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The slowdown in homebuying has investors who fund most U.S. mortgages hungry for alternative products, helping San Francisco-based Kiavi Funding close its first rated securitization of notes backed by short-term “fix-and-flip” loans totaling $400 million.
The deal announced Tuesday was upsized by $100 million, due to “significant interest from a broad set of institutional investors, including several first-time investors,” Kiavi said.
Bundling mortgages into securities backed by Fannie Mae, Freddie Mac and Ginnie Mae and selling them to institutional investors like pension funds and insurance companies is a routine process, and the ultimate source of funding for most home loans.
Kiavi has been securitizing fix-and-flip loans (formally known as “residential transition loans,” or RTLs) since 2019, and says it’s packaged up more than $5.1 billion in RTLs in 19 sales to investors to date — including $1.4 billion this year alone.
In February, Kiavi closed a $350 million unrated securitization of RTLs that it said was also oversubscribed.
This was Kiavi’s first RTL deal to be evaluated and rated by a credit rating agency, Morningstar DBRS — a process that can give investors more confidence that they understand the risks and rewards involved. Some institutional investors won’t invest in securities that aren’t rated.
Arvind Mohan
“We’re thrilled to close our first rated securitization, enabling a much wider set of institutional investors to invest in Kiavi’s RTL program,” Kiavi CEO Arvind Mohan said, in a statement. “This deal, along with our previous securitizations, demonstrates our strong track record in the RTL sector.”
Founded in 2013 as LendingHome, Kiavi rebranded in 2021 and now claims to be one of the nation’s largest private lenders to residential real estate investors, with more than $21 billion loans funded to date.
In addition to providing fix-and-flip loans of up to $3 million, Kiavi also offers new construction loans and debt service coverage ratio (DSCR) loans to investors who want to buy and hold one- to four-unit rental properties.
“Say goodbye to tedious paperwork like pay stubs and W-2s,” Kiavi promises on its website. “Our innovative, tech-driven platform cuts through the clutter, getting you to the closing table faster.”
In evaluating Kiavi’s latest securitization of fix-and-flip loans, Morningstar DBRS rated the bulk of the mortgage-backed notes as A1, and the remainder at A2, M1 and M2.
“Historically, Kiavi RTL originations have generated robust mortgage repayments, which have been able to cover unfunded commitments in securitizations,” Morningstar DBRS analysts said.
Unlike traditional residential mortgages, RTLs are short-term, interest-only balloon loans with the full amount due at maturity — typically 12 to 36 months.
“The repayment of an RTL is mainly based on the ability to sell the related mortgaged property or to convert it into a rental property,” Morningstar DBRS analysts noted. “In addition, many RTL lenders offer extension options, which provide additional time for borrowers to repay their mortgage beyond the original maturity date.”
The latest batch of loans securitized by Kiavi required minimum borrower FICO scores of 735 and maximum repaired loan-to-value ratios of 73 percent, Morningstar DBRS said.
The credit rating agency issued its methodology for evaluating securitizations of fix-and-flip loans last fall and in March rated what was touted as the biggest rated securitization of RTLs to date: A $500 million offering of notes originated and serviced by Genesis Capital and sponsored by Rithm Capital.
Ratings from Morningstar DBRS have also been instrumental in helping institutional investors warm up to securitizations of home equity agreements that let homeowners cash out some of their equity in exchange for a stake in their property.
Last fall, Unlock Technologies announced the first rated securitization of $224 million in notes backed by home equity agreements.
“A rated securitization is the only way for an asset class to become mainstream,” Saluda Grade CEO Ryan Craft said at the time.
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