By the Numbers
Assessing risk for FRESB investors
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 epicenter of multifamily loans in forbearance for Freddie Mac has been in the small balance loan program as opposed to those in the standard K-series. A FRESB deal with 20% of loans in forbearance can have a very idiosyncratic risk profile, where risk due to involuntary prepayments can range from zero to highly concentrated depending on the class. By drilling down on a tranche-by-tranche basis, investors can also track how loans in forbearance are transitioning either back to performing status or into serious delinquency and default.
Exhibit 1: Freddie Mac multifamily forbearance summary
Note: *projected losses assume all loans seriously delinquent or currently in special servicing default and have losses. It also assumes none of the loans that are currently performing or late, the bulk of which are still in forbearance, eventually default. Reasonable projections can vary substantially. All data as of 5/26/2021.
Source: Bloomberg, Amherst Pierpont Securities
A summary of multifamily loans that entered COVID-related forbearance across the two programs (Exhibit 1) shows that 1.6% of standard K-series loans entered forbearance, compared to 10.4% of small balance loans. This is not surprising and is in no way indicative of weaker underwriting of the small balance program. Small balance loans tend to be for smaller buildings, tend to skew towards properties that are owned by mom-and-pop investors and often provide housing for moderate- to low-income tenants. During Covid, those tenants were more likely to experience income loss and economic hardship and struggled more to pay rent. And obviously when two tenants cannot pay rent for six months, it has a much greater impact on the owner of a building with five units than one with 50 units.
Consequently, FRESB security investors have been tracking forbearance rolls carefully. Unlike FHMS or FREMF securities, which are structured with sequential classes or pass-throughs where the underlying collateral supports all classes, the loans in FRESB securities are assigned to particular tranches based on the interest rate type (fixed = F and hybrid fixed-to-floating = H) and maturity (5-, 7- or 10-year final). An investor in the A2 class of an FHMS security, or the loss-absorbing B-piece of its companion FREMF security, cares what total percentage of the collateral is in forbearance because involuntary prepays and defaults, respectively, impact the performance. The exposure for an investor FRESB 2019-SB60, for example, where 21% of the collateral entered forbearance, ranges from a high of 38% in the A5H security to a low of 3.0% in the A7H security (Exhibits 2 and 3, tables in order by deal vintage and number).
Exhibit 2: FRESB loans that entered COVID-19 forbearance by tranche
Note: Starred deals ‘*’ have non-standard asset groupings and it cannot be definitively determined which loans belong to each tranche. Please refer to deal documents for these deals. The % of tranche in forbearance is calculated as the current trust balance of the loan(s) in forbearance divided by the amount of UPB outstanding of the tranche. As a loan stays in forbearance or falls delinquent the trust balance will increase by the forborne or delinquent payments. In some instances the current trust balance of the loan may exceed the tranche UPB outstanding, in particular if that loan is the last one outstanding in the tranche. Data as of 5/26/2021.
Source: Bloomberg, Amherst Pierpont Securities
Exhibit 3: Current payment status of loans that entered COVID-19 forbearance by tranche
Note: Loans in COVID-19 forbearance that have not fully cured are on the watchlist, which is designated with a (w) on the payment status. Data as of 5/26/2021.
Source: Bloomberg, Amherst Pierpont Securities
Once the risk profile is identified for the specific deal and tranche, investors can use that to assess the payment status of loans in forbearance for a particular tranche. Of the 21% of collateral that entered COVID-related forbearance at some point in the FRESB 2019-SB60 deal, 1.2% has exited forbearance and is reperforming, 15% is performing while still in forbearance and 3% is already in special servicing or default (Exhibit 3). In the FRESB 2019-SB60 A10H tranche, 27.9% of the collateral entered forbearance: 11.2% of that collateral is in forbearance and currently performing, while 16.7% (from 10 loans) is 90+ days delinquent and in special servicing (Exhibit 4). This illustrates the considerable different in risk exposure across tranches even in the same deal. The A7H class of the SB60 deal only has 3% of the underlying UPB that ever entered forbearance, while this A10H class has 27.9% and 16.7% of those are already in special servicing and will likely result in default.
Exhibit 4: Current status of loans in COVID-19 forbearance for a particular tranche
Note: Table on the left shows the current loan UPB; table on the right shows UPB as % of the tranche. All data as of 5/26/2021.
Source: Bloomberg, Amherst Pierpont Securities
Investors need to drill down on loan-by-loan in each security to determine the exposure by tranche.
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