The fourth securitization deal of big investor-owned single-family homes for rent is here.
Is this just another Wall Street gamble that will wreck the economy again, or is this time different?
You be the judge.
I'll tell you where I stand….
It's Already Begun
After buying more than 200,000 single-family foreclosed homes resulting from the mortgage meltdown, institutional investors are now spreading their risk through the system.
They're selling the risk of owning inventoried homes through securities with pools of underlying rental properties as collateral… to the same institutional buyers, who in their previous desperate hunt for yield, are back for more.
In the fourth deal of its kind, Blackstone Group L.P.'s (NYSE: BX) subsidiary Invitation Homes will close on almost a billion dollars' worth of real estate owned (REO)-to-rental credit-enhanced structured securities on May 30th.
Last year in November 2013, Blackstone's Invitation Homes packaged up 3,207 of the more than 40,000 single-family homes it purchased for $7.5 billion since late 2011. The first-ever REO-to-rental securitization raised $479 million and was six times oversubscribed.
After Blackstone's successful issuance of securities, two other industry leaders in the REO-to-rental market, Colony Capital's subsidiary Colony American Homes and publicly owned American Homes 4 Rent, followed suit.
The latest deal, with an issuance of $993 million of securities, is the second deal from Invitation Homes and the biggest to date.
Keefe Bruyette & Woods, an institutionally oriented broker-dealer and full-service investment bank, estimates that REO-to-rental securitizations could grow to $900 billion to $1.5 trillion. The bank says their issuance estimates assume 15% of purchases by institutional investors, with just 35% of their inventoried homes going to market.
All four deals are constructed similarly, and all have substantial portions of securities rated top-notch by three major rating agencies.
Bonds Collateralized on Thin Air and Opinion
Let's look at Invitation Homes' first template deal, Invitation Homes 2013 SFR1, to see if anything's different this time.
Invitation Homes structured the deal by getting a non-recourse first-lien floating-rate mortgage loan on the underlying 3,207 rental homes from German American Capital Corporation. German American is a "significant subsidiary" of Deutsche Bank AG, the bank behind Invitation Homes' deals. The mortgage loan gets funded from the proceeds of sale of the securitization certificates.
The certificates represent six different "tranches" that make up the structured deal. The deal is "structured" to provide "credit enhancements" to various tranches up the ladder. Essentially, in structured deals the credit enhancements desired are nothing more than better ratings.
Better ratings on laddered tranches, all the way up to top-notch "AAA," result from redirecting cash flows and principal prepayments and losses in a manner that it is theoretically supportive of a "AAA" bond.
If you think you've heard that before, you're right. Structuring was behind more than $2 trillion in losses suffered by the world's largest financial institutions during the credit crisis and mortgage-backed securities meltdown.
Invitation Homes 2013 SFR1 was issued last November. At the time, according to raters of the deal, the company was borrowing more than the relative value of the underlying collateral homes than any recent vintage residential mortgage-backed securities deals. Their "cushion" was "smaller than apartment complex" deals that had come to market.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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