The risk that the failure to refinance a loan collateralizing a single-family rental (SFR) securitization would cascade into a “widespread” decline in property prices is low, according to Moody’s Investors Service.
Critics of single-family rental securitizations have argued that the institutional investors behind these deals leave local rental markets exposed to sudden and severe price declines, if, for instance, they decide to sell their properties en masse.
Moody’s said in a report that the inability to refinance a loan backing an SFR deal would not lead to a price spiral for two key reasons.
One is that the properties behind SFR deals add up to only a small share of the total homes in any market, minimizing potentially wider impact. The other reason is that homes would be unlikely to get dumped on the market all at once. “The transactions’ special servicer would explore options to maximize revenue from the properties before the bonds mature,” Moody’s said.
Some risks remain however.
The agency pointed out that more issuance of SFR deals could raise the share of a market’s housing stock that is contained in securitized rental portfolios — increasing the market’s vulnerability to sales of those rentals. Also, a sponsor could simultaneously fail to refinance its loan and need to sell its unsecuritized properties.
The wider housing market might not suffer from the failure to refinance a loan in an SFR deal, but the transaction itself could feel pain from a disruption in short-term cash flows.
In addition, while contained, priced drops could still eat into the recoveries on sales of the securitized portfolio.
The rental properties in SFR deals remain a relatively small percentage of local housing markets. Among the 10 largest SFR markets, no single SFR operator/sponsor has more than 3.6% of that market’s annual sold properties in a securitized portfolio. The table below shows that the major market with the highest share of securitized properties — of all sponsors — is Atlanta-Sandy Springs-Marietta, with a figure of 8.2%.