Thursday, September 20, 2012

Demand growing for new type of ABS: residential rental income securitization

While the total home ownership in the US has stalled, the rental market continues to expand (a trend that started prior to the financial crisis), providing support to the overall housing market.

Source: BNP Paribas

As home prices declined up until this year and rents increased (see discussion), rental properties have become a more attractive investment - particularly in comparison to other fixed income products available.

Source: BNP Paribas

Cash buyers, many of whom convert distressed homes into rental properties, have been coming into the market in increasing numbers.
BNP Paribas: - As investors seek returns, housing looks increasingly attractive. A lot of increased activity has come from cash buyers; the National Association of Realtors reports that the share of existing single-family home sales purchased by cash buyers has risen to just below 30% from 20% a few years ago. Private equity investors have also been reportedly buying blocks of homes for rental conversion...
But unlike a traditional mortgage, 90% of which are provided or guaranteed by the US government, financing rental properties is more difficult. And most large landlords are looking to finance these properties to boost returns. A recent development however could give the rental market in the US a boost by making such financing available. This potential new approach is the securitization of rental income.
WSJ: - Waypoint Real Estate Group LLC, a major investor in U.S. foreclosed homes, has secured a $65 million loan from Citigroup Inc. C -1.17% to help add to its portfolio of properties, according to people familiar with the matter.

Bankers and investors said the debt-financing deal is a milestone for the burgeoning business of renting out houses that were previously in foreclosure.

Waypoint, an Oakland, Calif., investment firm, is working with Citigroup on a bigger, longer-term financing deal that is expected to close in the coming weeks, the people said.
The Waypoint deal underlines banks' confidence in the investment strategy and may serve as a precursor to another development in the market: Bankers said they have been hammering out details on how to create the first security backed by home-rental payments
And as with other types of securitization, banks need these loans rated in order to lower capital usage and potentially improve liquidity.
WSJ: - Citigroup and other major banks have held talks with the major credit-rating firms about potential securitizations, people familiar with the conversations said.

In recent weeks, rating firms such as Fitch Ratings and Moody's Investors Service have published research reports outlining their views on potential structured deals.
The problem with rating this type of product however is the lack of historical performance (delinquency and vacancy) data in the rental market.
WSJ: - Fitch said initial deals were unlikely to be rated above the single-A category. One major hurdle to high ratings: the lack of long-term data detailing the likelihood tenants living in previously foreclosed homes will pay rent on time.

While mom-and-pop businesses have been buying, renovating and renting out homes for years, major investors backed by private-equity and hedge funds only began amassing single-family homes within the past couple of years. The market has developed rapidly, but data on the tenants' behavior are limited.
Demand for rental homes is on the rise and the need for leverage by the landlords (in order to boost rental yields) is also increasing. At the same time, fixed income investors are searching for new slightly higher yielding product. Conditions could be right for the rental securitization market to take off - particularly as more data becomes available. Over time this will help clear the remaining distressed home inventories in the US.
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