WASHINGTON, DC–At the start of the year, what will likely be the largest REIT initial public offering for 2017 came to market: the $1.8-billion Invitation Homes, a lessor of single-family homes backed by Blackstone Group.

The wow factor about the size of the IPO — this is the second largest REIT IPO to date — was quickly replaced by even more startling news. As part of the transaction Fannie Mae backed a 10-year, interest-only $1 billion loan originated by Wells Fargo.

There were questions and a bit of outrage as well. The GSE's mission is to support affordable housing — 'how does backing a loan to a private equity company accomplish that?' asked some Congresspeople of the Federal Housing Finance Agency.

To be sure, Fannie Mae and the FHFA defended the deal; indeed there is talk that the regulator wants Fannie and Freddie Mac to experiment with some more transactions.

No Regrets

But leaving aside the questions of mission appropriateness, to which we will return, a larger question looms: does Fannie Mae regret the transaction from a bottom line perspective?

A recent report from the Urban Institute's Housing Finance Policy Center report, “GSE Financing of Single-Family Rentals: What Have We Learned from the Invitation Homes Deal?” suggests no.

The report, co-authored by Center Co-director Laurie Goodman and Research Associate Karan Kaul, lays out data that looks very promising for future GSE participation in such transactions.

Don't Jump To Conclusions

That said, Kaul cautions it is important not to jump to conclusions.

“What Fannie Mae did with this deal was to carefully attempt to stick its toe in this market and see what it is all about,” he tells GlobeSt.com.

It wanted to see firsthand what the data was on single-family home rental properties and to get comfortable with this asset class, he says. “It's still an open question whether Fannie Mae, or Freddie Mac, will provide financing for future transactions. A lot depends on their regulator as well.”

Kaul also noted that single-family rentals are a small percentage of the overall rental market — but it is a high growth one. [see chart #1].

Ultimately, it could make sense for the GSEs to become involved in single-family rental securitizations and financing, Kaul says.

Why Invitation Homes?

Goodman and Kaul made a convincing case why Fannie Mae was right to experiment with the Invitation Homes IPO.

“Doing this pilot allowed Fannie to venture into the single-family rental space with minimal risk, identify potential issues, and work through them,” they wrote. “This is also why this deal could not have been done on a purchase property.”

Another reason — and this one is key given that the FHFA is still in exploratory mode about this asset class — is that partnering with one of the largest single-family rental operators gave Fannie Mae access to a rich data set on the underlying properties.

Less Risk

The analysis by the Urban Institute found that Fannie Mae assumed less risk with this deal than a typical multifamily transaction because of lower loan-to-value ratio, enhanced risk sharing, and a higher than average debt service coverage ratio.

According to the report:

The aggregate value of properties collateralizing this debt is $1.683 billion, as measured by broker price opinion. The notes guaranteed by Fannie Mae represent 56.7 percent of the properties' value. The total loan amount, which includes the 5 percent first-loss piece, is 60 percent of the collateral value. This is considerably lower than a typical Fannie multifamily deal. Fannie Mae's latest 10-K indicates the origination loan-to-value ratio of Fannie's multifamily book of business averages about 67 percent.

In addition to the 5 percent first-loss piece, Fannie Mae's guarantee of the top 95 percent is reinsured under a loss-sharing arrangement with Wells Fargo. Although the precise arrangement is not public, Fannie Mae's Delegated Underwriting and Servicing-approved multifamily lenders (of which Wells Fargo is one) are typically required to share one-third of the loss while Fannie absorbs the remaining two-thirds on a pari-passu basis. The requirement that the sponsor also take the 5 percent first-loss piece is not typical.

The debt service coverage ratio for this deal is 1.35 on a fully amortizing basis. Even though this is an interest-only loan, the debt service coverage ratio has been underwritten on the basis of a 30-year amortizing loan. This underwriting is conservative.

Less Affordable

This is not to say the transaction eventually passed muster with its critics. The report also found that it was less affordable than Fannie Mae's other transactions, undercutting the argument that this financing supports the GSE's affordability mission. [see chart #2].

It found that 66.7% of the 7,204 properties in the transaction are affordable to renters earning 100% of the area median income or less — far less than the 80 to 90% for recent Fannie Mae multifamily acquisitions.

Again, though no regrets on Fannie's part — at least per the Urban Institute report. As it concluded:

….this transaction opens the door for programs to finance the middle sector — properties with 10 to 1,000 units — which have a dearth of financing opportunities. Some of these participants will be nonprofits.

