Coronavirus related stressors could increase the number of securitized, delinquent and vacant single-family rental (SFR) property loans, and reduce rental property values in the near term, hampering borrowers’ ability to pay their promissory note obligations, industry observers found recently.
The delinquency rate for many residential, mortgage-backed security (RMBS) asset classes “may remain at higher levels in the coming months… some meaningfully,” due to the coronavirus related economic contraction, unemployment and income reductions, according to DBRS Morningstar said in its December 2021, "Single-Family Rental Research."
Delinquency risks
DBRS based its coronavirus stress baseline for the SFR asset class on data through October 31, 2021. Insufficient cash flow from rents and other SFR tenant fees paid by SFR tenants, could, in turn, hamper the ability of property owners to make monthly interest payments. They could also struggle to refinance or sell the properties profitably enough to repay the principal of a promissory note (or loan) at maturity, analysts wrote.
Nontraditional Where SFR differs from traditional RMBS
Unlike traditional RMBS debt, which is linked to a pool of home loans, SFR securitization certificates are loan obligations secured by income producing properties owned by one or several SFR investors.
Single-borrower SFR securitization deals collateralized by a single loan, to a single commercial borrower, are secured by single-family residential properties.
Multi-borrower SFR deals are collateralized by conduit-style pools of loans made to small and midsize investors. These financings are, secured by single-family residential properties, and a small portion of mixed-use and small commercial properties.
Single-borrower SFR performance improves
The October 2021 SFR Performance Summary, which rated 37 single-borrower deals with close to 123,000 properties, found the average delinquency rate on single-borrower transactions decreased to 5.3% in September from 5.5% in August – despite increasing four times in the past 17 months, “to the some of the highest levels ever observed.”
Lease expirations fell to 5.2% in September from 7.0% in August. The rent growth for vacant-to-occupied properties, fell to 16.7% in August, (the most recent data available), from 16.9% in July, the most recent data available. In September, the average vacancy rate was 3% down from 3.1% in August, and the average retention rate for expiring leases increased to 86.6%, from 85.7% in July.
Multi-borrower SFR challenges
As the pandemic wears on, its effects had a greater impact in rent collections on loans backing multi-borrower SFRs than single-borrower SFR transactions. Average 60+ day delinquencies by balance, including foreclosure and real estate owned (REO), increased to 4.12% in September from 4.09% in August, but remain high compared with 2.8% in April 2020.
Challenges include borrower default risk inherent in the interest-only (IO), amortizing balloon, and non-amortizing balloon mortgage loans that typically are included in trusts. Borrower defaults often occur on the final, and usually much larger, balloon payment of a loan’s maturity date, DBRS said. Performance data show borrowers may address this shortfall by refinancing these types of the loans or selling troubled properties to raise the funds they need to make balloon payments.
In September 30-day delinquencies by balance increased to 0.55% from 0.07% in August. By October, the total number of multi-borrower loans fell to 815 from 837 in September, of which nine were 30 to 59 days delinquent, up from three loans. Yet realized loss as a percentage of original balance is less than 1% in all the transactions, DBRS said.
Additionally, SFR securitizations issued in 2018 or later may be more at risk from potential rating volatility, because the transactions are not seasoned enough and lack adequate home price appreciation.
At least DBRS' Single-borrower SFR data bear out the optimism expressed by some buy-side professionals, however. The share of residential home purchases increased to 16% in Q3 from about 11% a year ago, “mostly for the purpose of converting the homes into rental units,” one such professional said.
“As we enter 2022 vacancy rates are low, asking rents are showing significant growth, and property values have appreciated between 18%-20% on a year-over-year basis,” he said. “Demand should continue to outpace supply, which bodes well for SFR property owners.”
