Nuances of agency multifamily forbearance

| April 24, 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.

Mortgage servicers have begun accepting and processing applications for the multifamily forbearance programs launched by Fannie Mae, Freddie Mac and HUD. Differences in implementation, required documentation and ongoing surveillance between the three programs have already led to disparate rates of uptake by multifamily borrowers.

The agencies have taken various measures in an effort make sure that multifamily borrowers entering into forbearance agreements are actually in financial need. Fannie Mae’s forbearance agreement contains the strongest protections, by requiring borrowers to enter into a cash flow sweep agreement, where all operating cash flow is directed towards loan payments throughout the forbearance period. The sweep is subject to borrower certification each month that the remitted payment represents all operating cash flow.

Multifamily mortgage servicers have asked Freddie Mac and Ginnie Mae borrowers to document their financial need by providing monthly rent rolls, but those forbearance agreements do not require the cash flow sweep provisions. This stricter financial condition and the additional operational hurdles it imposes has led to a very small number of Fannie Mae multifamily loans so far entering forbearance – four loans totaling $94 million in principal balance as of 4/22/2020 (Exhibit 1). In addition, servicers have stated that the number of inquiries and active requests they have received from Fannie Mae borrowers has dropped precipitously when they learn of the cash flow sweep.

Exhibit 1: Fannie Mae multifamily loans in forbearance due to COVID-19

Note: The heat map score is a range from 1 to 48 that scores multifamily properties by Congressional district, based on how exposed renter households in that district are to job losses and income stress due to COVID-19. A heat map score of 1 is green, which is the lowest exposure; a score of 48 is red, the highest exposure. See Exhibit 2 for a frequency distribution. Source: Fannie Mae, Amherst Holdings, Amherst Pierpont Securities

Because there are only four Fannie Mae multifamily loans already in forbearance, and Freddie Mac and Ginnie Mae have not yet released details of their loans in forbearance, it’s unwise to draw any conclusions. However, it’s possible to make a few broader points based on the details of Fannie Mae’s forborne loans.

  • Of the four loans already in forbearance, three of the loans have heatmap scores above average, with Brooklyn property located in one of the top 5 Congressional districts in the country where renters are potentially the most stressed by job and income loss.
  • While the Dallas Texas property has an above average heat map score, perhaps a more significant sign of potential distress is the barely above breakeven debt service coverage ratio.
  • Although the score for the White Plains property is roughly average, it’s a senior housing property, the multifamily segment that has come under the most stress due to COVID-19. Senior housing, nursing homes and assisted living/skilled nursing properties have experienced a dramatic rise in expenses due to the need for increased staff and better equipment as a result of health and social distancing measures. At the same time many seniors have left or been relocated from these properties due to the perceived higher risks of virus transmission, decreasing the number of tenants and putting downward pressure on rental income.

Another nuance is that Fannie and Freddie have both included senior housing within their forbearance programs. HUD has stated that nursing homes and assisted living/skilled nursing properties are not included in the streamlined forbearance protocol, but borrowers may apply for forbearance and those requests will be reviewed on a case by case basis.

Exhibit 2: Distribution of heat map scores across 437 Congressional districts

Note: The average heat map score across the 437 Congressional districts is 11.3, with a standard deviation of 7.7. However the distribution of heat map scores is leptokurtic and skewed. Only 10.8% of districts have a heat map score of 21 or higher, and less than 7% of districts have greater than or equal to 25. Source: Amherst Holdings, Amherst Pierpont Securities

Freddie Mac and Ginnie Mae have not yet released data of their multifamily loans in forbearance, but Fitch Ratings has been collecting data from mortgage servicers across the CMBS universe to log the number of coronavirus related requests (Exhibit 3). The number of requests or inquiries for coronavirus relief from Freddie Mac borrowers was 645 by the middle of April, representing 1.4% of the total multifamily book, or 2.4% of the roughly 27,000 multifamily properties.

Exhibit 3: US CMBS coronavirus related relief requests

Note: During both of the first two period, loans secured by hotel, retail and multifamily assets represent approximately 75% of relief inquiries. Source: Data collected by Fitch Ratings from the four largest CMBS master servicers – Wells Fargo Bank, Midland Loan Services, KeyBank National Association and Berkadia Commercial Mortgage; *Freddie Mac multifamily securitization overview December 31, 2019; Amherst Pierpont Securities

It’s likely that a much larger proportion of the requests and inquiries for forbearance from Freddie Mac borrowers will become active forbearance agreements since the hurdles to execution are lower.

Background on the eviction moratorium in the CARES Act

All three of the housing agencies incorporated the provisions of the CARES Act into their forbearance programs. Tenant protections and landlord requirements are covered in Section 4024 of the Act. An excellent overview is available in the CARES Act Eviction Moratorium, by the Congressional Research Service. The Section prohibits landlords of rental properties that have federally backed mortgage loans, or participate in federal assistance programs, from initiating eviction proceedings against a tenant for the nonpayment of rent for 120 days from enactment (March 27, 2020). Landlords are further prohibited from assessing fees or penalties for nonpayment. At the end of the 120 day period (July 25,2020) landlords must provide the tenant at least 30 days-notice before they must vacate the property (August 24, 2020).

The need for higher frequency data

Payment reports for loans underlying agency CMBS are released on the 25th of each month, so investors only get a comprehensive view of how many borrowers are utilizing forbearance programs at the end of the month, weeks after the payment deadline. However, the COVID-19 emergency has forcefully demonstrated the need for higher frequency data to monitor economic, tenant and borrower stress in real time. This has led some mortgage servicers, property management software companies and the agencies themselves to release more frequent updates.

Fannie Mae has been the first agency to respond to the market, releasing a list of multifamily loans already in forbearance due to COVID-19 (Exhibit 1) on DUS Disclose, and promising to update the list weekly.

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

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