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CRE Finance World, Autumn 2013

Second, securitized SFR has a distinct first mover disadvantage as discussed below. The Exit There is currently no long-term established private or public lender market that would provide a means by which a SFR loan could refinance through securitization. This may create a situation in which issuers look to pay down of the bonds through other means such as a REIT offering, portfolio sale or individual sale of the assets. Since, there is no precedent through which rating agencies would be able to quantify refinance probability of default for securitized SFR loans, this concern would need to be addressed in the structure of the securitized pool. It is possible that a securitization could have structure in place that may rely on a transfer of the assets to a special servicer who would perform an orderly liquidation of the portfolio at maturity. However, a distressed sale of SFR assets would be tricky as there is a real risk of flooding particular markets with supply. As such, DBRS would expect value recovery results to be less than that of residential NPL collateral. Alternatively the portfolio may also be structured in a way that it does not need to experience a forced sale of the assets upon maturity but instead maintains them as performing assets with a replacement operator and fast-pay amortization. This type of structure would need to rely on finding a replacement operator who could swiftly take over the operation of the assets, collect rents, and perform leasing and all of the required maintenance. Given the sophistication of the management information systems necessary, the network of knowledgeable local operators required, the specialized central control needed to take advantage of the economies of scale, and the sensitivity of property level performance to management expertise; DBRS believes it would be problematic to switch operators. At the present time, there may not be enough third-party managers in the business to swiftly take on thousands of nationally diversified homes in a timely manner that would ensure no missed payments to bondholders. As such, the success of an SFR securitization may be as much tied to the quality of the operator as the real estate itself. CRE Finance World Autumn 2013 48 Conclusion Many companies have made a business out of buying REO homes unlevered, fixing them up and renting them. This has helped to reduce the inventory of properties that were flooding the market and allowed certain communities to avoid urban blight. Furthermore, investors have been able to make a profit by renting the house or, if that was not a viable option, selling the property at an attractive yield. Often, if the basis in the properties is low enough, one could say that a failed rental is still attractive with less downside because you could just sell it. However, as prices rise the opportunity for new acquisitions should wane because, with leverage, rents will likely not support the cash returns that the sector is expecting and the asset appreciation may not be as dramatic in the future. Until now, this space has not been able to support the expense that comes with securitization, the cost of issuance and cost of debt. That may be for good reason. DBRS cannot be sure that securitization opportunities that are being contemplated today will be a viable option in the future for this asset class if they face a balloon refinance payment, or other traditional lenders emerge in this space. Portfolios that would need to rely on value appreciation in order to be economical, depend on a public offering, or future re-securitization in order to be profitable, would have risks that are challenging to quantify. Having said that, the proposed SFR securitizations are (in a broad sense) likely to be more stable than a typical Residential Non-Performing Loan transaction. Additionally, with the upfront cash investment in the properties, buyers can safely assume that the deferred maintenance that was present from the purchase has been remedied. However, there are still some concerns that the properties may be located in markets that are highly susceptible to NPL activity and therefore there may be additional value impacts when calculating subordination levels in a securitization. As a result, DBRS expects the first few SFR transactions to be viewed conservatively by the market and, if ultimately rated, that the ratings will reflect the lack of imperial data and the products uncertainties discussed in this report. 1 General Housing Data — All Housing Units (NATIONAL) more information 2011 American Housing Survey 2 General Housing Data — All Housing Units (NATIONAL) more information 2011 American Housing Survey 3 http://www.realestateconsulting.com/blog/wayne-yamano/homeownership fall-8 Single-Family Rental Securitization


CRE Finance World, Autumn 2013
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