Moody’s Investors Service said today that the lens for assessing credit risk in single-family rental securitizations (SFRs) backed by loans to multiple borrowers will be different than the one used for SFRs backed by loans to single borrowers.
The market has already seen three deals in the latter category, with the most recent pricing today from American Homes 4 Rent.
In a report, Moody’s focused in particular on how it would look at SFRs securitizing small loans to many borrowers because these entail credit concerns that would be the most different from single-borrower SFRs.
In the agency’s view multi-borrower SFRs are “likely to exhibit less default volatility, potentially lower recoveries, and more operational risk because of the larger number of borrowers represented in the transaction and the variability of their business practices.”
Performing a credit assessment of multi-borrower SFRs could be complicated by a lack of standardization in property maintenance and in reporting practices among borrowers.
In a nod to a related asset class, Moody’s said that legal and structural protections that are present in CMBS conduit securitizations could be employed to mitigate operational risk in multi-borrower SFRs. One is a strong framework of reps and warranties for loans, which add comfort to investors by claiming that no document in a deal contains false statements and defining recourse for investors if a reported characteristic of a transaction is actually not true.
Default volatility will generally be lower for multi-borrower SFRs than single-borrower SFRs — the volatility can be particularly low in the former if there’s broad geographic diversity among the borrowers.
In a multi-borrower SFR “analysis of a pool with many small borrowers will relay more on an assessment of the lender’s underwriting criteria and how it conducts its business, and less so on assessments of the individual loans,” Moody's said.
The agency's analysts believe higher complexity of multi-borrower vs. single-borrower SFRs would make the former more difficult to assess for credit risk.