The single-family rental (SFR) market gained traction as a viable asset class with phenomenal growth in 2015. The homeownership rate fell to its lowest level in nearly five decades during the summer as more and more families and individuals chose to rent.
“The underlying growth in the single-family residential asset class was an increase in renters, a decrease in house prices, a decrease in credit availability, and all of that led to opportunities for institutions,” said Brian Grow, managing director, RMBS with Morningstar Credit Ratings, which reports monthly on SFR securitizations. “They could go into areas and build technology to find undervalued homes. A lot of the renters that are filling these properties owned by single-borrower issuers (institutional investors) are borrowers who probably don’t fit the profile of someone who would take out a mortgage in this new environment or alternatively. They don’t want a mortgage because something happened when either they or someone they know were looking for a mortgage. That led to an increase in rentership and an increase in opportunities.”
The opportunities for institutional investors have declined somewhat due to a recent increase in the number of buyers in the space and house prices that have largely recovered to the point that they are within 5 percent of their pre-crisis peak (a median price of about $268,000). Grow said he expects the opportunities will eventually level off. RMBS issuance was slow in the fourth quarter of 2015 due to general securitization market volatility.
“I think SFR was affected less than other asset classes, but still, the decision to securitize or to borrow elsewhere or to use equity was affected by the volatility in the general securitization market,” Grow said.
“There’s definitely a market for smaller investors to get financing for homes, but the question it comes down to again is whether interest rates will stay low and the performance of those three deals.”
Brian Grow, Managing Director, RMBS, Morningstar Credit Ratings
Right now, Grow predicts the SFR market will be up somewhat in 2016 from last year, but the growth will depend on the performance of three multiborrower securitizations. Multiborrower transactions are defined as deals that contain many loans made to smaller investors (often the traditional “mom and pop” investors) and are usually backed by five or more properties. Since the first single-family rental securitization was issued in October 2013, the majority of securitizations (24 out of 27) have been single-borrower deals, which consist of a single loan to a large institutional investor. The three multiborrower deals were issued by B2R Finance, FirstKey Lending, and Colony American Finance.
Grow said he believes multiborrower transactions will eventually take off, but when it will do so is unknown. One thing that will build more interest and confidence in multiborrower securitizations is the data on how the market and the servicers react to the performance of those three securitizations—and how the securitization fares should there be a default or delinquency.
“There’s definitely a market for smaller investors to get financing for homes, but the question it comes down to again is whether interest rates will stay low and the performance of those three deals,” Grow said. “I don’t know the timing of it, but if it grows fast, it will be the growth driver in single-family rental.”