Uncategorized

Forbearance highlights the weakest loans

admin | October 22, 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.

The Covid pandemic has shown so far that multifamily loans with slightly weaker underwriting have been more likely to seek out forbearance. Fannie Mae multifamily loans in forbearance tend to have lower debt service coverage ratios and higher loan-to-value ratios at underwriting than loans not in forbearance. A handful of states also appear to have significantly higher-than-average rates of distressed loans. Loans in extended forbearance with DSCRs that have fallen below 1.0 raise the question of whether they can recover.

Fannie Mae multifamily loans current as of June 30 had lower LTVs on average across all product types than loans in any stage of delinquency (Exhibit 1). Current DUS loans also tended to have higher DSCRs at underwriting than delinquent loans, with loans delinquent 90 days or more having average DSCRs of 1.52 compared to current loans with average DSCRs of 1.70. This is not the case for loans 60 days delinquent, though their average occupancy was 92.1% compared to 93.7% for current loans. The non-DUS, bulk delivery and credit facility loans show a mix of DSCR metrics, but the population of delinquent loans in those products are too small to draw any conclusions.

Exhibit 1: Fannie Mae multifamily credit overview

Note: The loan to value ratios (LTV) are at the time of loan acquisition. The debt service coverage ratios (DSCR) and occupancy rates are as of loan underwriting. Loan performance data as of 6/30/2020. Loans in forbearance are marked as delinquent by servicers even though the payment is not legally due. So a loan that has been in forbearance for 1 month is 30-59 days delinquent, and a loan that is in extended forbearance is 90+ days delinquent. Table above reflects credit metrics of loans that were currently outstanding at the end of Q2 2020.
Source: Fannie Mae, Amherst Pierpont Securities

The number of loans that applied for or entered forbearance continued to rise modestly during the third quarter. Focusing on the loans that applied for or entered forbearance at any time through mid-October, the deterioration in the DSCR, particularly for loans that were repurchased or entered extended forbearance, is quite dramatic (Exhibit 2).

Exhibit 2: Fannie Mae multifamily forbearance summary

Note: Repurchased loans are no longer outstanding. Loans that withdrew or later resolved their forbearance do not have their UPB included in Fannie Mae’s total forbearance amounts. Current LTV and DSCR are from Bloomberg as of 10/20/2020. Fannie Mae forbearance summary as of 10/15/2020.
Source: Fannie Mae, Bloomberg, Amherst Pierpont Securities

Loans that have already defaulted and been repurchased out of forbearance have DSCRs that fell from an average to 1.61 to 0.67. The 33 loans totaling $442 million in UPB that have been granted an extension of forbearance are not obviously in much better shape, as their DSCRs have deteriorated from an average of 1.70 to 0.90. This group is at particularly high risk for transitioning into default and repurchase over the next few months. The three loans whose forbearance has expired and will likely soon be repurchased by Fannie Mae.

The loans that have already defaulted and those at risk of default are also somewhat smaller in average size at $10.7 million and $8.1 million, respectively, compared to the average loan size across all DUS loans of $13.1 million. Overall, the $15.5 million average size of Fannie Mae loans in forbearance is above the mean. But smaller loans are typically for smaller properties, which can have less ability to compensate for a few tenants that cannot pay rent or for a rapid drop in occupancy rates. Freddie Mac’s program for smaller loans, FRESB, has shown more stress than the larger loans in its K series.

A quick look at geography

Geography is also having a clear impact. The defaulted loans currently in workout come from a handful of states with the largest amounts in Texas, Indiana and Ohio, followed by Georgia and Nebraska (Exhibit 3).

Exhibit 3: Loans repurchased from forbearance

Note: Fannie Mae forbearance summary as of 10/15/2020.
Source: Fannie Mae, Bloomberg, Amherst Pierpont Securities

The overall percentage of DUS loans in forbearance or repurchased is 1.5%. These loans are broadly distributed by state, although the percentage of DUS loans within that state that are in forbearance or repurchased is not equal (Exhibit 4). All of the four states that have the highest UPB of loans that have already been repurchased are also among the group that overall has higher than average forbearance rates. These states are joined by Mississippi, Louisiana, Alaska, Virginia, Maryland and New York as among those with more than 2.0% of outstanding DUS loans in the state in some stage of delinquency.

Exhibit 4: Percentage of DUS loans in forbearance or repurchased by state (UPB in millions)

Note: For DUS pools that have properties in multiple states, the entire balance is attributed to the state with the largest concentration of loans. States that are not listed have zero loan balances currently in forbearance or repurchased. Total reflects total outstanding balances from all states, including those not shown. Forbearance and repurchase data as of 10/15/2020. Outstanding DUS balances by state as of 6/30/2020.
Source: Fannie Mae, Bloomberg, Amherst Pierpont Securities

Agency default and loss rates serve as an important benchmark for the overall multifamily market, and tracking performance over time helps put the current crisis in context (Exhibit 5).

Exhibit 5: Fannie Mae multifamily performance comparison

Note: All performance data as of 6/30/2020.
Source: Fannie Mae, Amherst Pierpont Securities

Complete historical performance data for Fannie Mae multifamily is available through June 30 (table on the left). Loan payment status for current loans (table on the right) shows performance for the $344 billion outstanding. Clearly the potential defaults are going to draw heavily in vintages from 2015 and later. The default rates by vintage do not look likely to meet or exceed the worst years of the financial crisis, which had default rates of 4.00% to 5.50% for the 2006 to 2008 vintages. The 2015 vintage currently has the heaviest delinquencies at 3.92% of outstanding UPB. It is possible that the loss severities could be higher than historical, simply because the accrued payments missed in forbearance will be capitalized into the losses. This could be particularly true of loans that default after being in extended forbearance with up to six months of missed payments.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

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.

Important Disclaimers

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.