Despite the buzz about the REO-to-rental market over the past year, there is still no clear indication of the role securitization can play in the permanent financing of repossessed single-family homes for conversion into rental properties.

One of the big challenges is that using mortgage liens as collateral would be prohibitively costly in a deal backed by large numbers of low-value properties. So market players are looking instead to use equity pledges in the vehicle that owns the properties as collateral. This creates another set of problems, however. If the sponsor went bankrupt, investors in the securitization would have to compete with other creditors. Having an unsecured claim on the properties would also expose investors to the risk that the property owners could incur additional liens. And it would leave these investors unprotected in the event of an unauthorized sale of properties.

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