The number of homes removed from single-borrower single-family rental transactions has been negligible, posing minimal credit risk for these transactions, according to a recent report from Morningstar Credit Ratings, LLC [1]. According to the report, in the roughly three years since the first transactions came onto the market, only 0.5 percent of over 93,000 securitized properties have been released from deals through April 2016. Of the 483 properties removed, over half were voluntary releases.
The main reasons for property releases according to Morningstar are voluntary release and disqualification as well as less frequent reasons such as condemnation and casualty. Morningstar monitors changes in the number of properties for each deal as well as performs an annual surveillance review based on updated property data for deals seasoned at least a year.
The report says that of the 483 properties removed through April, 261 properties were voluntarily released at a premium over the allocated loan amounts, and 127 properties were released as mandatory prepayments. For the remaining 95 properties, they were released within two months of the transaction’s closing and were excluded from Morningstar’s analysis.
The majority of property releases reported in the research occurred due to voluntary prepayment, which means when a property release results from a borrower’s voluntary action, the borrower must pay a premium over the property’s allocated loan amount. It is stated that the amount of required premium increases as the aggregate amount of the voluntary prepayments rises beyond certain prescribed limits. The premium is typically capped though at 120 percent of the property’s allocated loan amount.
The report cites disqualification as the second major reason properties are removed from deals. Of the 105 disqualified properties, the borrowers paid the allocated loan amount for 88. The remaining 17 were substituted with qualifying properties. None utilized the eligibility reserve account, according to the analysis.
In addition to the reasons listed above, Morningstar notes three properties were removed from the transaction pool due to damages from sudden, unexpected, or unusual events, known as casualty losses, which may be tax deductible. Likewise, three additional properties were released because of condemnation occurring when the government exercises its power of eminent domain to appropriate private property in exchange for fair compensation.
Lastly the report shows that 16 properties were released through April from the Home Partners of America 2016-1 transaction, the only single-family rental transaction with a right to purchase option, as tenants exercised their rights under Home Partners’ Right to Purchase Agreement to buy the homes.
Morningstar reports that borrowers released a fraction of properties from single-borrower single-family rental transactions and only 17 disqualified properties were substituted. Morningstar expects such a proportionately miniscule number of releases to have minimal credit risk impact on these transactions.