Many of the key points made in last week’s Fitch Ratings Report on REOs to Rentals (See How Ratings Could Dramatically Change the Single Family Rental Business) were not new or surprising. However, seeing them in black and white under the letterhead of one of the most powerful ratings agencies in structured finance changed the rules and probably the timetable for the birth of SFR securities?bonds created by pools of single family rental properties backed by rental payments and the underlying value of the homes.
Nearly a month ago, the Wall Street Journal outlined the parameters of the issue, noting that serious hurdles stand in the way of these new securities despite the fact that interest is intense, from both structured-finance units at the major rating firms and banks who have been frustrated by the lack of progress establishing a private mortgage-backed securities market to compete with Fannie and Freddie, and by a platoon of players ranging from builders to hedge fund financed investment partnerships attracted by the size of the $3 trillion market and the potential yields SFRs would bring.
However, Fitch made it clear that its rating will be based not by price or yield but by the underlying value of a security’s assets, which will be determined by location, quality of management and the availability of data.
Location, of Course
Location is fairly easy to project. CoreLogic recently listed the top 26 major markets based highest single-family rental capacity rates capacity rates and found they are generally in Florida or the Midwest. West Palm Beach had the highest rate at 12.4 percent, followed by Cleveland (12.3 percent), Fort Lauderdale (12 percent), Chicago (11.6 percent), and Las Vegas (11.4 percent). Another good source for cap rates is Local Market Monitor.
Management quality is another matter altogether and the requirement for historical data is an expected but inescapable problem for many of the new big investors, especially those starting or expanding a wholly owned management subsidiary. Properties managed by management companies without established track records, though they may be excellent, won’t get good ratings unless they have been in business several years.
The ratings agencies’ need to measure, track and assess management quality might lead to widespread certification by a creditable third party organization like the National Association of Residential Property Managers, which certification programs for both management professionals and companies.
“Rating agencies may give a big boost to a certification program like NARPM’s, that includes an onsite audit or site visit,” said Reggie Brown, CEO of All Property Management, the largest US property management network online. “There will also have to be a way to check on the quality of properties and management companies.”
Single family property management has exploded in recent years along with single family investment, and Brown says that the vast majority of management companies serve only local or regional markets at most, due to the localized nature of the business.
Time will Tell
Some of the players working on these new products are the same ones who packaged, rated and then sold complex securities in the mid-2000s. The collapse of those deals helped to deepen the financial crisis. Now, they are pitching the new products as a potential way to accelerate a nascent housing recovery.
“The industry is somewhere between anxious and desperate for new products,” Rick Sharga, executive vice president at Carrington Mortgage Holdings LLC, told the Wall Street Journal weeks before the Fitch report came out. “Because of that, there is a danger they will throw caution to the wind and securitize something that doesn’t really have a track record.” Sharga, by the way, had a great deal to do with making RealtyTrac a household name during his years with that company.
Some had hoped the first SFR securities could be packaged and marketed as early as late this year or early in 2012. Now it looks as though Sharga’s cautions will be heeded and that years might pass before an SFR securities market develops the kind of traction it will take to achieve top shelf ratings that will attract the kind of capital that it will take to transform the single family market with an infusion of capital.