NEW YORK CITY—Fitch Ratings will ratesingle-borrower single-family rental transactionsas high as A, but no higher, the ratings agency said last week. Itcited elevated cash flow leverage, refinance risk and dependence onproperty liquidation for debt repayment as key factors.

“Presale reports for recent SFR transactions justify elevatedleverage with current property values and the likelihood ofrepayment through the foreclosure and sale of the properties,particularly to owner occupants,” according to Fitch. “In our view,this line of thinking may persuade market participants tomaterially underestimate maturity default risk and the issuers'ability to refinance.”

Unlike traditional RMBS loans, Fitch notes, SFR transactions donot fully amortize, which exposes issuers to term as well asmaturity risk. Although term default risk is mitigated by thecurrently low interest rates and interest rate caps, loans withballoon payments will default at maturity if not refinanced. Inorder to refinance, secured lenders expect property cash flow tocover expected principal and interest payments.