New mortgage security blends residential and commercial

There's a new kid on the block.

Institutional investors are getting exposure to a new type of residential security, one that securitizes bundles of loans for the large portfolios of single-family homes big managers bought as rental properties after the financial crisis.

These new offerings are a combination of residential mortgage-backed securities and commercial MBS, said Brian Grow, managing director, RMBS, at Morningstar Credit Ratings LLC, New York, the rating agency subsidiary of Morningstar Inc.

It's a small but growing market. The bonds secure the rental cash flow. Morningstar Credit Ratings has rated all of the single-family rental securities — 28 bonds with total issuance of $14.29 billion. Morningstar analyzes them differently from RMBS, in that they are rated based on whether the total rents collected exceed the mortgages, Mr. Grow said.

After the housing market collapsed in 2008, large managers like Blackstone Group, and others, started buying foreclosed homes, renovating them and renting them out.

Some of these single-family home portfolios have been spun out into real estate investment trusts. The largest REIT of this kind, American Homes 4 Rent, has done $2.5 billion of securitizations, said Dave Bragg, managing director of Green Street Advisors LLC, a Newport Beach, Calif.-based real estate research firm.

MatlinPatterson Global Advisers LLC does not have a large investment in these securities, but it is a small market, said Marc Rosenthal, co-portfolio manager and co-head of the New York-based hedge fund firm's securitized credit team.

The move by Blackstone and other money managers to buy single-family homes to rent “was a huge savior for the subprime residential market in 2012 to 2013,” Mr. Rosenthal said.

“Those investors bought property with cash and were able to get the (portfolio of single-family homes) cash flowing, and now they are securitizing the rental cash flows,” he noted.

Another small but growing market that for some managers is serving as an RMBS proxy is credit risk transfers.

The Federal Housing Finance Agency started the program in 2012 to reduce Fannie Mae and Freddie Mac's overall risk. Fannie Mae and Freddie Mac have been selling off the riskiest slices of the single-family mortgages in their portfolios creating this small — $25 billion — but growing securities market, explained Noah Funderburk, senior vice president and portfolio manager in the Durham, N.C., office of money manager Amundi Smith Breeden. He specializes in residential credit securities.

“Payments are made by Fannie Mae and Freddie Mac to emulate the economics of RMBS without interfering with the agency mortgage-backed securities market,” Mr. Funderburk said.

Babson Capital Management LLC also has looked at credit risk transfers as part of its asset-backed portfolios.

“With regards to credit risk transfer deals, we don't view spreads in this market as unattractive in their own right, but we are finding better relative value in other securitized products,” said Douglas M. Trevallion II, managing director and co-head of securitized products group at Babson Capital in the Springfield, Mass. office.