American Homes 4 Rent, which went public in August, has tapped JPMorgan Chase, Goldman Sachs and Wells Fargo as its bankers for a debt deal that is expected to be sold by the end of the first quarter, these people said.
While this securitization market is still in its infancy, a recent Wall Street estimate put potential financing opportunities for the single-family rental industry as high as $1.5 trillion. Already some members of Congress and economists are worried about another credit bubble.
“The investment and lending opportunities are immense and perhaps just beginning,” Jade Rahmani, a real estate analyst with Keefe, Bruyette Woods, wrote in a recent report.
In just the last two years, large investors have bought as many as 200,000 single-family houses and are now renting them out, according to the K.B.W. report.
The private equity giant Blackstone Group sold the first single-family rental securitization of its kind last fall, a $479 million bond, attracting six times as many investors as the private equity firm could accept, a person involved in the deal said.
Investors like mutual funds and insurance companies bought slices of the bond, which are backed by the rental homes owned by Blackstone’s company, Invitation Homes.
The rental business is still dominated by landlords who own and manage only a handful of properties. Wall Street has found a way to finance them, too. Cerberus Capital Management and Blackstone have started businesses that lend to small-time and medium-size investors.
And there are discussions about bundling many of these small loans and securitizing them also.
“That’s the part of the business that will take off,” said Stephen D. Blevit, a lawyer at Sidley Austin. “Providing cheap financing to mom-and-pop investors who save their pennies, buy a few properties and do all the maintenance themselves.”
What the new securitization boom will mean for homeowners and renters is less clear.
Wall Street may be clamoring to lend to investors in single-family homes, but it is still difficult for millions of Americans to qualify for a mortgage. The easy financing could give investors the upper hand in bidding for homes on the market.
(Read more: From ashes of housing crisis, a new type of bond)
Representative Mark Takano, Democrat of California, whose district includes the Inland Empire just east of Los Angeles, which was hit by a tidal wave of foreclosures, has asked the House Financial Services Committee to hold hearings on the impact that single-family rental bonds could have on the housing market.
“Proper oversight of new financial innovation is key to ensuring we don’t go down the same road of the unchecked mortgage-backed security and create an unsustainable bubble that will wreak havoc when it bursts,” Mr. Takano said in a letter to the committee last week.
Securitization, however, could provide a pick-me-up to Wall Street’s mortgage machine, a once-mighty profit engine that has never fully recovered from the financial crisis. Bankers estimate that single family-rental bond deals could total as much as $7 billion this year and eventually grow to about $20 billion a year.
For landlords like American Homes 4 Rent, securitizing debt would provide them with more leverage to buy more homes. It would also increase their profits by lowering their borrowing costs.
With securitization, landlords could in theory put as little as 25 percent of equity into their properties, while borrowing the rest. Credit lines from banks typically require 40 percent equity.
Last month, economists at the Federal Reserve warned that if large landlords took on too much debt, they might feel pressure to hold fire sales of their properties, flooding the housing market with supply.
“Financial stability concerns may become more significant should debt financing become more prevalent or if the share of homes owned by investors in certain markets rises significantly further,” the Fed economists wrote.
They added that it was important to monitor the emergence of single-family rental securitization for signs that it could destabilize “financial markets.”
For now, though, companies like American Homes 4 Rent are earning their early investors big profits. Many tenants used to own the houses they are now renting from the company, said a person with knowledge of the matter.
A spokesman for the company, which owns 21,000 homes, did not return calls requesting comment.
Article source: http://www.cnbc.com/id/101376344