Aug 24 (IFR) - The first so-called real estate owned
(REO)-to-rental securitizations in the United States may go
ahead without credit ratings, as agencies ponder how to assign
grades to the new and potentially risky products.
In the planned 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.
"There are unrated deals in the works," said Suzanne
Mistretta, a senior director at Fitch.
"Right now investor demand is focused on short-term [two
years or less] unrated offerings, but by next year, we could be
presented with a new rated transaction. Beyond a two-year
average life, investors may want a rating."
Over the past three months, Fitch, S&P, DBRS and Morningstar
have each published initial assessments of the potential risks
of the new asset class. But no agency has yet published official
criteria for the product.
Fitch said that such transactions are unlikely to merit a
rating above Single A -- and even that would require sufficient
historical rental-payment data or a solid record from the
Moody's issued its first report on the subject on Thursday,
but said that since it had not seen a formal proposal yet, it
was too early to tell exactly what rating it would assign a
transaction. However, it noted that even extra credit
enhancement would not mitigate a lack of historical
rental-payment data, and therefore some transactions might not
merit top grades.
"We would like to see the specific underwriting criteria
that the operator is using to choose these tenants," Kruti Muni,
a Moody's analyst, told IFR.
"Obviously the operators would rely on income information,
the existence of security deposits, history of utility payments,
etc. The diversity of the geography of the pools of homes is
significant as well."
Moody's also said that before assigning a rating, it would
need to know detailed information about the operator, and would
conduct a review of the operator's performance, its experience
and its ability to perform its role in the transaction, which
includes determining tenant default rates and re-leasing
S&P, which published its initial thoughts on the idea in
May, also would not specify a specific rating ceiling, while
Kroll said that it was monitoring the development of the
The agencies have spoken to numerous market participants
interested in the idea, but say no potential issuer has yet
presented them with a concrete proposal. However, smaller
unrated deals are already being assembled.
Securitization specialists say that Jefferies and Wells
Fargo, among other banks, are interested in an early rollout of
Interest in these transactions is rising because the housing
market depression has left financial institutions with a large
inventory of single-family foreclosed properties. At the same
time, demand for family rental homes is rising because mortgage
underwriting is tight and many potential buyers do not qualify
for mortgages. Other buyers have stayed on the sidelines,
waiting for home prices to stabilize.
"Large numbers of displaced homeowners who have defaulted on
their mortgages have no choice but to rent," Muni said.
Fitch estimates that, in the non-agency sector alone,
distressed inventory -- properties covered by loans that have
been delinquent for 60 days or more -- totalled 1.13 million
units in June, while government-sponsored entity delinquencies
of 60 days or more plus real estate-owned inventory at the end
of the first quarter totaled roughly 1.3 million.
With the primary private label RMBS market stalled, the
financing of family rental properties may provide an alternative
investment opportunity for non-agency RMBS buyers.
Several real estate and private equity investors, including
a subsidiary of Colony Capital and Waypoint Homes, have started
buying blocks of foreclosed properties in the hope of becoming
sponsors of such deals. Meanwhile some securitized-debt
investors, particularly those who have already bought
non-performing loan bonds, have expressed interest in the
offerings, the ratings agencies say.
One of the main challenges to completing a rated transaction
is clarity on the criteria used by the individual management
firms to choose which tenants will live in the transformed
"With FICO scores dropping from foreclosure proceedings,
managers are going to have to think outside the box about a
tenant's ability to pay," said Jon Van Gorp, a partner at law
firm Mayer Brown.
Given their recent record with residential mortgage
products, the agencies are cautious before issuing an actual
rating, Van Gorp said.
"Rating agencies must work hard to earn back the trust they
lost during the credit crisis."
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