As more financial institutions look to crack the real-estate owned market for rental opportunities, the need for more financing increases.

The Rialto Real Estate Fund may have solved the latter problem if it successfully sells its latest REO asset-backed securitization to investors.

According to Kroll Bond Ratings, RIAL Series 2013-LT2 is a non-performing loan securitization of 1,472 REO properties. There are also a number of performing loans in the mix, but REO outnumber these two-to-one.

Rialto Capital, a subsidiary of homebuilder Lennar Corp., (LEN), acquired the assets between December 2010 and December 2012, purchasing 28 separate non-performing loan portfolios from eight regional banks and financial institutions for $345.9 million. The aggregate unpaid principal balance stands at $843.6 million.

However, each NPL is relatively small. The average UPB is below $400,000, for example.

Railto will pay investors on recoveries on interest due. However, payment may be delayed up to one year if these recoveries are insufficient.

“The transaction is structured as a liquidation vehicle that monetizes recoveries from the assets to pay the rated notes,” said the Kroll presale report, which expects to rate the deal BBB-.

The collateral is predominantly located in the southeastern and southern United States, primarily in Florida, Georgia and South Carolina.

Like any new structured finance vehicle, one of the primary concerns Kroll maintains is the loans were originated for securitization, the loans generally lack certain structural features and reporting requirements for similar commercial mortgage backed securitization transactions.

“This means that there are no limitations on, among other things, the borrower’s ability to incur additional debt,” the Kroll analysts state. It’s a big worry, as some of the NPLs have three liens.

Furthermore, “the lack of lockbox and cash management provisions creates the risk of the borrower diverting funds from the property for matters not related to the loan,” the pre-sale report concludes.

In its defense, this type of structure finance is not new to Rialto. In March 2009, Rialto Capital Series 2012-LT1 marketed as a securitization of loans with little to no cash flow. Nearly all the loans are nonperforming, pooled from hotels, offices and retail properties in the Rialto real estate portfolio. In that deal, less than 28% still generate money from tenants.





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