Friday, August 24, 2012

Lack of data limits ratings Moody's et al will to assign to rental home structured finance deals

Bloomberg reports that apparently even the rating firms learned from the sub-prime mortgage/CDO disaster that having access to all the useful, relevant information is necessary for valuing or rating a structured finance security.

Regular readers know that all the useful, relevant information includes both historical data and observable event based reporting.  

Moody's links its ability to initially rate a security to access to historical information (presumably it has access to observable event based reporting on the underlying assets during the rating process).

However, as was learned at the beginning of the financial crisis, it is observable event based reporting that is needed if investors are going to know what they own and be able to value the securities.  Moody's confirmed this in its testimony to Congress when it explained why in the absence of observable event based reporting it was unable to update its ratings in a timely manner.

Potential issuers of securities tied to U.S. home rentals may not be able to obtain the credit ratings they seek because of a dearth of historical data on the business, according to Moody’s Investors Service. 
The risk to investors with the unprecedented rental-home bonds would be tied mainly to the quality of property managers and the variability in net revenues from tenants and eventual home sales, the New York-based ratings firm said today in a report. 
Moody’s listed the types of data it will probably seek, saying debt issuers may not always be able to overcome limited information by structuring deals with more investor protection. 
“In some stressed cases, credit enhancement would not be able to mitigate the concern associated with limited historical information and requested ratings would not be achievable,” analysts led by Kruti Muni and Joseph Snailer wrote....
Ratings companies, which helped create the U.S. housing bubble that began to burst in 2008 by granting inflated grades to mortgage bonds, have begun commenting on how they would approach assessing bonds created through private securitizations that such investors could use for financing. 
With securitizations, the graders compare potential losses on the underlying assets with the so-called credit enhancement provided for specific classes of the deals. That can include some bonds taking losses before others, cash reserves or asset cash flows that exceed coupons on the securities created.

Moody’s has been approached by “numerous real-estate market participants” seeking insight into how it would assess such deals, though none has presented “a specific transaction or deal structure to us,” according to its report today. 
The ratings company said it’s unclear whether the transactions will involve securitization trusts owning homes or loans to operators. Each approach carries different risks, Moody’s said. 
Fitch Ratings said Aug. 8 that it’s unlikely to grant investment-grade ratings in the top AAA or AA categories to deals backed by single-family rental properties. 
The reasons include the “limited performance data for the sector and individual property management firms” as well as for “market rents, rent roll histories, vacancy rates, and supply and demand.” The “ambitious growth strategies by regional operators looking to expand their portfolios rapidly over the near term” is another concern, New York-based Fitch said. 
Standard & Poor’s released a report in May examining the “emerging asset class” that contained fewer details on how the New York-based company will approach grading the deals.

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