Single Family Rental Securities Ratings Could Benefit From More Borrower Data

Borrowers holding portfolios of single family rentals that serve as a basis for mortgage-backed securities could improve the precision of performance projections of the loans undergirding them and, ultimately, those bond ratings by supplying more financial information about their holdings, according to Fitch Ratings. 

The COVID-19 pandemic has, so far, generally affected renters more than homeowners, and many single-family-rental borrowers have sought payment relief, Fitch experts say.  Potential credit losses tied to single-family rentals will depend on the pandemic’s duration and the degree to which fiscal interventions by the federal government can mitigate the impact of the resulting recession on consumers, they said.

But ratings of restructured deals resulting from economic conditions tied to the pandemic could potentially be enhanced by additional information not typically required from single-family-rental borrowers, Fitch experts said.

Those experts recognize that single-family tenants may be longer term and in a better financial position to weather the pandemic-driven recession than multi-family rental properties. The current competitive home-buying environment may also mean that single-family tenants remain in place longer, and, thus, generate  a favorable income stream for structured finance deals, they said.

“It is our belief that single family rental … is likely a better-performing asset than other types of residential properties,” said Roelof Slump, managing director in Fitch’s U.S. residential mortgage-backed securities group.

But, unlike traditional commercial mortgage-backed securities transactions, where there are standardized financial reporting requirements, “In single-family rental transactions, the reporting does not follow the standard guidelines,” said Britt Johnson, a senior director in Fitch’s U.S. commercial mortgage-backed securities group.  “Loan servicers don’t generally get that same level of information from the borrowers.”

As a result, she said, “It does impact how conservative we are with our rating in these deals.”  Even if a loan has good amortization and good paydowns, “We tend not to upgrade these transactions because the data transparency isn’t there,” she said.

But if borrowers voluntarily supply more financial data,  Johnson said, “We may be able to accurately predict expected losses.”   That could include updated property valuations, loan modifications, cash flow, occupancy data, the projected length of time a loan may be delinquent, and what relief borrowers are seeking.

“If servicers are successful in getting information from borrowers who are requesting relief, requesting forbearances, it will make it easier for us to make accurate credit assessments,” she said.

“It’s important for the ratings agency to know,” she added. “Otherwise, we will be making more conservative assumptions on loss expectations.”