Freddie Mac multifamily loan forbearance surges in April with more likely in May
admin | May 7, 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.
Freddie Mac has seen a surge of loans in forbearance and requests for forbearance from multifamily borrowers in April with more likely through May. COVID-19 has had a heavy impact on senior independent living communities and small balance loans in FRESB deals. Impact across deals averages about 3.4% of the underlying loan balance but varies from a low of 0.25% to a high of 27.8%. Loans that enter forbearance likely have a higher probability of eventual default and can have a greater loss severity during workout. Accelerated prepayments due to defaults could cause premium bonds and IOs to underperform and put downward price pressure on the non-guaranteed FREMF B and C classes.
There are currently 441 Freddie Mac multifamily loans totaling $2.8 billion in principal balance that are either actively in forbearance or are on the COVID-19 impact list (Exhibit 1), the vast majority of which have already requested forbearance .
Exhibit 1: Freddie Mac multifamily loans affected by COVID-19
Note: A list of loans in forbearance can be produced on Bloomberg using appropriate criteria . A broader method of monitoring impact on loans due to COVID-19 has also been developed by Bloomberg, which lists loans in CMBS where servicers included the word ‘COVID’ in the servicer commentary so that investors could do further research. The COVID-19 list can be compared to the forbearance list, producing a category of loans actively in forbearance and those impacted by COVID-19 but not yet in forbearance as of the latest update from the servicer, which typically occurs monthly. The servicer comments from the underlying Freddie Mac loans revealed 91.2% of the loans on the COVID-19 impact list that are not currently in forbearance have an outstanding request for forbearance. Data as of 5-4-2020. Source: Bloomberg, Amherst Pierpont Securities.
More than 91% of the loans on the impact list that were not in forbearance as of the April 27 tape date have inquired about or notified the servicer that they intend to seek forbearance (Exhibit 2) or are already applying for forbearance.
Exhibit 2: Breakdown of Freddie Mac multifamily loans on the COVID-19 impact list
See Exhibit 1 for notes on methodology. Source: Bloomberg, Amherst Pierpont Securities
Commentary from servicers suggests a pipeline of issues from COVID-19 (Exhibit 3). A few of the loans have already entered forbearance but the agreement has not yet been reflected in the data. Borrowers requesting forbearance has typically triggered the loan being put on the watchlist with code 6A for “other issues”, but this does not seem to be entirely uniform. Some loans have been on the watchlist repeatedly or for long durations of time, and the COVID-19 crisis appears to be exacerbating their financial difficulties.
Exhibit 3: Sample of commentary from COVID impact loans not currently in forbearance
Note: This is a small sample of the 125 loans on the impact list that are not currently in forbearance. The commentary above only includes the excerpt that is relevant to the COVID mention. Many loans have extensive comments, particularly ones that have been on the watchlist in prior months. The complete list of COVID-related excerpts for each loan is available upon request. Source: Bloomberg, Amherst Pierpont Securities.
Exposure by shelf and by property type
The FHMS and FRESB deals that contain loans either actively in foreclosure or on the COVID impact list is summarized in Exhibit 4. The average exposure for FHMS deals is 3.4%. Notably some of the non-standard K-series deals tend to have among the highest levels of exposure to loans that are in or have requested forbearance, including a senior deal (KS) with 27.8%, one deal with loans from third-party originators (Q) with 17.6% exposure, both lease-up deals (KLU) with exposure of 6.6% and 12.7% respective, and some of the later floating rate (KF) deals have significantly higher exposure with many levels around 8%.
Exhibit 4: Summary of Freddie Mac multifamily deals with COVID-19 exposure by shelf
Source: Bloomberg, Amherst Pierpont Securities
FRESB deals tend to have higher exposure than FHMS deals, with 4.8% of the underlying collateral on average comprised of loans in forbearance or impacted by COVID-19. Small balance loans issued off the FRESB shelf proportionally make up only 8% of unpaid principal balance (UPB) of Freddie Mac multifamily deals, but comprise 28% of the UPB of loans already in forbearance or impacted by COVID-19. This overweight is not surprising given the characteristics of small balance loans. These are typically mom and pop type borrowers that own properties from five to 50 units, where a handful of tenants who cannot pay rent can quickly translate into financial hardship for the borrower.
Exhibit 5: Loans in forbearance or impacted by COVID-19, by shelf
Source: Total loan counts and total outstanding UPB numbers from Freddie Mac’s Multifamily Securitization Forbearance Report with data as of 4-13-2020; Bloomberg, Amherst Pierpont Securities
The concentration of COVID-related impact on senior housing is just beginning to emerge (Exhibit 6), but this too is likely to increase rapidly during May and possibly into June. Due to the much greater vulnerability of seniors to the virus, the increased costs from additional staff, equipment and social distancing measures are likely to be sticky. Moreover, the decreases in occupancy rates due to individuals and family members exercising caution and moving themselves or residents out of the facilities could prove persistent, and may fall further in the coming months.
Exhibit 6: Breakdown of Freddie Mac loans in forbearance and COVID-impacted by property type
Note: All data as of 5-5-2020. Does not include property subtypes Other, Health Care, Medical Office / Assisted Living, Cooperative or Mixed Use. Source: Bloomberg, Amherst Pierpont Securities.
The jump in seniors housing loans impacted by COVID-19 is currently almost entirely in the Independent Living sector. In fact, all of those 20 loans are in the FHMS KS05 deal (all senior housing) and the notes from the servicer indicate that a borrower had plans to sell a portfolio of 78 loans in Q1 2020 but the deal fell through and there is currently no sale pending. The borrower claimed hardship due to COVID-19 and requested forbearance, and that request is in process. Many of the 78 loans in the portfolio are in the deal, and of the 20 impacted by COVID-19 the majority had been watchlisted for several months due to other issues.
Exhibit 7: Example of breakdown by property type across FREMF 7-year fixed rate deals
Note: All data as of 5-5-2020. Excel workbook that covers breakdown of all FREMF deals by property type available upon request. Source: Bloomberg, Amherst Pierpont Securities
Student housing is another property type that has so far only shown a trickle of impacted loans, but one that investors are watching nervously. Properties in the weakest markets – where student housing was overbuilt – have been among the first to succumb to pressure. Although the FHMS/FREMF pools are usually diverse, some do have outsized exposure across seniors and student housing (Exhibit 7).
On May 8, the National Multifamily Housing Council will release the first report tracking rent payment rates of multifamily tenants in May. The should begin to establish a bar for how many multifamily borrowers may ultimately seek forbearance.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.