The Rush to Securitize Single Family Rentals: The Fitch Report Changes the Rules


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.

Management Quality

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.

Photo: Wonderlane

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Quite an interesting blog post you write up full of “What If’s” that every individual single family real estate investor…. and even people such as first time home buyers need to be concerned about.

    As it is already… first time home buyers in Las Vegas looking for something under $200,000 that’s decent can’t compete against the cash buyers which tend to be more often then not, investors. Numerous listing agents won’t even look / accept FHA buyers on their listings for properties under $200K right now due to the ferocious competition. Just imagine if the securitization of SFR rentals comes to fruition and there are powerhouse security firms racking up giant pools of cash to go out and purchase.

    Rental payments made to somebody local in the community who invests in SFR rentals will be directed to who knows who on Wall St.

    Instead of individuals taking the risk that goes along with owning SFR rentals, they’ll just invest in XYZ securities…. I certainly have my share of individual SFR investors that have plenty of money. Would they continue buying properties for themselves, or hit the Easy Button and just invest in XYZ securities? Hmmmm….

    Will XYZ Securities just end up selling properties to ABC Securities when the ROE % becomes too low to keep on the books…. completely bypassing the real estate agent? Hmmm…

    Real Estate Agents and RE Investors beware… Some big institutional investors already convinced the FHFA that selling off SFR properties to them in bulk was a good idea. With the last big purchase in our area, I did not notice a FHFA owned home on the market for sale for months.

    • Jason, perhaps the best way to answer your question is to list the pros and cons of a secondary market for SFR-based securities for the real estate economy as a whole and for small investors, as I see it.
      1. A secondary SFR market will create a significant new demand for investment properties and single family rentals. For the real estate economy as a whole, this will create upward pressure on prices and values and help sustain the infant recovery. Negative equity will diminish which will speed the decline of foreclosures and short sales, both purchase mortgages and refinancing will become more accessible as values rise and homeownership will become less affordable. For small investors, this will make bargains harder to find but will create a new market for resale and properties they hold will be more likely to appreciate.
      2. A secondary market will fulfill the business plans of well-financed “hedge fund” investors who will buy, manage, and securitize rentals and sell the securities on the new market to generate significant capital for more investments. For the real estate economy as a whole, this will add a major new dimension that will change the seasonality of supply and demand, and diminish the importance of homeownership as the singular driver of demand. For small investors, the success of securitization will encourage even more Wall Street-funded competition and many will find it difficult to continue. Some may essentially become buyers for the larger investors, sniffing out bargains and selling. Yields will shrink. Buying and holding will remain an option for individuals able to spot a deal in their local markets.
      3. The impact of a secondary market on the real estate economy will not be greatest in those markets like Las Vegas or Phoenix where the SFR business is most developed. Rather it will impact high cap markets most, largely in the Midwest.
      4. If the Fitch report sets the standard for ratings, the property management business will change dramatically, and standards of one sort or another will dictate a high level of quality and recordkeeping. For the real estate economy as a whole.
      5. The delay of several years for the fruition of a secondary market implied by the Fitch Report means that it will begin to have its impact on the SFR marketplace at about the same time that the greatest construction of new multi-family capacity in a decade comes fully on line. Though single family and multi-family are different categories, at the local market level they certainly compete for tenants. Will the demand for rental sustain this new capacity? Personally, I have doubts, especially in light of considerable recent research that suggests that the reduction in household formation that’s been driving the rental boom will subside with an improving economy. Homeownership is nowhere near dead. Millions of people renting today would own when confidence is restored in real estate. Even if they stay where they are for now, the odds are good that over capacity will mean rising rens and low vacancy rates can’t be sustained, which changes the long-term equation for small and large investors alike. The small guys are nimble, know their markets best and have options. The large guys have investors who have been sold on a terrific yield on their money and billion dollar business plans built around expectations that may become irrelevant in tomorrow’s real estate market, in which case they’ll find another place to invest and the secondary SFR market will become a blip in history.
      On the other hand, I could be wrong.

      Thanks for your comment.


