Bloomberg News

Cerberus, Blackstone Loosening Credit for U.S. Landlords

July 07, 2014

U.S. property owners with just one rental house can now get cash from Wall Street to buy more.

Cerberus Capital Management LP, which initially targeted landlords with multimillion-dollar loans, is financing low-volume deals for small investors through its FirstKey Lending, with looser terms than government-backed mortgages from Fannie Mae and Freddie Mac, said Randy Reiff, the business’s chief executive officer. Blackstone Group LP (BX:US)’s rental lending arm, B2R Finance LP, is making a similar push to mom-and-pop landlords.

“Our premise has always been to be able to lend to the middle market and entrepreneurial borrowers in the space, not just the institutional borrowers,” Reiff said. “The biggest guys have always enjoyed access to capital. The largest part of this market is really the entrepreneurial owners.”

The companies are competing to lend to owners of the almost 14 million rental houses in the U.S. at a time when many Americans are struggling to get a mortgage and homeownership is declining. Cerberus and Blackstone, along with Colony Capital LLC, also are racing to package debt on homes managed by separate landlords for the first multiborrower bond sale.

Blackstone, the biggest U.S. single-family landlord after amassing 45,000 houses since early 2012, has led Wall Street’s issuance of $3 billion of securities backed by properties owned by one company. The New York-based firm’s B2R unit is expanding the rental bet with plans to offer funding to investors who only need one rental home to qualify, starting this year, John Beacham, president of B2R, said in a telephone interview.

Cash-Out Mortgages

About 53 percent of the 14 million U.S. investor-owned or vacation houses were without a mortgage as of last month, based on data from property-research firm RealtyTrac, implying investors in about 7 million homes could get cash-out mortgage financing to buy more real estate or make other investments. There are more than 1.3 million property owners in the rental market who own at least two homes, according to Westminster, Colorado-based RentRange LLC.

Blackstone’s B2R was among companies offering loans last month at a Dallas meeting of HomeVestors of America Inc., which has 472 franchises for property investors in 120 cities, most of whom own fewer than 10 single-family homes, according to Co-President David Hicks. Small landlords have struggled to get financing until the last couple of years and most offers came with high interest rates, said Hicks, whose company advertises on billboards that say “We buy ugly houses” with a picture of a cartoon caveman.

“Now they have a choice of who to borrow from,” he said. “It’s like night and day.”

Hard Money

The Wall Street firms offer loans with interest rates of 6.5 percent to 7 percent, compared with 12 percent to 15 percent for non-bank hard-money loans, the most common source of debt for landlords who can’t get a bank mortgage, Hicks said. The lower-interest deals can come with strings, such as such as requiring an analysis of the cash flow from rents, a turnoff for many HomeVestors franchisees, who usually buy properties based only on the price, according to Hicks.

“They’re using Wall Street money and they’ve got all those rules,” he said. “Sometimes it’s just hard to relate that to an independent investor.”

Rental demand is climbing as tight credit, slow wage growth and the lingering effects of the foreclosure crisis limit purchases. More than 40 percent of borrowers in 2013 had FICO scores above 760, compared with about 25 percent in 2001, according to a Feb. 20 report by Goldman Sachs Group Inc. analysts Hui Shan and Eli Hackel.

Homeownership Rate

The U.S. homeownership rate dropped to a 19-year low of 64.8 percent in the first quarter, down from a 2004 high of 69.2 percent, according to the Census Bureau.

Stagnating wages and an increase in student debt are keeping younger people from qualifying or even wanting to buy, said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute in Washington.

“They don’t see it as a store of value,” she said.

Home sales will fall this year as higher prices and interest rates limit people’s ability to buy, according to Fannie Mae economist Douglas Duncan. Over the next 12 months, rent increases are expected to outpace home-price gains, 4.3 percent to 2.4 percent, Fannie Mae’s June survey of consumers showed today.

“Despite recent improvement, we now expect an annual decline in existing-home sales due to weak volume in the first four months of the year associated with the rise in mortgage rates mid-last year and the current dearth of supply of lower-priced homes,” Duncan said in a statement today.

Lender Opportunity

For lenders, that’s an opportunity to expand credit to rental property owners, including those who wouldn’t qualify for government-backed loans or have outgrown the parameters.

“Investor loans are business purpose and not subject to the increased regulatory burden on consumer lending,” said Carl Bell, a managing director at Amundi Smith Breeden, the U.S. subsidiary of global asset-manager Amundi, which oversees more than $1 trillion. “From that perspective, it is easier for investors to underwrite the regulatory and liability risk than with the owner-occupant lending market.”

