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A first look at the impact of COVID-19 on Freddie Mac multifamily housing
admin | May 1, 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.
Although the total share of multifamily mortgages in forbearance looks low so far, according to data released by Freddie Mac and Fannie Mae, exposure across different multifamily CMBS varies substantially. Forbearance ranges from 0.33% of principal to 9.87% in regular Freddie Mac K-deals with higher percentages in other programs. The forbearance exposure could turn into credit events for the unguaranteed classes of Freddie Mac securitizations. For guaranteed classes, the issue is prepayments. Defaults come through as prepayments at par, typically when the property is liquidated. With some K-series A1 classes priced as high as $117, trading in these premium securities has turned a bit sloppy in part from the uncertainty surrounding forbearance uptake by borrowers in the underlying collateral.
This first look at Freddie Mac multifamily loans in forbearance provides some needed initial clarity.
Background
Freddie Mac securitizes multifamily mortgages through several programs:
- Freddie Mac’s Small Balance Loans (SBL) are generally from $1.0 – $7.5 million for properties with 5 – 50 units. The SBL program began in 2015 and total issuance has been $25.0 billion. Small balance loans are issued off the FRESB shelf.
- The K-deal program started in 2009 and encompasses a variety of series, but these are all referred to as “K-deals”. The standard series is FHMS KXXXX but other types include “value-add” (KI), “lease up” (KLU), “large loan” (KL), “workforce housing” (KW) and Q-deals (KQ), which are third party loans re-underwritten by Freddie Mac. A complete list of deal types appears in Exhibit 4. Across all K-series there has been $386 billion of total issuance since the program began in 2009, and $61 billion of issuance in 2019.
There are 279 Freddie Mac loans totaling $1.5 billion in principal balance that are in forbearance due to COVID-19 (Exhibit 1). This is so far a tiny fraction of the roughly 27,000 Freddie Mac multifamily loans currently outstanding, but there are some interesting trends that investors need to monitor:
- Of the $1.5 billion of loans already in forbearance, 35% ($510 million) are in Freddie Mac small balance deals (Exhibit 2) compared to 65% ($950 million) which are in Freddie Mac K-deals. Considering the relatively small size of the FRESB program that’s a relatively rapid uptake of forbearance by borrowers.
- Across deals, the percent of collateral that is in forbearance ranges from 0.33% to 9.87% in regular Freddie K-deals, though jumps to as high as 17.58% in some Q-series.
Small Balance Loans (SBL) are generally from $1.0 – $7.5 million for properties with 5 – 50 units. The SBL program began in 2015 and total issuance has been $25.0 billion.
Exhibit 1: Multifamily loans in Freddie Mac deals that are currently in forbearance due to COVID-19
Note: The loans are considered be in forbearance due to COVID-19 based on their modification date. There are 10 loans included totaling $135 million in principal balance for which no modification date is listed – those loans could potentially be in forbearance for other reasons. Data as of April 28, 2020. Source: Bloomberg, Amherst Pierpont Securities
Exhibit 2: Loans in forbearance due to COVID-19 in Freddie Mac K-deals
Source: Bloomberg, Amherst Pierpont Securities
Exhibit 3: Loans in forbearance due to COVID-19 in FRESB deals
Source: Bloomberg, Amherst Pierpont Securities
A complete list of Freddie Mac loans in forbearance in Excel is available for anyone who would like it. Fannie Mae is publishing separately on their website a list of loans in forbearance, which is discussed in the article Nuances of agency multifamily forbearance.
Exhibit 4: Freddie Mac multifamily K-series deal types
Source: Freddie Mac Multifamily Securitization Overview – December 31, 2019
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