REO-to-rental securitisation market may be closer than expected

Tue Jan 29, 2013 1:47pm EST

Jan 29 (IFR) - The concept of securitising the rental income from a portfolio of leased homes is gaining ground at a faster pace than expected, and the first so-called real estate owned (REO) to rental securitisation deal could hit the primary market by 2015.

That's the view of Gary Beasley, managing director at Waypoint Homes, a company that invests in REOs. Beasley made the comments at a panel discussion during the American Securitisation Forum conference in Las Vegas.

"The market is growing faster than anyone imagined," said Beasley. "There's a chance that this can be a large asset class."

Beasley is expecting a handful of multi-billion dollar public real estate investment trusts (REITs) dedicated to investing specifically in the burgeoning REO-to-rental business to emerge by year end, up from zero just a year ago, he said.

That would indicate that a significant securitization market may eventually be based on the product, and that it may come about sooner rather than later.

"It may take two to three years instead of five years, because of the significant capital inflow," he said.

The concept of REO-to-rental securitisations has been widely discussed in recent months with even rating agencies weighing in on the subject last August.

Interest in the deals is growing because of the large inventory of single-family foreclosed properties held by financial institutions.

In the planned deals, real estate investors would buy up blocks of foreclosed properties and rent them out to borrowers who were displaced by their own inability to pay their mortgage. The rental payment streams - and possibly the proceeds from eventually selling the property - would provide payments to bond investors.

Last year, rating agencies said the main risks involved in assigning a credit rating to such a deal are of the operator/manager of the properties not being able to perform his duties, and the potential variability of cashflow from the rental and ultimate sale of the properties.

Panelists at the conference touched on those issues and debated whether firms view the REO-to-rental industry as a "trade" or as a "business". That is an important distinction, as it can reveal whether investors buying up homes were deciding to integrate or outsource property management and operations.

Frank Terzuoli, a director at KPMG, said that property management could be expensive. For example, in Florida, single-family homes are so cheap to buy, that fixing a roof on such a home can be more costly than the house itself.

Terzuoli also said that most renters want to become homeowners, so eventually they will leave, causing issues for the cashflows that may underpin a securitisation.

But Beasley said confidence was growing in the product.

"A year ago the idea of lending against a portfolio of leased homes was really a foreign concept," he said.

The market has evolved very quickly, with many firms now able to understand the asset and structure.

"Competition is ferocious now."

Ryan Stark, who oversees RMBS at Deutsche Bank, said that bond investors just want to see well-structured deals, and have expressed interest in an ABS backed by REO-to-rental cashflows. They have been curious about the structure and tenor of such potential transactions.

Stark has had to explain to them that if a deal were to happen, it would not be as commoditised as other residential real estate transactions.

Until a securitisation actually happens, many Wall Street banks are providing lines of credit to REO-to-rental aggregators such as Waypoint and Colony Capital.

Citigroup and Deutsche Bank have been most active in extending credit to these investors but panelists said almost all major banks are now involved in financing the nascent asset class.

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