Chart #1

Chart #2

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WASHINGTON, DC–At the start of the year, what will likely be the largest REIT initial public offering for 2017 came to market: the $1.8-billion Invitation Homes, a lessor of single-family homes backed by Blackstone Group.

The wow factor about the size of the IPO — this is the second largest REIT IPO to date — was quickly replaced by even more startling news. As part of the transaction Fannie Mae backed a 10-year, interest-only $1 billion loan originated by Wells Fargo.

There were questions and a bit of outrage as well. The GSE's mission is to support affordable housing — 'how does backing a loan to a private equity company accomplish that?' asked some Congresspeople of the Federal Housing Finance Agency.

To be sure, Fannie Mae and the FHFA defended the deal; indeed there is talk that the regulator wants Fannie and Freddie Mac to experiment with some more transactions.

No Regrets

But leaving aside the questions of mission appropriateness, to which we will return, a larger question looms: does Fannie Mae regret the transaction from a bottom line perspective?

A recent report from the Urban Institute's Housing Finance Policy Center report, “GSE Financing of Single-Family Rentals: What Have We Learned from the Invitation Homes Deal?” suggests no.

The report, co-authored by Center Co-director Laurie Goodman and Research Associate Karan Kaul, lays out data that looks very promising for future GSE participation in such transactions.

Don't Jump To Conclusions

That said, Kaul cautions it is important not to jump to conclusions.

“What Fannie Mae did with this deal was to carefully attempt to stick its toe in this market and see what it is all about,” he tells GlobeSt.com.

It wanted to see firsthand what the data was on single-family home rental properties and to get comfortable with this asset class, he says. “It's still an open question whether Fannie Mae, or Freddie Mac, will provide financing for future transactions. A lot depends on their regulator as well.”

Kaul also noted that single-family rentals are a small percentage of the overall rental market — but it is a high growth one. [see chart #1].

Ultimately, it could make sense for the GSEs to become involved in single-family rental securitizations and financing, Kaul says.

Why Invitation Homes?

Goodman and Kaul made a convincing case why Fannie Mae was right to experiment with the Invitation Homes IPO.

“Doing this pilot allowed Fannie to venture into the single-family rental space with minimal risk, identify potential issues, and work through them,” they wrote. “This is also why this deal could not have been done on a purchase property.”

Another reason — and this one is key given that the FHFA is still in exploratory mode about this asset class — is that partnering with one of the largest single-family rental operators gave Fannie Mae access to a rich data set on the underlying properties.

Less Risk

The analysis by the Urban Institute found that Fannie Mae assumed less risk with this deal than a typical multifamily transaction because of lower loan-to-value ratio, enhanced risk sharing, and a higher than average debt service coverage ratio.

According to the report:

The aggregate value of properties collateralizing this debt is $1.683 billion, as measured by broker price opinion. The notes guaranteed by Fannie Mae represent 56.7 percent of the properties' value. The total loan amount, which includes the 5 percent first-loss piece, is 60 percent of the collateral value. This is considerably lower than a typical Fannie multifamily deal. Fannie Mae's latest 10-K indicates the origination loan-to-value ratio of Fannie's multifamily book of business averages about 67 percent.

In addition to the 5 percent first-loss piece, Fannie Mae's guarantee of the top 95 percent is reinsured under a loss-sharing arrangement with Wells Fargo. Although the precise arrangement is not public, Fannie Mae's Delegated Underwriting and Servicing-approved multifamily lenders (of which Wells Fargo is one) are typically required to share one-third of the loss while Fannie absorbs the remaining two-thirds on a pari-passu basis. The requirement that the sponsor also take the 5 percent first-loss piece is not typical.

The debt service coverage ratio for this deal is 1.35 on a fully amortizing basis. Even though this is an interest-only loan, the debt service coverage ratio has been underwritten on the basis of a 30-year amortizing loan. This underwriting is conservative.

Less Affordable

This is not to say the transaction eventually passed muster with its critics. The report also found that it was less affordable than Fannie Mae's other transactions, undercutting the argument that this financing supports the GSE's affordability mission. [see chart #2].

It found that 66.7% of the 7,204 properties in the transaction are affordable to renters earning 100% of the area median income or less — far less than the 80 to 90% for recent Fannie Mae multifamily acquisitions.

Again, though no regrets on Fannie's part — at least per the Urban Institute report. As it concluded:

….this transaction opens the door for programs to finance the middle sector — properties with 10 to 1,000 units — which have a dearth of financing opportunities. Some of these participants will be nonprofits.

Chart #1

Chart #2

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