On Dec. 13, 2023, S&P Global Ratings published a request for comment (RFC) on its proposed criteria, "U.S. Single-Family Rental Securitization--Methodology And Assumptions." Following feedback from market participants, we finalized and published our criteria, "U.S. Single-Family Rental Securitization--Methodology And Assumptions," on Feb. 20, 2024. This RFC process summary provides an overview of the external written comments we received from the market on the proposed criteria. During the RFC process period, we received only one comment and would like to thank the commenter. The feedback did not lead to any significant analytical change to the proposed criteria that were published in the RFC.

External Written Comments Received From Market Participants That Led To Significant Analytical Changes To The Final Criteria

We did not receive any external written comments from market participants that led to significant analytical changes to the criteria.

External Written Comments Received From Market Participants That Did Not Lead To Significant Analytical Changes To The Final Criteria

The commenter disagreed with the analytical approach of the proposed criteria. This section of the process summary outlines the key points made by the commenter and our responses.

Feedback:   The commenter suggested that single-family rental businesses operated by a single borrower (SB) should be evaluated as an operating business, and loss severity should be based on net cash flow (NCF) haircuts and an exit cap rate. Moreover, the commenter noted that single-family properties generally cannot be liquidated on a "piecemeal" basis and highlighted the experience of a particular single-family rental (SFR) operator that tried to sell properties "one-by-one" to support their view that such an approach can result in substantial losses. In addition, the commenter used this example to highlight their observation that operators' liquidity is directly tied to performance and recovery value. The commenter also indicated that given geographic clustering, if a certain industry or sector were to be disrupted, the performance would be adversely affected due to a lack of diversification.

Response:   As articulated in the SFR criteria, our criteria framework for evaluating SB transactions draws from the U.S. residential mortgage-backed securities (RMBS) loss severity framework, given that the underlying properties are single-family homes. However, it also considers the operating elements of a portfolio as outlined in "Portfolio Tier" under Section 3 of the criteria.

While the commenter offered evidence of properties being sold individually at losses, we note that our criteria assume market value decline (MVD) assumptions on the value of the properties under different rating scenarios as it relates to losses, irrespective of how the assets are liquidated. We also note that based on the portion of the portfolio being impacted, property value decline resulting from a certain industry or sector disruption could reflect a more stressful environment and potentially correspond to a higher loss projection in such more stressful rating scenarios. In addition to the MVDs, we further adjust our projected losses for a given portfolio accounting for metropolitan statistical area (MSA)-specific housing market over/undervaluation. We also apply an MSA-based geographic adjustment factor to recognize concentrations and the lack of property location diversity for a given portfolio.

We agree that operator performance can affect the recovery value of a portfolio of single-family rental homes. However, in the commenter's example, the individual property sales by the operator were performed to meet the need for maturing corporate financial obligations, which may have further affected the recoveries. In contrast, from a securitization standpoint, our view of recovery value would relate more to the prevalent servicing standards and the workout strategies (piecemeal/portfolio basis sales or a combination thereof) performed by the servicer to maximize proceeds on the portfolio. The example provided by the commenter does not contradict the premise that a securitized SFR portfolio could be sold on a piecemeal basis.

Feedback:   The commenter indicated that owning and managing single-family properties can be more difficult than MF, and because such portfolios include more geographic dispersion, more knowledge of local regions is required. The commenter also provided examples of legal claims/motions that involved matters such as inadequate maintenance, wage payments, and building permits as a way of illustrating the challenges faced by SFR operators.

Response:   We believe that our criteria account for the more challenging burden of owning/operating /managing SFR compared to MF properties in its NCF assumptions (e.g., higher property management fees) as compared to an MF NCF evaluation.

Regarding potential legal liabilities and corresponding financial impact, we would consider the extent and materiality of applicable pending or active legal proceedings in our analysis. In many instances, we note that the mere presence of a corporate entity can be associated with ongoing legal-related items that may have varying degrees of materiality.

Feedback:   The RFC does not address that issuers have been issuing classes at deep discounts (instead of at par reflecting a market rate of interest), which in turn enhances the debt service coverage (DSC) and raises the question of whether such DSC is appropriate to assess probability of default (PD). The commenter suggested we use a fair market interest rate, assuming that debt was issued at par.

Response:   We agree that the DSC could be artificially high because of issuing classes at a coupon lower than the prevailing market rate. However, the criteria provide other measures and considerations to account for such situations.

For SB SFR, the criteria assume 100% PD, so the SB loss projections are driven by recovery analysis. The portfolio tiering approach in Section 3 of the criteria incorporates the use of debt yield and net rental yield to further isolate related effects of the cost of funds.

For multi-borrower (MB) securitizations, the criteria give credit to loan diversification, so the PD is typically less than 100%, considering the DSC plus other factors. We could adjust the diversified 'B' PD as outlined in Section 2 of the criteria in these situations.

We also note that per our Ratings Definitions article (see "S&P Global Ratings Definitions," published June 9, 2023), we rate to the stated coupon on the classes and to the legal final maturity date as opposed to the effective yield.

Significant Analytical Changes To The Final Criteria That Did Not Arise From Market Feedback

We finalized and published the final criteria without making any significant analytical changes to the criteria that are unrelated to the market feedback we received.