By the Numbers
SFR losses confined to multi-borrower deals
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Home price appreciation and rent growth are both beginning to weaken, with some areas printing modest declines as mortgage rates rise. Single-family rental spreads have followed the market wider, but only multi-borrower deals show any deterioration in performance so far. Losses have been trickling in for some multi-borrower deals, though they remain well below 1%. Over time, losses should grow modestly as several deals have properties in foreclosure and most deals have loans currently in special servicing.
To date, CoreVest has been the only issuer of single-family rental (SFR) securities with multiple loans, where each loan is typically backed by a different borrower. The borrowers tend to be small to mid-sized SFR operators who are not large enough to either tap the securitization market or raise money from private investors directly. The financial strength of the borrowers overall tends to be somewhat weaker than that of the institutional SFR operators, and the quality of the collateral is much more diverse. The credit risk in these deals is higher than in single-borrower, single loan deals, and the lower-rated classes tend to price wider when they come to market (Exhibit 1).
Exhibit 1: Single-family rental class D (‘BBB’) spreads at pricing
Note: Fixed-rate deals only. CoreVest (CAFL) deals are multi-borrower and tend to come to market and trade wide of single-borrower deals.
Source: Bloomberg, Amherst Pierpont Securities
Despite the somewhat lower credit quality and the stress endured by landlords generally during the pandemic, CoreVest deals have taken quite modest cumulative losses to date. Across the 17 CoreVest deals issued to date, a handful of loans in 14 of the deals are currently in special servicing and in some stage of default (Exhibit 2). CAFL 2018-2 has turned in the worst performance so far. This deal has 121 loans at origination covering about 2,300 properties with an average appraisal value of $118,000. The collateral includes manufactured homes, attached and detached single-family homes, and some small multifamily buildings. To date the deal has accumulated 53 bp of losses, 1.59% of the original collateral is currently in foreclosure, and another few loans are in special servicing but current.
Exhibit 2: Performance of CoreVest single-family rental deals
Note: The 2015 and 2016 deals are no longer outstanding.
Source: Bloomberg, Amherst Pierpont Securities
Loss severities on multifamily properties historically average about 40%. Suppose all of the collateral currently in foreclosure has that loss rate. The additional cumulative losses as a percent of the original deal balance would be:
1.59% collateral * 40% loss severity = 0.64% of additional losses
This would result in total losses to the deal of:
0.53% current losses + 0.64% projected losses = 1.17% projected total losses
That’s still less than the most subordinated H class, which has zero credit support and is currently 3.86% of the deal. The loans in the 2015 through the first 2020 deals were all originated prior to the pandemic, and likely benefitted from the exceptional price appreciation of single-family and multifamily properties. Arguably that could contribute to lower loss severities for properties that are in workout.
The multifamily and single-family residential markets have begun to experience downward pressure on prices and rents. That will likely increase as mortgage rates rise. One beneficiary of the steep drop in housing affordability are rentals. This is likely to be persistent as the demand for rentals could increase if the economy weakens next year. Investors should stay overweight single-family rentals, including the riskier multi-borrower space down to ‘BBB’ classes, where yields are now above 8% for some paper and credit quality overall is still quite strong.
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