A Q&A on coronavirus relief impact on agency CMBS

| March 20, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Agency multifamily borrowers have outsized exposure to renters who look likely to suffer loss of income based on current social distancing guidelines. Fannie Mae recently announced a forbearance program for multifamily loans affected by the coronavirus. Freddie Mac and Ginnie Mae have yet to announce their relief programs, though based on the agencies’ response to previous catastrophic events, it’s possible to outline the scope of what directed forbearance programs may entail for multifamily borrowers and investors.

Fannie Mae and Freddie Mac, with the support of the FHFA, are likely to co-ordinate support for multifamily borrowers throughout the coronavirus crisis. These efforts are likely to be similar to accommodations made after Hurricanes Harvey, Irma and Maria hit the mainland US and Puerto Rico in 2017. Both GSEs put standard forbearance programs in place in the wake of the catastrophic hurricanes. Since Fannie Mae provided more disclosure regarding their efforts after the hurricanes, it largely informs this analysis, although Freddie Mac’s program was fundamentally the same.

Q: How long is the forbearance period?

Fannie Mae has announced that a temporary payment forbearance period of at least 120 days will be granted to loans backed by properties impacted by the economic effects of the coronavirus if requested by a lender.

After the hurricanes, the GSEs allowed multifamily servicers to grant forbearance from loan payments for up to three months to borrowers with properties affected by the hurricanes. Fannie Mae could grant further extensions to forbearance on a case-by-case basis. During the forbearance period Fannie Mae required servicers to work with borrowers to make damage assessments, file insurance claims and make other preparations to respond to the damage.

Fannie Mae reported the loans as delinquent in their MBS disclosures, but did not take any adverse action against the borrowers for loan delinquency during the forbearance period. For example, the borrowers or loans were not reported as delinquent to banks or credit rating agencies.

This is consistent with the standard multifamily forbearance agreement, which grants forbearance for 90 days.

Q: Can servicers grant forbearance if multifamily tenants can’t pay rent?

Yes. Freddie Mac stated explicitly in their hurricane response that servicers can grant forbearance for “other factors that can affect the borrower’s ability to make payments, including the tenants’ ability to pay rent.”

Q: Did the investors continue to receive payments during forbearance?

Yes. Loans in forbearance due to the Hurricanes remained in the pool, and the GSEs advanced scheduled payments to investors as guaranteed by the timely payment of principal and interest.

Fannie Mae has stated in their COVID-19 response that they may choose to advance principal and interest payments for up to 2 years before being required to buy the loan out of the MBS trust, which results in a prepayment in full without prepayment penalties.

Q: What happens at the end of the forbearance period?

At the end of the hurricane forbearance periods, the borrower was required to bring the loan current either within twelve months or upon receipt of insurance proceeds by the borrower or servicer, whichever occurred first.

If the loan continued to be delinquent, Fannie Mae evaluated loans at the end of the forbearance period and could remove them from MBS based on their delinquency status or other factors. Throughout the delinquency period Fannie Mae continued to make timely payments of principal and interest as scheduled, just as is done for any other delinquent loan still in an MBS trust.

Q: What occurs if the delinquency isn’t cured?

Once the forbearance period has lapsed, loans that become delinquent due to a catastrophic event are treated the same as loans that become delinquent for other reasons. If the delinquency cures and the loan becomes current, the MBS will remain outstanding. If the loan is persistently delinquent Fannie Mae has the right, but not the obligation, to purchase the loan out of the MBS trust when the loan becomes four months delinquent. The result is a full prepayment of principal at par, without a prepayment premium, and any accrued interest on the date of the prepayment. Fannie Mae is generally obligated to purchase the loan out of the trust after 24 consecutive missed payments.

Q: Where can I find additional information on the GSE’s catastrophic event programs?

The most recent information can be found in Fannie Mae’s Multifamily Investor Communication Regarding COVID-19. Additional details from Fannie Mae can be found in the Fannie Mae Multifamily MBS – Catastrophic Events FAQs and the December 2017 announcement regarding Multifamily Mortgage Loans in Forbearance Due to Hurricane Damage.

Freddie Mac’s multifamily support program was announced in Servicing Standard Updates for Hurricanes Irma and Harvey, with follow-up information in the Impact of Hurricanes on Multifamily Loans.

Q: Did Ginnie Mae launch a similar disaster relief program for multifamily borrowers?

Ginnie Mae did offer a disaster relief program to single-family borrowers after Hurricanes Harvey and Irma, but there was no formal program announced for multifamily borrowers. There was this reference in a Ginnie Mae memorandum from September 2017:

Multifamily Issuers facing substantial economic hardships as a result of Hurricane Harvey or Hurricane Irma should contact their Ginnie Mae Account Executive directly to assess potential relief options under the Multifamily Program.

Q: Then what’s going to happen with Ginnie Mae project loans?

Unlike Fannie and Freddie, Ginnie Mae doesn’t own the credit risk for the project loan – that is retained by the issuer, who is typically also the originator, and the mortgage insurer, typically the FHA. When the mortgagor defaults on a payment the decision to enter into a forbearance agreement or buy the loan out of the pool belongs to the issuer, though it normally requires written approval from Ginnie Mae and the insurer.

Based on conversations this week with the FHA, decisions on policy for handling multifamily loans are just getting underway. If FHA’s past responses to disaster and its’ current approach to single-family loans are good guidance, then issuers and servicers will have significant discretion to offer initial forbearance. FHA wants to streamline the process for initial relief, and put more traditional due diligence in place for any further requests for relief.

For investors in Ginnie Mae project loans, the crisis raises the risk of default. Although Ginnie Mae covers any losses on principal, it does not cover payment of loan penalties. Investors leveraged to payment of penalties could see cash flows fall short.

john.killian@santander.us 1 (646) 776-7714

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