FirstKey has $500 million of loans either funded or in the process of closing, most for $5 million or more, Reiff said in a telephone interview.

Shifting the focus to property owners with fewer houses is “just an expansion of our efforts to service the entire scope of the single-family market,” Reiff said.

More Properties

While Fannie Mae limits landlords to loans on a maximum of 10 properties, and Freddie Mac will lend on four, FirstKey will finance as many as 25 under its latest debt product, Investor Property Express. The company will offer 30-year fixed-rate mortgages to borrowers with minimum credit scores of 620 on loans starting at $100,000 for houses worth a maximum 75 percent of the property value if they are already leased, according to documents obtained by Bloomberg News.

Loans are underwritten based on the value and cash flow of the property being financed and borrowers are only required to show one year of tax returns, the documents show. Fannie and Freddie require information including one to two years of tax returns, pay stubs, W-2 wage forms and social security award letters, according to FirstKey documents.

B2R has made about 100 loans that have either been completed or are in the closing process, all of which are to investors with at least five properties, Beacham said. He declined to disclose the dollar amount.

Efficient Lending

“There are not a lot of those large investors, Beacham said. ‘‘We started out with a minimum of $500,000 loan balance and we expect to continue to press that down. That’s the part of the market that most needs more efficient lending.’’

Colony, which like Blackstone has its own rental properties, is lending as much as $60 million a month to other landlords, a pace that probably will increase, said Beth O’Brien, president of the Colony American Finance unit. The Santa Monica, California-based company isn’t offering single-property loans to investors, she said. Instead it’s buying already originated loans on single assets, she said.

All three finance companies said they expect to sell their first bonds this year, which would free up funds and give them the opportunity to increase yields if they hold some of the riskier portions of the debt.

‘‘There’s still a lot of wood to chop,” said Nitin Bhasin, a managing director in the structured finance group at Kroll Bond Rating Agency. “The firms are still originating loans and when they get to a critical mass and can iron out issues, we’ll see them. My guess is late this year we’ll see the first securitizations.”

Different Risks

Securities backed by single-family rental homes with multiple borrowers have different risks than securities with a single borrower, according to Moody’s Investors Service.

“Loans in multiborrower SFRs will be more likely to default than loans in single-borrower transactions because of the larger number of borrowers represented in the pool,” Kruti Muni, Todd Swanson and Sang Shin wrote in a May 14 note. “But the rate of default will not be 100 percent, as is the case when the lone borrower in a single-borrower transaction defaults.”

The market for bonds backed by rental houses could “reach or exceed $30 billion” a year, according to a January report by Keefe, Bruyette & Woods Inc. analyst Jade Rahmani.

Market Size

The size of the market could be limited to $20 billion total, Urban Institute’s Goodman estimates, because it still costs more for many small landlords to borrow from Wall Street than from banks, the main source of funding before the real estate collapse. If banks increase lending again, companies like Cerberus and Blackstone will be forced to reduce the spread between what they charge borrowers and the cost of the debt in their securitizations, she said.

There have been five home-rental bond deals since Blackstone’s first sale in October. Those transactions were tied to purchases made by institutional investors, who have accumulated at least 200,000 properties after home prices nationally plunged as much as 35 percent from the 2006 peak.

Some of the largest landlords are increasing lending to broaden their exposure to the rental housing market at a time when higher home prices have cut into their returns and managing the scattered properties remains costly, according Sam Khater, deputy chief economist for CoreLogic Inc.

Different Strategies

Others are seeking new ways to expand their holdings of rental properties. American Homes 4 Rent (AMH:US), the largest publicly-traded landlord, with about 26,000 homes, acquired 1,300 more last week from Beazer Homes USA Inc. and KKR & Co. on July 1. Starwood Waypoint Residential Trust, whose chairman is Barry Sternlicht, is purchasing soured loans to source cheap property.

Lending could also be a way to acquire future rental homes or wager on different markets across the country, according to Khater.

“It allows them to diversify their geographic risk,” he said.

Khater also expects more Americans to become renters as many younger people who deferred forming households and lived with their parents start leasing homes in a recovering economy.

“Rents are holding up fairly well,” he said. “The demand is there and it’s still rising.’

To contact the reporters on this story: Heather Perlberg in Washington at hperlberg@bloomberg.net; John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net


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  • BX
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  • AMH
    (American Homes 4 Rent)
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