By the Numbers
Monitoring the stress in small balance multifamily loans
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 pandemic took a particularly brutal toll on low- to moderate-income workers, and that economic stress flowed through to many small landlords that rent to those households. The relief funds appropriated by Congress did not get distributed efficiently enough to offset the consequences of the eviction moratorium for many landlords or their tenants, and a trickle of defaults and workouts continues to build in the small balance multifamily sector. Before the pandemic, the Freddie Mac small balance loan program showed minimal defaults. To date there have been 64 loans resolved or repurchased from FRESB deals, with 60 of those occurring during the pandemic. There are currently twice that many loans in some stage of delinquency or default that will likely be bought out during 2022.
Freddie Mac’s small balance multifamily loan program began after the housing crisis, with the first deal securitized in 2015. The rental housing market experienced strong property price appreciation and rent growth since the crisis, making loan defaults relatively rare. Only four small balance loans were bought out of deals due to non-performance before to the second quarter of 2020. Since then, 64 loans have been bought out of deals due to non-performance, with the current quarter already notching 13 loans and a new high of over $35 million in UPB (Exhibit 1).
Exhibit 1: History of FRESB loan buyouts due to non-performance
Note: Column labels indicate the number of non-performing loans bought out of FRESB deals each quarter. *2021 Q4 reflects quarter to date. Data includes all loans whose terminal status was some stage of delinquency, special servicing, foreclosure or REO. Does not include matured loans. Data as of 12/2/2021.
Source: Bloomberg, Amherst Pierpont Securities
The COVID-19 forbearance program was a tremendous success: at its peak, nearly 900 FRESB loans were granted some period of forbearance, representing 10% of outstanding UPB (Exhibit 2). About half of the loans granted forbearance (410 loans, $1 billion in UPB outstanding) have fully cured, and another third are currently in repayment and performing (329 loans, $950 million in UPB outstanding).
Exhibit 2: FRESB portfolio performance
Note: The summary of loans granted COVID-19 forbearance are those still outstanding. Twenty loans that were granted forbearance have already been bought out of deals and are included in the previous defaults or workouts. Of the 148 loans currently in some stage of delinquency or default, 96 of those loans were granted forbearance. Data as of 12/2/2021. UPB in millions.
Source: Bloomberg, Amherst Pierpont Securities
There are currently 148 loans representing $354 million in UPB outstanding that are in some stage of delinquency or default, 96 of which were granted a forbearance period (Exhibit 3). The bulk of these loans will likely proceed through workout and eventually be bought out of their pools during 2022. It is also possible that some of the loans that entered forbearance and are currently in the repayment period may eventually default. Conversations with servicers have indicated that many struggling multifamily borrowers have been able to refinance or sell their properties, in some instances fully curing delinquencies.
Exhibit 3: Summary of non-performing FRESB loans
Note: The “(w)” means the loan is on the watchlist; “ss” means the loan is in special servicing. All loans that were granted forbearance were put on the watchlist while in forbearance and during the repayment period. Data as of 12/2/2021.
Source: Amherst Pierpont Securities
The strong price appreciation in the multifamily sector will likely buffer losses on defaulted loans. This will be somewhat offset by the higher loan balances accrued during forbearance periods, which will put modest upward pressure on loss severities. There have been 13 loan buyouts already during the fourth quarter – a historical high for the FRESB program – and more are expected. Buyouts are likely to peak in the first or second quarter of 2022, depending on the speed with which special servicers can resolve workouts. The outlook for the broader multifamily market remains robust, though the dramatic price appreciation has already begun to slow and will probably be modest in 2022.
Investors in agency CMBS securities need to monitor the status of non-performing loans in their deals. The involuntary prepayments due to buyouts can result in underperformance of securities or DUS pools that are trading at a premium dollar price, because the principal is returned at par. A complete list of Freddie Mac small balance and K-series deals (FRESB and FHMS shelf) with current exposure to non-performing loans is available upon request.
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