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‘Fix And Flip’ Loans Are Taking The Main Stage With New Rated Products

A specialized type of real estate asset is going mainstream after a new financial product bundling together hundreds of loans won institutional backing for the first time this year.  

Residential transition loans, sometimes referred to as “fix and flip loans,” are short-term bridge, construction or renovation loans aimed at helping real estate investors purchase and renovate residential or small-balance commercial properties. Earlier this year, Toorak Capital Partners closed the first rated RTL securitization, a $240M deal that consisted of 370 residential transition loans financing about 527 housing units. 

The deal marked the start of the asset’s evolution from a niche product with limited national reach into a budding lightning rod for investment, with major financial players like Morgan Stanley and JPMorgan Chase entering the fray. Since then, six issuers, including Toorak, have completed nine more deals for a total of $3.1B.

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RTL securitizations are becoming more mainstream.

“It really is a coming-of-age moment,” Toorak CEO John Beacham said. “Our space is transformed from one that was hyper-local … to one that's shifted into a fully institutionalized asset class [with] significant participation from large investors and insurance companies and other types of investors who were not participating in the space before.”

Toorak launched its business in 2016 at a time when the RTL market was regional in nature and most lenders were funded by their own resources or with local investors, Beacham said. There was no securitization market for the asset class in any form, he said. 

RTL securitizations differ from other types of securitizations because the loan pool is short-term in nature, with an average loan term of about a year. To extend the length of the securitization, Toorak designed a revolving structure so that in addition to an initial pool of loans, it can add new loans over time so long as they meet eligibility requirements, Beacham said. 

In 2018, Toorak completed its first unrated securitization, and he worked for the six years following that to educate rating agencies on the industry. The firm provided the agencies with data enabling them to outline criteria for a rated RTL securitization.  

Major financial institutions backed the first rated product, which Toorak announced in March. Morgan Stanley led the offering and served as an initial purchaser along with Deutsche Bank Securities, J.P. Morgan Securities, Performance Trust Capital Partners and KKR Capital Markets

“What you see in the rated securitization is … significantly more participation by rating sensitive investors, including insurance companies, including banks, including money managers,” Beacham said. “The scope and the number of investors who participate in the rated market is significantly higher than the unrated market.”

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John Beacham

In Toorak’s first rated securitization, about 42% of the collateral was originated by Toorak’s affiliate company, Merchants Mortgage & Trust Corp. For both of Toorak’s two rated securitizations, the average loan-to-value is 70%, according to data provided by the company.

Vetting those RTLs follows a similar process to a conventional loan underwritten by an institution, with a credit committee and a review of title work and appraisals before the company will approve the loan, said Justin Land, CEO of Merchants Mortgage. 

All of the loans are investor-purpose, and the rated securitizations span a variety of residential property types, Land said. Merchants Mortgage has previously been successful in getting financing for RTLs through structures that weren’t rated securitizations.

But the rated product creates new pathways to get funding, he said.

“Getting the rating is the validation moment for the industry that signifies that this product has validity when it's looked at across the spectrum of other products,” Land said. “It opens up the door to a much larger audience.”

Beacham said there is a massive need for RTLs across the country because of underinvestment in the housing supply for a long period. Investors continue to look for deals where they can add value to properties, and Toorak is noticing a higher percentage of deals with elevated rehab costs, he said. 

Just this week, Toorak completed another unrated RTL securitization, its first backed exclusively by loans secured by multifamily and mixed-use properties. Continued demand for additional and improved housing stock means Beacham is bullish on the future of RTLs. 

“We expect to continue to be an active issuer,” Beacham said. “We expect the other issuers to be active issuers, and we expect more issuers to enter the market. On all fronts, we expect this to be a significant and growing asset class in the future.”