Banks prep lending facilities for foreclosure-rental bonds
NEW YORK, Sept 4 (IFR) - At least seven investment-bank lenders are getting set to roll out the first round of balance-sheet term financing to a handful of private equity and real estate firms looking to buy foreclosed US single-family homes and convert them to rentals.
The banks, including Deutsche Bank, Barclays, Citigroup and Wells Fargo, will hold the loans on-balance sheet and by year-end are likely to refinance them with unrated securitizations backed by the rental cashflows, sources say.
Once completed, the unrated transactions will be presented to the rating agencies early next year as concrete proposals. Agency analysts will be able to vet them to determine proper credit enhancement for eventual rated asset-backed securities (ABS) transactions, which industry experts predict will appear in about six to 12 months.
The initial warehouse lending facilities, which may be static or revolving (the latter allowing operators to add new collateral), will have two-year to six-year terms, and in many cases allow the sponsors to keep buying homes and season their portfolios.
Other sponsors that might not like the bank financing terms may access the capital markets directly with unrated issues as a first step.
"We can do an unrated deal pretty quickly," said Gary Beasley, managing director of California-based Waypoint Homes, which has already bought more than 2,100 distressed homes that it intends to renovate and rent out.
"What's unclear is what those terms would look like. We're actually seeing better terms from balance-sheet lenders."
Others may favor the financing route.
"Bank financing will likely precede securitization," said Justin Chang, head of Colony American Homes, a subsidiary of Colony Capital, which has already snapped up 3,000 homes and deployed US$350m of equity to enter the REO-to-rental market.
"Banks are saying they can lend with less risk - not mortgage-by-mortgage - and can offer term financing at a corporate level, giving security against a pool of homes. Bank financing will also mean better risk diversification and can get done at modest advance rates and debt levels."
This development is imminent and "marks the entrance of leverage into the market", Chang told IFR.
In the planned ABS deals, real estate and private equity investors would buy up blocks of foreclosed properties and rent them out to borrowers who have been displaced due to their unpaid mortgages. The rental payment streams - and possibly the proceeds from an eventual sale of the properties - would provide payments to bond investors.
One ABS head at a broker-dealer developing an unrated transaction said that issuers were currently assessing the merits of unrated versus rated foreclosure-rental bond deals.
"An unrated deal will be more costly to do, but advance rates will be higher," he said, meaning that the sponsor would not need to provide as much equity.
"A rated deal would be a lower cost, but advance rates would likely be lower. Issuer/operators have to weigh the coupon they're charged versus the advance rate, and determine which is more important."
One major difference between bank financing and ABS is that the first securitizations are likely to contain only short-term leased properties, while bank warehouse lines will probably contain both "stabilized and unstabilized properties", meaning unleased properties, said one senior RMBS banker.
"If you can do a facility with a bank that allows you to buy homes and borrow against them when you buy, and renovate them in advance of leasing, you can more easily season a portfolio," said one REO-to-rental sponsor.
"Investors in securitizations, however, would like it if the properties were all leased. There's a perceived risk: what if these homes don't lease?"
Securitizations will also contain release mechanisms enabling the sponsor to sell homes to boost returns. If a property is sold, part of the proceeds will be applied to reduce the securitization debt, or potentially shared between the equity and debt investors.
"There will likely be a release price structure in the transactions as these pools grow," said Colony's Chang.
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