first deal in October 2013
, rental securitisation has
been viewed as a
second life for the housing market
. The real-estate owned
(REO) to rental securitisation deals have focused on single
family homes concentred in areas hardest hit by the housing
crisis. The purchase of these properties by larger investors
instead of individuals is seen as responsible for the spike
in real-estate prices in depressed areas.
Some believe it could become a
trillion dollar-plus industry. But politicians and major
rating agencies, including S&P and Fitch, stress that
there is not enough precedent behind the product to make a
solid judgement about its viability.
Transactions to-date have been
private placements. But the industry continues to attract
investors, and it may not be long before a Securities and
Exchange Commission (SEC) registered issuance is completed
which would force the regulators to weigh-in.
"I am concerned that before
this takes off and grows in to an industry that some estimate
might be worth $1.5 trillion, we should try to understand
these products now and have more oversight now, so that we
understand the pit falls and what the future consequences
might be," Congressman Mark Takano told IFLR.
"It’s premature to
call for regulation," he added. "I’m calling for
more oversight. I want the Financial Services Committee to
use its staffing to perform an analysis so these instruments
can be better understood."
Congressman Tekano represents
st district of California, south east of Los
Angeles. The area was hit hard by the housing market crash
and subsequent recession. Like other areas of the US sunbelt
including parts of Florida, Arizona, Georgia and Nevada, it
has now become a popular area for investors looking to buy
single family homes to rent.
- The growing popularity of rental securitisation
is raising concern about the safety of its products and
effect on communities in the US;
- Politicians and regulators say they are keeping
an eye on the development to see where it presents a risk
to the market;
- Though the structure resembles that of
traditional MBS, the securitisations have so far been based
upon single loan payments and not the rent payments on the
The REO to rental scheme was
originally presented by the Federal Housing Finance Agency
(FHFA) as a way for individuals whose homes had been
foreclosed to remain in the property as renters.
The eventual securitisation of
these is unsurprising, but the collateral is not the same as
traditional mortgage back securitisations (MBS). The
transactions that have been completed so far have been based
off of a single loan.
This loan is granted to a
special purpose borrower, which uses the capital to purchase
the properties. The lender then sells the loan to a deposit
entity, which then sells it to a common law trust. The trusts
have, so far, elected to be classified as real-estate
mortgage investment conduits (REMIC) to avoid double
This structures closely
resembles that of MBS, as it is based off a single loan and
must be repaid regardless of whether the properties produce
"In the past, some individual
borrowers were offered loans that they did not have the means
to repay," said Seth Messner, partner at Katten Muchin
Rosenman. "In this case, the borrowers are sophisticated
financial institutions that have an incentive to keep their
It is anticipated that as the
market grows, new multi-loan securitisations will also be
issued based on the same basic structure. Again, while the
rent would be used to facilitate the loan payments, each of
the repayment bundles must be made regardless of whether rent
Vacancies are a major risk factor for the product.
When the first securitisation
was issued in October, Moody’s and smaller
agency Morningstar rated it triple A. Since then the vacancy rate in those properties has risen to
eight percent, two points higher than the estimates.
It is in property
owners’ best interest to keep their properties
occupied and maintain a low turnover rate. This minimises
costs and ensures they have cash flow from the rents to
service the original loan.
"Even in securitisation where
the collateral is the mortgage, the debt service on the bonds
is paid by the cash stream coming off the rent," said Aimee
Cummo partner at Alston & Bird. "Short of securitisation,
institutions are providing
to call for regulation. I’m calling for
financing for residential rental properties on a bridge loan
basis and those loans are either secured by mortgages or by
the rental stream directly."
Politicians, who are looking to
increase home ownership among ordinary Americans, will
therefore need to take a look at the wider housing market and
not just the impact of this single product. The restructuring of the government sponsored
enterprises, Fannie Mae and Freddie Mac, is intended to
help bolster the market, but a final plan has yet to be
Greater understanding of the rental securitisation product could help it
gain legitimacy and prevent politicians from pushing for
It should also help the
investors, especially given many areas that were ideal for
REO and eventual securitisation were those hardest hit by the
recession and still struggle to come back.
"If I was an investor I would
be concerned about the speed of the economic recovery in
these areas," said Congressman Takano. "There is a reason why
the bottom fell out of these markets so dramatically."
"In my district we are still
struggling with unemployment and people who are employed are
dealing with lower income levels. It makes me wonder whether
these bonds are sustainable if investors can expect decent
returns from low income levels," he added.
A fear that these investors
will drive prices up and long-time residence out is clashing
with claims that the rental opportunities enable families who
cannot afford to buy to remain in neighbourhoods.
"I think it is better to have
higher home values than a street full of vacancies," said
Messner. "I think FHFA probably had the same rationale when
they launched their REO to rental pilot programme back in
The verdict is still out on
whether this will be a boon for the market or if it could
hurt investors and homeowners. Leaving regulators with few
options expect further investigation and a wait-and-see
First PACE ABS offers lower risk green
Why one-size-fits all securitisation
reform won’t work
Ruling clarifies CMBS servicer