Fix-and-Flip Loans Enter Securitization Market With Recent Deals

Some CRE finance firms have been announcing new securitization deals of residential transition loans (RTLs). The structure comes out of residential mortgage-backed securities, or RMBSs.

In April, Genesis Finance said that it had completed a $500 million securitization with three classes of bonds rated from A to BB. August brought word from “tech-enabled lender to residential real estate investors” at Kiavi that it had closed a $400 million securitization of RTLs. And Toorak Capital Partners in September said that it had closed its second RTL securitization for $237.5 million consisting of 521 RTLs of about 661 housing units.

Real estate and financial services asset manager Rithm describes the loans as “asset-based finance meets private credit.” They’re also known as fix-and-flip loans because they’ve been widely used by people looking for bridge financing to take an existing property, fix it up, and then sell it off at a profit.

The individual loans typically have between a one-year and three-year term, with interest-only payments for most of the loan and a balloon payment at the end.

These properties fall outside of the federal government’s Qualified Mortgage definition, according to a Morningstar DBRS post last fall. The borrowers are riskier, often self-employed, with lower FICO scores and higher debt-to-income ratios than in prime borrowing. DBRS Morningstar noted that a housing strategist at Morgan Stanley said the loans typically had “low” loan-to-value ratios from the high 60s into the low 70s, which would now seem high.

Separately, Morningstar wrote that RTLs are similar to traditional residential mortgages, “but may differ significantly in terms of initial property condition, construction draws, and the timing and incentives by which borrowers repay principal.” They are also most often used by real estate investors and not consumers. It is more costly for borrowers than other many other types of loans, but the underwriting standards are looser than those from government-sponsored enterprises like Freddie Mac and Fannie Mae.

The securitizations typically run for three years. During the first two years, collateral can enter or exit, enabling the swaps of properties as makes sense. The third year is when amortization happens.

Law firm Mayer Brown said that securitization of RTL loans has grown, with the first large one issued in 2018. They said a 2022 estimate of total U.S. origination was nearly $10 billion and that the securitizations “present interesting tax challenges.”