Real estate professionals attending a recent Morningstar | DBRS panel discussion were optimistic about the new production prospects for residential transition loans (RTL), with about 60% saying they expected positive long-term growth, and around 32% expecting flat production from the sector.
The financing environment is also positive, they said. Forty-four percent of industry professionals in attendance said they expect rates on the seven- and 10-year Treasurys to dip over the next 12 months, while about one quarter said they expected rates to stay flat.
Attendees shared their outlooks during live polling at the panel discussion event covering the home equity investment and residential transition loan (RTL) industries Wednesday afternoon.
The industry's biggest opportunities involve the evolving cost of capital, which will shift funding sources from the private, local lending markets to institutional sources, said Arvind Mohan, chief executive officer of Kiavi, a private real estate lender that has also sponsored several RTL securitizations.
"You're going to see a continued retreat from the banks, and it's going to be necessary," said Robert Wasmund, founder of Ascent Developer Solutions.
As ubiquitous as the residential real estate market is, investors find it difficult to access for various reasons, according to Maksim Stavinsky, co-founder and chief executive officer of Roc360, a full-service real estate capital provider. Owning several homes can become operational complex or unwieldy if the properties are widely dispersed geographically.
Known as fix-and-flip mortgages, residential transition loans are short-term, small-balance mortgages—often interest-only—that help investors buy and renovate commercial investment properties. Borrowers usually repay the loans after selling the properties. Bond investors are still on a learning curve about them.
"It's a very non-conforming asset that differs, even within the RTL sector," according to Mohan.
When it comes to investing in bonds backed by RTL loans, the investor mix has expanded over the last 18 months. Insurance companies are generally still trying to get comfortable with the product, but the sector is attracting more active participation from sovereign funds and asset managers, Mohan said.
Investors often need a fair amount of education on a property's as-repaired value, in particular, Stavinsky said, adding that the company often presents numerical examples to investors demonstrating the way that RTLs mitigate risk. "Whenever we do these pitches, that's a slide that we find ourselves going over again," he said.
