Magazine article Mortgage Banking

Reo-to-Rental Securitizations: Behind the Scenes of a New Asset Class

Magazine article Mortgage Banking

Reo-to-Rental Securitizations: Behind the Scenes of a New Asset Class

Article excerpt

THE REAL ESTATE-OWNED (REO)-TO-RENTAL SPACE has now proven to be more than a trend or another trade, and become more of an entirely new asset class. Following the $479 million Invitation Homes issuance, the REO-to-rental securitization market, while still extremely young, has continued to expand with growing interest from aggregators and lenders.

In speaking with ratings agencies and both the issuers of the securitizations of bonds and their buyers, one significant concern is that property management companies are simply not used to the structure or rigors associated with these bonds.

While this new asset class indicates exciting times for investors and the industry as a whole, it requires a higher level of security to ensure all parties operate within specified guidelines and that investment returns are optimized. However, with the right infrastructure and third-party oversight, or surveillance expertise in place to provide that supervision, this market can continue on a successful path and sustain a positive economic impact.

REO-to-rental: A long-term strategy

Some industry professionals have continued to ask the question: Is the REO-to-rental securitization market a trade or a business! It is a question that could not be answered with certainty for at least a year. While still in its infancy, it is evident now that this market is here to stay.

The strong, steady increase in the model of purchasing, repairing and renting assets has become and will remain a long-term strategy as opposed to the practice of house flipping. REO-to-rental as an enduring business is very achievable, and it is apparent that more companies are aligning with this sentiment-many are devoting billions of dollars and developing the infrastructure to support it. These are resources and efforts that undoubtedly would never be spent for a trade.

As the REO-to-rental market continues to garner industry interest, there is a clear lack of surveillance services, primarily due to the fact that this is a completely new asset class with different requirements. For many years it was local investors purchasing and renting assets; they typically lived in the area and saw this as a good investment vehicle. Today marks the first time in history that national institutional investors are using single-family homes as a long-term rental investment.

Previously there had not been a need for this level of surveillance; local investors would manage 30 properties, for instance, themselves--they knew where they were located in the area and would drive by almost daily. However, today's institutional investors are holding thousands of assets and operate more similarly to a commercial enterprise, and they need a way to track their properties accurately but also economically.

A new level of oversight

Institutional investors are largely aligning with partners to deliver proper oversight for their properties, as there is virtually no cost-effective method to accomplish this on their own. There are the typical surveillance responsibilities--overseeing real estate agents, aggregating data, monitoring funds transferred in and going out, and reporting on the end balance. However, today's REO-to-rental secunrization market requires a much greater level of surveillance.

Aggregators' biggest concern is that investors often use up to 30 separate property management companies, resulting in multiple systems sending data instead of having one repository to normalize data and run reports. …

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