Secondary Market Limitations for SFR Loans

WASHINGTON, DC–Invitation Homes. Progress Residential. Tricon American Homes. Starwood Waypoint Homes. Colony American Finance. These are the institutional investors that are active in the single family rental (SFR) home market. Their names are recognizable and their deals are big. These and other large institutional investors have spent $16 billion in purchases from 2012-2014 with an additional $3 billion in renovations, according to a white paper from Freddie Mac.

A casual observer of the single family rental home market, therefore might be surprised to learn that the secondary market for SFR loans is fairly limited for the largest segment of players in this space, which is, incidentally, not the institutional investors. Instead it is the very small investors that are easily the largest single participant in the market space, Freddie Mac says. And their limited secondary market loan options could hamper the growth of this asset class.

The Growth of the SFR Market

Institutional participants make up only a small percentage (1%) of the total SFR market, and have only recently begun acquiring and operating portfolios of homes. The SFR market, for its part, has been a long-standing asset class and a significant component of affordable housing. In the last ten years, since the Great Recession, it has been expanding.

Pre-recession data, from 1985-2005, shows that SFRs have consistently made up 10-12 million units or 30-35% of the renter market share, according to Freddie Mac.

Since the Great Recession, this sector has been the fastest growing segment of rental occupied households, adding 4 million rental homes, which is an increase of 35% over the past 10 years, according to 2016 American Community Survey (ACS) data cited by the GSE. The large institutional investors did not enter the market until 2012 and have only accounted for 1-2% of the total share of purchases through 2014.

SFR Lending and Capital Markets

Not surprisingly the funding for acquisitions varies by the type of owner. The larger the owner type, the less likely they are to finance their purchases with individual mortgages, Freddie Mac writes.

Institutional investors often get funds in advance of purchase from private equity, bank lines of credit or public bonds, and generally purchase the homes for cash. When they have amassed a sufficient portfolio, they issue bonds backed by homes in their portfolio.

Since November 2013, 48 rated single-sponsor/borrower deals have been settled for a total debt of $29 billion. The two largest borrower/sponsors are Invitation Homes (13 transactions for $11.4 billion) and Progress Residential (11 transactions for $5.9 billion), and comprise half of the total number of transactions.

While institutional investors have ready access to capital, this does not appear to be the case for middle-tier investors as a whole, especially when it comes to capital markets executions, Freddie Mac writes. Less than 10% of SFRs owned by middle-tier investors and nearly 20% of SFRs owned by small investors were purchased with mortgage financing, while the rest were purchased with other sources of funds.

Despite the lack of a scalable secondary market for middle-tier investors, there have been a small number of rated multi sponsor/borrower securitizations that have settled since 2013, though this does not represent a mature market, Freddie Mac reports. Two lenders have been active in this space — CoreVest (formerly Colony American Finance) and B2R Finance — and they have sponsored nine of the 11 total transactions of this variety. These 11 transactions total $2.4 billion.

Options for this group were further limited when Freddie Mac’s SFR pilot project was not extended for 2019. In January 2017, Freddie Mac received approval from FHFA to develop and execute an SFR pilot that allowed the GSE to purchase and/or guarantee and securitize loans on SFRs — “essentially, to develop from the ground up and test a new secondary market deliberately focused on SFRs affordable to households making 80 percent of AMI or below,” Freddie Mac wrote.