk tolerance we see these types of securitizations occurring much more frequently,” said David Lee, senior vice president of Matt Martin Real Estate Management (MMREM).
But the new asset class poses some significant challenges from a valuation standpoint. Unlike mortgages in a standard Residential Mortgage Backed Security, the single-family rentals that underlie the securitizations are scrutinized by rating agencies and investors alike, making accurate valuations more important than ever.
Ratings agencies look at factors like vacancy rates, expenses and cash flow when evaluating the SFR securitizations. The cash flow from the rentals is designed to pay the interest payments, while the sale price from the properties will repay the principal.
“Knowing the assets are being rated by a credit rating agency and sold to investors, the process must include a multi-level valuation approach that includes both automated and manual QC processes,” Lee said.
At MMREM, that multi-level approach includes utilizing multiple valuation tools, ranging from Broker Price Opinions, appraiser reconciliations, appraisals and automated valuation tools to enhance the valuation review process and ensure overall accuracy, Lee said.
“Using multiple valuation audit and quality control tools enables us to back-test the values,” Lee said. “In addition, we use our in-house appraisers to review and reconcile reports. We follow an extremely detailed process, aided by our proprietary workflow platform.”
Third-party vendors play a critical role in managing the risk for SFRs. Ratings agencies conduct a “rigorous evaluation of the operational competence of the sponsor, property manager, servicers and other third-parties,” according to Moody’s Investors Service.
So what factors should investors look at when choosing a vendor for valuation?
Lee offers these criteria for selecting a proven third-party partner:
- Nationwide valuation panel coverage
- Recognition by a rating agency
- Nationwide BPO coverage and network
- Nationwide Appraisal Management Company (AMC)
- Recognition by the GSEs
- A strict Quality Control management process
- Workflow process
- A robust technology platform
"Potential pitfalls in the value assessment process for single-family rentals revolve around managing quality and SLAs," Lee said.
Ensuring quality across the large number of homes involved in a typical securitization is no easy task. The Starwood Waypoint Residential Trust securitization that was announced this week — SWAY Residential 2014-1 — will be collateralized by a $531 million loan secured by mortgages on more than 4,000 homes. The first SFR securitization by Invitation Homes was secured by mortgages on 6,537 properties.
MMREM, which manages a national network of valuation experts, maintains a comprehensive database of vendor performance data to mitigate risk for investors. And in 2013, the company was ranked as one of the Top 250 GSA Vendors.
"We have a very seasoned staff that understands the government space and continually strives to meet and exceed all government guidelines," Lee said. "MMREM has implemented a multi-level risk management process that includes vendor management, IT, quality control and specific valuation tools, processes and workflows."