Borrowing money

Family investors fuel the PLS market

“We are beginning to see signs of a resurgence in investor loan issuance backed by agency-eligible loans,” the MAXEX report said. “Many of these transactions continue to have some seasoning, with new creations beginning to appear as cash away from agencies for certain loans with specific criteria.”

Regarding these investor loans, whether agency or not, Keith Lind, CEO of non-QM lender Acra loansaid regular Joes are driving the market.

“In 2021, 71% of homes were bought by someone who was going to live there; 28% was bought by small investors, mom and pops; and 1% of all single-family homes purchased in the United States in 2021 were purchased by institutional investors,” Lind said. “So if you think about it, 28% was bought by retail investors, and that number before COVID was around 10%.

Lind attributes the rise in retail investor activity, in part, to individuals — including the self-employed and young professionals, or millennials — having increased interest in buying real estate as an investment. in this market where home values ​​have remained strong and continue to appreciate.

“It’s amazing that investors have almost tripled among baby moms and pre-COVID pops through 2021, and how much real estate they’re buying,” Lind added. “And, in most cases, those investors will have more money and more options than that person buying their first home.”

Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutionsadded that many investment property owners are independent borrowers, which he said presents a great opportunity for non-QM lenders – outside of the agency loan stream.

“For many independent borrowers, their business is to be professional real estate investors,” Hutchens said. “I believe the self-employed market is underserved, and whether the rates are high, whether they’re low or low, it’s still an underserved market. So I think the opportunity is still great.

In addition to increased buying activity from individual investors – for use as second homes or for rentals – helping to drive forward PLS transactions downstream, the single-family rental market is also seeing buying activity. and robust securitization by large institutional investors. Much of this home buying activity, however, is concentrated in a few Sun Belt metro areas of the country, according to bond rating reports.

To date, KBRA has tracked eight institution-sponsored PLS securitization transactions — often called Wall Street transactions because they involve large companies that own thousands of rental properties. These transactions, called single-family rental (SFR) transactions, are securitized in a slightly different way than the structure used in so-called mom-and-pop investment property securitizations – in which the issued securities are directly backed by a pool of mortgage loans. The bonds issued within the framework of institutional SFR operations are guaranteed by a single fixed-rate loan, itself guaranteed by a large pool of mortgages on income-producing single-family homes.

The eight SFR transactions on KBRA’s radar through April 27 involved rental property guarantees worth a total of $5.7 billion. An analysis of bond rating reports on these deals shows that four metro areas – Atlanta, Phoenix, Dallas/Fort Worth and Las Vegas – account for between 33% and 64% of the thousands of rental properties included in the loan pools backing these deals. . These percentages reveal the disproportionate impact that institutional investors have on certain Sun Belt Markets.

Other Sun Belt metro areas with a high concentration of institutional buying, based on collateral pools analyzed in bond rating reports, are Memphis, Nashville, Tampa, Orlando and Charlotte.

“Higher interest rates on mortgages actually put institutional investors and even many individual investors at a competitive advantage,” said Rick Sharga, executive vice president of marketing for the real estate research firm. . RealtyTraca subsidiary of Attom Data Solutions.

“A very high percentage (typically in the range of 65% to 70%) of investor purchases are made in cash, which means that it is even more difficult for consumers to compete with investors for properties as they grow. the cost of financing increases.

“And individual investors we surveyed from ATTOM’s RealtyTrac database cited ‘competition from consumer goods buyers’ as a top issue in recent quarters. If higher mortgage rates dampen consumer demand, this reduces the competition investors face when buying a home.

Sharga adds, however, that individual investors and institutional players have an added advantage in the market over typical homebuyers, especially first-time buyers.

“Clearly, investors financing their purchases will face some of the same challenges that consumers face as interest rates rise, but they may be able to tap into the equity they’ve built up in their real estate portfolios to make financing less daunting,” he said. Explain.

Aaron Norrisvice president of the Norris Groupa California-based real estate investment firm and hard-money lender, however, expressed concern about about deception available market information on the impact of institutional buyers, who nationally own only about 2% of all rental properties.

Norris said there is a place in the market for mom-and-pop investors and large institutional investors, but their respective roles need to be clearly understood. He pointed out that while institutional players nationwide control a small percentage of the rental market, their market share in some Sun Belt cities is much larger and has an outsized impact.

“The dwelling which [Wall Street buyers] target for the first time [buyer] inventory that won’t recycle for millennials who want to finally own something,” he said. “We have to be smart with the data and understand it, so that we can actually get the right people at[[[[fiscal/regulatory policy]table.

“Main Street [investors] are local and are the people who work here, live here, give here. These are the guys supporting your football games this weekend, not Wall Street. I think there is room for Wall Street, but I would hate to see us get this data wrong and crowd out Main Street more than it has already been.

Emerging market forces, however, may already be helping to balance the scales, Sharga said.

“There has been a bit of a shift in recent quarters from institutional investors towards a more ‘build-to-let’ model, working with homebuilders to create new SFR inventory instead of competing with mom-and-pop investors. et-pop and home buyers for extremely limited inventory,” Sharga said. “Another thing to watch is an increase in foreclosure activity, which has traditionally been a more affordable source of inventory for institutional and individual investors.

“Although the number of foreclosures is still well below normal levels,” he added, “we are starting to see monthly increases which will start to bring more properties to market in the coming months.”

Of course, increased purchases of single-family homes by investors are also creating more collateral to fuel new capital asset-backed securitizations in the private label market in the future, which will help offset the decline in the activity of first-time buyers and the associated PLS guarantees.

“The first-time home buyer may not be able to get that property because the rates are too high and they don’t qualify now,” Lind of Acra said. “But investors who arrive [for loans]they either have a good cash line or they have a cash period.