Moody’s Investors Service just flagged a risk in bonds backed by single-family rentals: there aren’t enough special servicers.

Right now, the field is limited to two players: Midland Loan Services and Situs Holdings.

A special servicer steps in to administer a loan when a transaction is in trouble.

In a report published today, the agency warned that if this market keeps growing from the 22 securitizations currently outstanding and then, down the road, a number of single-family operators default in a downturn, then Midland and Situs could be overwhelmed.

Moody’s still believes that the two, which have experience dealing with commercial mortgage-backed securities (CMBS), are capable of handling widespread defaults among the deals currently outstanding.

It’s further issuance that could spell trouble.   

And the agency doesn’t seem to expect additional special servicers to enter this sector; the report notes that current fees aren't particularly attractive. Also, servicers that already have exposure to commercial mortgage securitizations might be reticent to take on SFR deals, since downturns in these markets could easily coincide.

In a scenario of more deals and only two special servicers, “if many transactions were to default at the same time, special servicers could have difficulty getting the highest possible recoveries on the defaulted loans, partly due to the high volume of homes backing the loans,” Moody’s said.

It’s not only the special servicing in SFR deals that are concentrated.

The agency said Midland is the master servicer on “nearly” every outstanding transaction. But Moody’s sees this as a less of risk, since master servicing doesn’t require as tailored and intensive approach as does special servicing.

Midland and Situs have evenly split the market between them, with each on 11 deals.

A special servicer takes over the administration of a loan when it is either going to default or has already defaulted. It then seeks to obtain the maximum recovery through any number of approaches. 

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