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.
This article was provided by Bloomberg News.