Investor Planned to Sell Zillow Bond, Then Thought Better Of It
Investor Planned to Sell Zillow Bond, Then Thought Better Of It
(Bloomberg) -- Hours after Zillow announced it was shutting down its house-flipping business on Tuesday, an unidentified mortgage debt investor alerted market participants that it would be offloading $12 million of bonds backed by the company’s homes.
Then the money manager pulled the plan.
The scuttled sale shows how Zillow’s big blunder is catching attention across debt markets after the company issued $1.15 billion of residential-mortgage backed securities to finance its purchase of homes.
The investor was looking to sell the slice of a Zillow mortgage bond as part of a list of four MBS it was planning to get rid of, according to Empirasign Strategies, a firm that tracks trading in the securitized markets. This morning, the money manager removed the security from the list, said Adam Murphy, founder and president of Empirasign.
It’s unclear who the seller was or what their motivation was, Murphy said in an interview. The other bonds on the list include RMBS slices from JPMorgan Chase & Co. and Flagstar Mortgage, and the shortened bid list will trade as planned. It’s possible the firm found a buyer through other avenues.
A representative from Zillow declined to comment.
The Zillow bond, known as ZILLO 2021-2A, was one of four pieces of mortgage bonds expected to be sold on a so-called bid-wanted-in-competition list, or BWIC. The Zillow securities were senior in the original RMBS structure, and had previously been trading at just below face value, said John Kerschner, head of securitized investing at Janus Henderson.
He said on Tuesday, after seeing the BWIC list, that he expected the bonds to trade lower. The tranche was part of a $700 million Zillow RMBS sold on Sept. 22, the company’s second such securitization to finance its nascent home-flipping business. Its $450 million debut securitization, ZILLO 2021-1, priced on Aug. 3. Both deals were unrated, according to data compiled by Bloomberg.
On Nov. 2, Zillow Group Inc. pulled the plug on its tech-powered home-flipping operation, an ambitious attempt to transform the company, after its vaunted pricing algorithms proved unequal to the task.
Cashflows from Zillow’s securitizations rely on the firm’s ability to get fair prices for the houses they’re selling. The securitization was a revolving trust, whereby Zillow could buy homes, fix them up, and then sell them. Now that the firm has shuttered its home-flipping business, its unclear how the bonds will perform.
It all depends on how much of a discount the homes are sold for, according to Kerschner. If the homes are sold for low enough prices, the lowest-rated mortgage bonds may get hit, he said.
“It’s not ideal,” Kerschner said.
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