Some CRE finance companies have announced new residential transition loan (RTL) securitization deals. This structure originates from residential mortgage-backed securities (RMBS).
Genesis Finance announced in April that it had completed a $500 million securitization of three classes of bonds, A through BB. August brought word from Kiavi, a “technology-enabled lender to residential real estate investors,” that the company had completed a $400 million RTL securitization. And Toorak Capital Partners announced in September that it had completed its second RTL securitization for $237.5 million, consisting of 521 RTLs with approximately 661 residential units.
Rhys, an asset manager in real estate and financial services, describes the loan as “a blend of asset-based finance and private credit.” These are also known as fix-and-flip loans, as they are widely used by people looking for a bridging loan to acquire an existing property, repair it, and sell it for a profit.
Individual loans typically have a term of one to three years, and the majority of loans are interest-only payments that are eventually repaid in a lump sum.
According to a Morningstar DBRS post last fall, these properties fall outside the federal government's definition of a qualified mortgage. Borrowers are riskier, often self-employed, have lower FICO scores, and higher debt-to-income ratios than prime borrowers. DBRS Morningstar notes that Morgan Stanley housing strategists say the loans have “low” loan-to-value ratios, typically in the high 60s to low 70s, that would now appear expensive. He pointed out that he said.
Separately, Morningstar notes that RTLs are similar to traditional mortgages but “can differ significantly in terms of initial property conditions, construction plans, and the timing and incentives for borrowers to repay principal.” There is,” he wrote. Also, these are most often used by real estate investors rather than consumers. They are more costly for the borrower than many other types of loans, but underwriting standards are more lenient than those made by government-backed companies such as Freddie Mac and Fannie Mae.
Securitizations typically run for three years. During the first two years, collateral can be moved in and out and, of course, assets can be exchanged. The third year is when depreciation occurs.
Law firm Mayer Brown said securitization of RTL loans is expanding, with the first large-scale issuance occurring in 2018. They estimated total U.S. originations in 2022 to be close to $10 billion, and said securitizations “present interesting tax challenges.”