      • Thanks for the detailed reply. I can see this having huge impacts on local markets that are “hot” and those that are not. If a large firm with thousands of homes in a market were to pull up stakes and move to the next hot market, it could have a immediate affect. Or vice versa when they purchase all the available low end inventory.

        I would love to hear your further insight on future posts. You have a much better grasp on the macroeconomics of this then most of us here.


  2. Chris Clothier

    Steve –

    Another great post on this topic. I cannot stress enough the real long term consequences of securitizing these assets which is a major goal stated by every company that has entered this market to date. I am very glad to hear how serious the ratings agencies are taking the issue, because the big boys with the money are counting on being able to slip right past major scrutiny from the ratings agencies. They are not the least bit concerned about the long-term dynamics of SF rentals and are perfectly happy cutting as many corners as possible to boost the profitability of the fund. Reducing renovation costs, deferring routine maintenance and driving down management costs are ways they plan to boost profits.

    I don’t know if it will slow down funds trying to enter markets, but it will certainly hurt their long-term plans. I will pose one other scenario that might occur if the ratings agencies slow down the securitization plans. A drawn-out process of dumping off the properties (these funds having to hold longer) will drive up costs and drive down performance. There will be a tremendous amount of pressure to get rid of poorly performing assets from the funds to try and improve bottom lines before securitization, which means many of these properties COULD re-enter the market int he next 2-4 years in as bad of shape as they are today. Poor renovation and poor management (which is what you get when you reduce fees) are a dangerous combination which will cause many of these funds to abandon plans to buy more properties in many markets.

    • Chris,

      I would argue that the poorly renovated properties would enter the market in worse shape. Its often harder to redo a poor renovation than doing it right the first time. You bring up some very valid points. I’ll be honest, it bothers me greatly that these houses go beyond arms length, were decisions are based solely on quick profit.

      The only benefit I see is having a bulldog fighting the same fight we are. It could have some positive effect on lobbying and rental laws. I hope this topic very thing catches some national attention. It needs to be discussed in much further detail.


  3. This is certainly one of the better real estate related posts that I’ve come across in awhile that’s not the same ole hum drum.

    I certainly agree with Steve’s statement in the comment above:

    “The large guys have investors who have been sold on a terrific yield on their money and billion dollar business plans built around expectations that may become irrelevant in tomorrow’s real estate market, in which case they’ll find another place to invest and the secondary SFR market will become a blip in history.”

    Last year, I had never seen cash on cash returns so good in the Las Vegas real estate market with so many extremely easy to find. The returns today are dwindling down as prices have been going back up and rents have actually been going down because all of the investors that have purchased and put the homes back on the market as rentals. (Not only have the returns been going down, it’s gotten hard to find something decent to buy.)

    Last year, I was spending the majority of my time trying to pick which one. This year, I’m spending the majority of time just trying to find a good one.

    10%+ cash on cash returns were well worth the risks involved with owning SFR rentals. Today, most of what I’m finding (when I can find something decent) is hitting the 7% cash on cash return. Certainly not bad but nothing as exciting as last year. The excitement of securitizing SFR rentals could eventually also dwindle down for the big guys that are not so nimble as they eventually see what I’m seeing today. (For our market anyways.)

  4. Jeff Brown

    Hey Steve — Excellent as usual. If there’s a lesson here, and you’ve directly and indirectly pointed out a few, this might be it: The almost total lack of any real macro analysis by the so-called big boys — especially long term analysis. I predict most of their funds will make huge profits for insiders, then cause real problems as more pages fly off the calendar. Remember, these guys are, and have been since I can recall, slaves of the quarterly performance report — and that, imo, will be their Achilles Heal.

    To those who might scoff at my claim of little or no macro analysis, especially long term, I point, as did Steve, to their last ‘securitization’ fiasco. Their only real analysis is how much larger their own bank accounts will be, and not 10 years from now, either.

    Those who’ve impressed others with tales of double digit cap rates in ‘great’ blue collar areas, and worse, will rue the day they chose to fly against quality, quality, quality, which is the Father of its favorite child, location, location, location. In the end, the physics of investment economics will not be mocked.

    Again, Steve, stellar info, and thanks.

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