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SEC Probes Rental Home Values in Private-Equity Bond Deals

The agency has been looking at whether broker price opinions were wrongly inflated, and similar letters were sent to other companies, potentially serving as a starting point for an industry-wide probe.

(Bloomberg)—U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.

Radian Group Inc.’s Green River Capital unit is one of the market participants that received a request for information from the Securities and Exchange Commission in March about broker price opinions, or BPOs, the company said in a regulatory filing late Friday. Green River provides BPOs that are used to value real estate in securitizations.

The agency has been looking at whether BPOs were wrongly inflated, and similar letters were sent to other companies, potentially serving as a starting point for an industrywide probe, according to a person with knowledge of the matter. The person asked not to be identified because the matter is private.

Green River is one of several firms that provide BPOs to the units of private-equity firms and other investors who bought up hundreds of thousands of properties in cities across the U.S. after the housing bubble burst. Many of them focused on distressed homes whose owners were evicted during the Great Recession.

The company, a subsidiary of Clayton Holdings, the real estate risk-management arm of Radian, said in the disclosure that the SEC was seeking information from “market participants.” Radian, the second-biggest mortgage insurer, said it routinely gets such requests from regulators, and the disclosure didn’t indicate that Green River was the focus of the agency’s inquiry. An SEC spokeswoman declined to comment.

“We believe that our company processes are both robust and comprehensive, and we stand behind our work,” Radian said in an emailed statement to Bloomberg. “We have solid quality control processes in place, including for our property valuation services, and those processes have been reviewed and validated by both internal and external sources.”

Broker price opinions are a cheaper and less-stringent way to evaluate what a property is worth than an appraisal. Property valuations are a sensitive subject in the housing industry because regulators said inflated appraisals contributed to the housing bubble a decade ago.

The biggest private-equity landlords, led by Blackstone Group LP’s Invitation Homes, have sold more than $15 billion in bonds since 2013 backed by some 120,000 rental homes, according to data from Morningstar, and many of those deals were valued using BPOs. One recent bond deal tied to Invitation Homes was backed by guarantees from U.S. taxpayers.

Claire Parker, an Invitation Homes spokeswoman, declined to comment.

Mortgage Bonds

The BPOs are key elements in securitizations, determining basic figures such as how much rent to charge tenants, how much leverage and risk is embedded in the deal and how much investors could recover if the bonds go sour. Many of the securities were assigned AAA grades and sold off to investors such as pension funds.

In traditional real estate deals, these opinions help establish sales prices, but in these bond deals, they help estimate how much could be recovered in a liquidation. Some analysts say the BPOs they don’t take into account a possible plunge in home prices, and the values tend to be more optimistic than a full appraisal. Unlike appraisals, BPOs also aren’t necessarily done by a licensed professional, nor does the inspector always go inside to look around, which is standard procedure for an appraisal.

‘Drive-By’ Value

In one April securities offering of about $944.5 million, Green River submitted BPOs that relied on “drive-by” evaluations, and homes were “assumed to be repaired and in good condition,” according to a deal prospectus issued by Fannie Mae. The BPO “is not intended to be a representation as to the past, present or future market values of any of the properties.”

The underlying mortgage in that deal, tied to rental properties owned by Invitation Homes, was guaranteed by Fannie Mae. That’s the first time a taxpayer-backed home finance company has guaranteed such a loan. Freddie Mac is also looking into getting involved in the market by providing its guarantee.

When private equity landlords opted to use BPOs instead of appraisals in their securitizations, some investors expressed skepticism and bond graders applied discounts to the BPOs. Moody’s Investors Service, for example, applied a 15 percent haircut to BPO valuations when grading a transaction last August, citing inherent risks of using BPOs on residential properties instead of an appraisal.

--With assistance from Katherine Chiglinsky.To contact the reporter on this story: Matt Scully in New York at [email protected] To contact the editors responsible for this story: Nikolaj Gammeltoft at [email protected] Rick Green

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© 2017 Bloomberg L.P

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