Which is worse for an investor in rentals — a broken boiler that serves a building with 100 units, or a hundred homes with broken furnaces?

Answers like that are the obvious division in scalability between multifamily and single-family homes, thereby showing some of the challenges in securitizing the latter.

Morningstar RMBS analysts called factors such as this a "reality check" in their research report for May.

REO-to-rental is emerging as a profoundly important new asset class. It's one that will need its own type of financing, and Morningstar, as a credit risk analysis firm, will need to get a bead on those unique dangers.

"Single-family rental demand is expected, in part, to come from recently displaced single-family homeowners who lost their houses to foreclosure," says Morningstar, which estimates the REO pipeline to grow in the short term. "Given the choice, it is likely that they will retain their preference for single-family housing rather than move into a multifamily living environment."

Therefore, these REO-to-rentals will require financing, hopefully in the form of securitization. One would expect that such a platform could operate as a plain vanilla trade receivables bond wrap. However, with housing nothing is ever that simple.

In fact, the Morningstar report shows how difficult it can be to get an even bead on the REO timeline, even if it's just in one state. Take, for example, the difference in timelines from the California Association of Realtors and data firm CoreLogic [stock CLGX][/stock].

"According to CAR’s data, bank-owned homes in California are closing within 60 days and are selling above list price," the report states. "However, Morningstar, in its analysis of REO data from CoreLogic for nonagency loans, concluded that California REO properties take an average of six months to liquidate."

In actuality, each are looking at different timelines. Investors need to be made aware of the difference in definitions. Research from Morningstar and CAR serve two different purposes.

"Our measurement is the time from when the listing is first posted to the MLS to the time an offer is accepted," said Lotus Lou, spokesperson for CAR. "Our 60-day figure should be called time on market. Seems Morningstar is calling it time in REO, which could have a completely different meaning than time on market."

Lou also referred to this article in The Orange County Register that said REOs are sold in 20 days.

Morningstar uses a longer timeline. "We are picking up 'time in REO time' from the time a loan becomes REO to when the property is liquidated as REO," said Lawrence Kwoh, one of the authors of the Morningstar report.