Moody's Investors Service noted an increased interest in securitizing the cashflow for renting out previously foreclosed homes but admitted difficulties in possibly rating the still hypothetical bonds.
A report from the credit ratings agency suggested there was more interest generated over the past several months as the government-sponsored enterprises moved forward with plans to sell more of their REO inventory for investors to rent the homes out.
"Numerous real estate market participants have asked how we would analyze the credit quality of these securitizations," said Moody's Vice President Kruti Muni. "No one has yet presented a specific transaction or deal structure to us, therefore, we have not yet completed development of a formal methodology."
Fitch Ratings previously said it would be unlikely to assign high investment-grade ratings for regional investors with little-known track records.
Moody's said in its note Thursday the risk would be if such investors or property managers fail to perform their duties. It said how they handle the homes would be similar to the management of a cell tower or a container lease asset-backed security. Value comes from property managers whose economist interest are more closely aligned with the investor.
Those looking to securitize the bonds would be able to free up more capital to purchase even more of these properties. But should the market move in ways that are hard to track historically, the cashflow could lock up.
"Rental rates can decline in weak markets, leaving rental income insufficient to cover expenditures and meet ongoing liabilities," Muni said. "Another concern is the possibility that proceeds from the sale of properties will be insufficient to repay the noteholders' principal."