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Mapping tenant risk into multifamily loans

| April 3, 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.

One month into the pandemic two things are clear: the economic ramifications vary greatly based on the industry and its location; and renters who are employed in those hard-hit industries and areas are likely to be more vulnerable to financial setbacks than homeowners. A heat map is utilized for multifamily CMBS to score the proximity of underlying properties to the most troubled areas and help assess relative risk across deals.

There are 122 million households in the US, where 44 million or 36% of those are renters and 78 million or 64% are owners. As a group, renters tend to have less education and lower incomes than homeowners. Only 26% of renters have a bachelor’s degree or higher compared to 39% of owners. Renters have a significantly lower median income than homeowners, $36,100 for renters in 2017 compared to $70,000 for owners, and the distribution of income for renters tends to be skewed lower than the distribution for homeowners (Exhibit 1).

Exhibit 1: Household income of renters vs owners

Source: American Housing Survey 2017, US Census Bureau, Amherst Pierpont Securities

As a group renters are more vulnerable than owners to potential job loss and financial strains from COVID-19. A greater proportion of renters tend to work in hourly wage jobs and in the hard-hit hospitality, transportation and service industries. As shutdowns have spread across the country, retail, construction and trades have also come under enormous pressure from layoffs and are likely disproportionately affecting renters.

Mapping where help is needed most

The federal government and the GSEs have begun forbearance programs for multifamily borrowers that include protection from eviction for tenants. Coupled with the expansion of unemployment benefits, sick leave and cash payments under the CARES Act, these measures should alleviate some of the pressure on both renters and owners. However, it’s unlikely that renter households in particular will be capable of fully catching up on back rent after forbearance ends.

Analysts at Amherst Holdings led by Sandeep Bordia evaluated areas across the country with employment concentrated in those industries hardest hit by COVID-19. They calculated the amount of rental payment support that is likely to be needed, broken down by Congressional district, in Coronavirus: Don’t forget America’s 43.8 million renters. The projected amount of additional rental payment support varied from a low of $6 million in a modestly impacted district in New Mexico, to a high of $54 million in one of the Congressional districts of New York. The districts that are projected to need the greatest amount of support for renters are located in states with currently the largest numbers of cases, including New York, California and New Jersey.

Congressional districts have roughly equal populations by design, currently about 750,000 residents in each district, though their demographic and economic composition obviously varies widely. The amount of projected support required for multifamily renters in each district can serve as a heat map of potential difficulty faced by multifamily borrowers in those areas as well. Based on the base case calculations of additional support from $6 million to $54 million the heat map has scoring from 1 to 48, with 1 being the lowest score (green) and 48 being the highest score (red).

Scoring COVID-19 exposure in agency CMBS

Freddie K-deals tend to be geographically diverse and benefit from low average loan size (Exhibit 2). Although the deals could not have been designed to lower multifamily risk from a pandemic, those two characteristics help mitigate risk. Heat scores range from 1 to 48, but most Freddie K-deals have weighted average scores in the mid- to low-teens. Deals with heavy defeasance but a few concentrated loan exposures in hard-hit areas need monitoring, because the extension of forbearance to multifamily borrowers is likely to increase loss severities for loans that do eventually default.

Exhibit 2: Heat map scoring for FREMF 2019-K43

Source: Freddie Mac, Amherst Holdings, Amherst Pierpont Securities

Deals with heavy defeasance but a few concentrated loan exposures in hard hit areas need monitoring, because the extension of forbearance to multifamily borrowers is likely to increase loss severities for loans that do eventually default.

Exhibit 3: Heat map scores for a sampling of Freddie K-deals

Source: Freddie Mac, Amherst Holdings, Amherst Pierpont Securities

This analysis has been extended to include all Freddie K-deals, Ginnie Mae project loans and Fannie Mae DUS pools and GeMS. Complete results available upon request.

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