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Forbearance highlights the weakest loans

| 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.

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