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A welcome slowdown in multifamily forbearance
admin | June 26, 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.
The pace of multifamily loans entering forbearance has slowed dramatically in June after surging in April and May. The proportion of tenants struggling to pay rent due to the economic impact of the crisis has also started to show modest improvement. The complicating issue now could be one of timing, as the first multifamily borrowers who entered agency forbearance programs in April are expected to start paying their loans again in July. Supplemental unemployment benefits, which have allowed many tenants to continue paying rent, are set to expire on July 31. If the economic rebound is vigorous and sustained, this mismatch should cause minimal issues. If the economic rebound sputters, additional government support and an extension of forbearance programs will likely be required to prevent a rapid transition from forbearance into default.
Timing the transition for borrowers and tenants
Forbearance periods and eviction protection for multifamily tenants established under federal powers in March were set as 120 days from enactment of the CARES Act; these protections expire at the end of July. Tenants in buildings where the borrower has entered into a forbearance agreement with one of the agencies can request extended rent forbearance through the period of the borrower’s loan forbearance. Given that the bulk of multifamily borrowers entered forbearance agreements in April or May, those 90-day terms will be up either at the end of June or July, assuming the forbearance period is not extended under the agreement. Borrowers will therefore be expected to begin remitting full payments on their loans and curing the forborne amounts as of the July or August payments.
Tenants who have been granted forbearance under the federal program should resume paying rent in August, and ostensibly begin curing the forborne rent. Many states and municipalities have extended tenant forbearance and protections from evictions due to COVID-19 for longer periods of time, putting additional pressure on multifamily property owners.
Based on the Household Pulse Survey conducted by the US Census, the percentage of renters who have not paid or deferred rent is beginning to fall modestly, improving from 17.8% to 16.1% week over week in mid-June. However most of these tenants have not yet returned to work or continue to work fewer hours due to the pandemic. Supplemental unemployment benefits of $600 per week are also scheduled to terminate on July 31 unless the program is extended by Congress.
A slowdown in multifamily loans entering forbearance
Freddie Mac’s multifamily forbearance rolls due to COVID-19 climbed by 170 loans in June to just shy of 2,000 total loans with unpaid principal balance (UPB) of $7.4 billion, up from $6.2 billion in May (Exhibit 1). This brings the percentage of loans in forbearance to 2.9% of Freddie Mac’s multifamily book outstanding across the FHMS and FRESB shelves. New loans entering forbearance continued to be heavily represented by the small balance loan (FRESB) program, which had 127 new loans in forbearance compared to 43 new loans from the FHMS shelf.
Exhibit 1: Freddie Mac multifamily loans in forbearance
Note: FHMS totals include all progams, with some non-core property subtypes (other, health care, medical office / assisted living, cooperative and mixed use) excluded if there are no outstanding loans in forbearance. FRESB totals include all property subtypes, though several (independent living, student, and senior) are small and have no outstanding loans currently in forbearance. Defeased (FHMS) and prepaid (FRESB) loans are also excluded in the total loan numbers and total balances. Defeased and prepaid loans are not excluded from the deal balance numbers. If deal balance is zero those loans are included in a deal that has other loans in forbearance to avoid double-counting. Data is as of May 2020. Source: Bloomberg, Intex, Amherst Pierpont Securities.
The number of K-series deals with loans in forbearance climbed to 154, up from 139 in May. Non-standard K-series deals continue to struggle most, with seniors deals (KS), lease-up (KLU), Q and floating rate series (KF) often having 15-20% or more of the balance in forbearance (Exhibit 2). There are a few standard K-series deals where the % of the deal in forbearance is close to or above 7.5%, which exceeds the attachment point for losses of the C mezzanine tranche. There is no expectation that all loans in forbearance will default, and certainly not all default with 100 loss severity. However, mezzanine tranches for those deal are likely to reflect the high levels of forbearance in the price. There are 68 FRESB deals with loans in forbearance, with 10.7% of the balance of these deals in forbearance on average. There are several FRESB deals with 25% of the loans in forbearance.
Exhibit 2: Freddie Mac multifamily deals with loans in forbearance due to COVID-19
Source: Freddie Mac, Bloomberg, Amherst Pierpont Securities
This slowdown mimics that seen at Fannie Mae, where only a handful of loans have entered forbearance over the past two weeks (Exhibit 3).
Exhibit 3: Fannie Mae multifamily loans in forbearance due to COVID-19
Source: Fannie Mae, Bloomberg, Amherst Pierpont Securities
The peak of forbearance has hopefully passed, and the speed and strength of the recovery may allow both tenants and borrowers to meet their obligations going forward.
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