Will Stepped-Up Foreclosures Save This New Asset Class From Crumbling?

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The mortgage meltdown was bad news for homeowners, banks, and the economy, but the boatloads of foreclosures cluttering the housing market sparked the creation of a new asset class, whereby institutional investors gobble up foreclosures by the bundle and transform them into single-family rental units.

This spring, however, signs of a slowdown began to appear. The number of distressed properties began to diminish, prices began ticking upward, and interest rates started a slow rise. However, two snippets of good news may help float the boats of private equity firm Blackstone Group (NYSE: BX  ) , and single-family REITs Silver Bay (NYSE: SBY  ) and American Residential Properties (UNKNOWN: ARPI.DL  ) : easier credit, and higher foreclosure rates.

Wall Street banks to the rescue
As prices rise and competition gets heated, big banks are stepping in to help institutional investors with financing. While Deutsche Bank (NYSE: DB  ) is the heavy hitter in this arena, recently extending a $1.5 billion line of credit for Blackstone, U.S. banks like JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) have been taking part in lending to the equity firm, as well. Meanwhile, Bank of America (NYSE: BAC  ) and JPMorgan set up a $200 million credit line for Silver Bay just last month.

Is it risky to be putting so much money into an as-yet unproven business model? Some may think so, including investors. Noting the tumble in stock price that newbies like Silver Bay and American Residential have suffered recently, Colony Capital (NYSE: CLNY  ) chief Thomas Barrack postponed the IPO of his new single-family rental company, Colony American Homes. Similarly, Public Storage (NYSE: PSA  ) has filed for an IPO, too, hoping to take its American Homes 4 Rent unit public -- at some unannounced, future date. In the meantime, American Homes can rely on its $500 million credit facility with Wells Fargo, which may be bumped up to $1 billion if necessary.

Foreclosures increase in May
As home prices have risen, so has the rate of foreclosure. Bank repossessions were up 11% last month, which may help alleviate the shortage of distressed properties for sale. Time will tell if this increase is sustainable, but Silver Bay noted at the KBW Conference recently that more than 5 million homes are either delinquent, or in some stage of the foreclosure process -- which means the pipeline is far from empty.

While easier credit and more robust pickings might give the single-family home investment market a shot in the arm, it seems likely that a permanent slowdown will eventually occur. Until then, it's still party time, and banks stand to make a pretty penny securitizing rental payments into bonds, which will be sold to investors in the very near future. Considering the receding share prices of the pure-play REITs, however, the market for these products may not be as hot as industry players think.

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