NEW YORK, June 12 (IFR) - Deutsche Bank is planning an REO-to-rental lending business as an add-on to its existing US commercial mortgage-backed securities (CMBS) conduit platform.
The bank will potentially fund smaller investors who want to partake in the US housing recovery by buying up foreclosed single-family homes to rent out, according to two sources with knowledge of the plans.
The plan is part of a two-year vision for the evolution of the REO-to-rental business at Deutsche, which has been among the most aggressive on Wall Street to provide financing to the growing industry.
The bank has already extended a US$2.1bn lending facility in the institutional investor space to Blackstone, the largest asset manager in the industry, as well as a US$100m loan to asset manager Five Ten Capital.
But it also sees potential in serving the smaller investors who are buying up single-family homes in specific pockets of the country on a more limited scale.
Deutsche Bank declined to comment.
The REO-to-rental lending business would require additional hires to the bank’s existing CMBS conduit platform, which is among the most robust on Wall Street. Lending will likely start later this year, with securitization as an eventual exit strategy.
Deutsche’s first priority is getting the first REO-to-rental securitization off the ground, and it is on record as predicting that the first deal would appear this year.
The bank is engaging with several ratings agencies on proposals for transactions.
REO-to-rental lending to smaller investors and mom-and-pop outfits is viewed as a natural fit with the bank’s CMBS conduit business. Loans would be in the US$10m to US$50m range, and as an exit strategy, they would eventually be pooled for securitization.
Having CMBS conduit machinery already in place is seen as a competitive advantage over other players recently entering the business of lending to smaller REO-to-rental investors, such as private equity firm Cerberus Capital.
“There are many more real-estate investors in the US$20m to US$30m range than there are Blackstones in the world, and that market is quite under-served right now,” said one securitisation industry insider.
“Any investment bank with a mature CMBS conduit will be getting into this.”
Investment firms and individual private investors in that smaller range currently have limited options to procure financing. The GSEs have a hard cap on the number of investor properties a borrower can finance. Fannie Mae allows 10 investor properties, while Freddie Mac allows four.
That would be suitable for a true mom-and-pop investor, but not helpful to the slightly larger investors managing US$20m to US$50m in properties.
One alternative may be commercial loans from regional banks, but those banks have not yet developed the loan product, experts say, and face the regulatory burden of meeting capital requirements.
The first securitizations of rental cashflows from formerly foreclosed single-family homes may be unrated, but Deutsche Bank is actively seeking a rating in order to make the new asset class attractive to bond investors.