Overall, DSCR mortgages have made up almost half of the private label mortgage-backed securitizations by dollar balance for the two-year period ended in July. Most of those involve properties where the tenant has a lease of at least one year.

But, while less than 10% of the properties included in deals are DSCR mortgages of "Airbnb-style investments," their growing prevalence is making a mark in PLS transactions, S&P said. 

"In addition to DSC-related underwriting differences, [short-term lease] loans differ from [long-term lease] loans in terms of the number of originators/aggregators that finance the loans, and idiosyncratic factors that could affect how STR DSCR loans perform relative to LTR DSCR loans," the report from a team led by S&P Global Ratings credit analyst Jeremy Schneider said.

S&P assembled a sample created from 37 non-QM transactions originated between July 2022 through this July that has over 2,100 short-term property DSCR loans (from over 125 originators) and more than 23,000 loans with long-term leases from over 550 lenders.

For comparison it also considered over 19,000 full/alternate/other income documentation loans securing 41 non-QM transactions, although 10% of the loans included in those deals were qualified mortgages.

The analysis showed that short-term rental-backed mortgages have higher borrower credit scores and average balances but also higher loan-to-value ratios than the more traditional rental property loans.

Average balance for the short-term lease properties were $478,479 while for the long-term lease it was $296,278; for the reference pool it was $610,115.

The weighted average CLTV for the "Airbnb" type properties of 70.06% compared with 66.48% for the more traditional lease NOO and 71.84% for the other type of non-QM securitizations.

Borrower credit scores were 744 for the short-term leases and 735 for the more traditional rental properties.

"The weighted average DSCR for [short-term rental] loans (1.35x) is higher than that of [long-term rental] loans (1.11x)," the report said, explaining "this means STR loans have higher rental yields."

At one point, the spread between the rate on the short-term loans to that for conforming mortgages was greater than that for the long-term ones. However, those have since converged, likely because of the expansion of the short-term rental market, which increased liquidity, the report said.

"Moreover, the growing use of securitizations to fund STR loans may have helped lower the spread by effectively widening the investor base," Schneider said. "In any case, DSCR loans (as well as non-QM loans in general) appear to share a spread of roughly 100 basis points to 150 basis points over the conforming rate, down from over 200 basis points at various points in the past."

As to the key point, loan performance, market consensus does not exist as to any credit quality differentiation between those two types of collateral in a securitization.

"On one hand, STR cash-flow volatility could be greater; on the other, tenant default is less impactful, as it doesn't introduce blackout periods and expenses related to tenant eviction," S&P said.

Furthermore, the short-term leased properties might tend to be better maintained by their owners so that they remain attractive to new clients.

"While over the long term, [longer-term rentals] are less volatile from an occupancy perspective, supply and demand for vacation-style rentals could be more impactful for STRs," the S&P report said.

Municipal laws and regulations that affect short-term renting activity are influential from a supply and demand perspective.

"Perhaps the question is whether the underwriting haircut on STR loans adequately captures associated expenses, resulting in the appropriate risk-adjusted rental yield," S&P commented.

"In any case, developing local regulations pertaining to STRs — and changes in consumer behavior and sentiment — will ultimately determine the course of STR DSCR and its representation in non-QM pools," Schneider concluded.