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Moderate loss projections as DUS loans enter repayment

| April 23, 2021

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 delinquency rates remain near historical highs, Fannie Mae’s multifamily forbearance rolls continue to shrink as more loans enter repayment and begin to cure. A small proportion of DUS loans that entered forbearance have been repurchased out of securities and entered workout. Updated performance projections incorporating repurchased loans indicate that although default and cumulative losses may rise, they should remain well below levels reached in the wake of the 2008 housing crisis.

Across Fannie Mae’s multifamily portfolio, 370 loans representing 1.58% of outstanding UPB requested or entered forbearance; based on Fannie Mae’s most recent forbearance report, 247 of those loans comprising 0.93% of outstanding UPB currently remain in forbearance or are in repayment.

Exhibit 1: Status of Fannie Mae multifamily loans that entered forbearance

Note: Data as of 4/15/2021.
Source: Fannie Mae, Amherst Pierpont Securities

Forty-four loans totaling $483 million (0.12% of UPB) have defaulted and been repurchased from securities. None of these loans has completed workout or recorded losses based on Fannie Mae’s multifamily loan performance database as of the last quarter of 2020.

The multifamily loan performance summary (Exhibit 2) does show that defaults are beginning to increase modestly in post-housing crisis vintage loans. Loss severities continue to average about 30%, with some recent severities as high as 50% and a few with positive recoveries (negative loss severities). This usually is the result of a property selling for more than the delinquent loan amount (outstanding balance plus all fees and expenses).

Exhibit 2: Fannie Mae multifamily loan performance summary

Note: Analysis based on most recent update through Q4 2020.
Source: Fannie Mae, Amherst Pierpont Securities

The loans that were in forbearance that have been bought out of DUS pools since the pandemic began are summarized in Exhibit 3. The current delinquent amount of the 44 loans is $443 million. A group of loans were bought out in August 2020 while other buyouts have been more recent.

Exhibit 3: Multifamily loans in forbearance repurchased from DUS pools

Note: Data as of 4/15/2021. Source: Fannie Mae, Bloomberg, Amherst Pierpont Securities

Loan performance is projected (Exhibit 4) by adding the above group of repurchased loans to defaulted loans. A loss severity of 35% is assumed to compensate for expenses and fees that would be added to the delinquent amounts.

Exhibit 4: Fannie Mae projected performance summary

Note: Projections assume that all 44 loans that have been repurchased from securities as of 4/15/2021 default at current delinquent balances. Loss severities are assumed to be 35%.
Source: Fannie Mae, Bloomberg, Amherst Pierpont Securities

A note on loss severities: They vary considerably depending on the method of liquidation (Exhibit 5). The highest average loss severities are for loans that go through foreclosure. Deeds-in-lieu of foreclosure presumably avoid the court costs, and discounted payoffs and third-party sales have the lowest severities. Repurchases by the lender is not equivalent to when Fannie Mae repurchases the loans from securities. That is most likely done when there is a defect in the underwriting and the loan is bought back by the original lender at close to face value plus any expenses.

Exhibit 5: Fannie Mae multifamily average loss severities by liquidation method

Note: All data updated through Q4 2020.
Source: Fannie Mae, Amherst Pierpont Securities

Overall delinquency rates have been steady at about 1.3% of outstanding loans since the pandemic hit (Exhibit 6). Loans in forbearance are marked as delinquent, and then roll out of delinquency as they complete repayment and cure forbearance. That’s why there is an early jump in 30-day delinquencies at the beginning of the pandemic that transition into the 60-day then 90+ day delinquency bucket. Now many of those loans have entered repayment and began transitioning out of 90+ days delinquency into 60 and 30 days delinquency buckets. This data is through the fourth quarter of 2020, so more loans have become reperforming and those overall delinquency percentages should have declined modestly by now.

Exhibit 6: Fannie Mae multifamily delinquencies

Note: Data through Q4 2020.
Source: Fannie Mae, Amherst Pierpont Securities

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