By the Numbers

Few multifamily defaults, manageable severities through pandemic

Mary Beth Fisher, PhD | April 22, 2022

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.

Widespread forbearance adopted at the start of the pandemic coupled with a surge in multifamily property appreciation has effectively buffered the impact of Covid on the sector. Few loans have defaulted, and even though loss severities on those loans have trended up, continuing property appreciation could reverse the trend. Using Fannie Mae as a benchmark, cumulative losses on agency multifamily loans since 2000 may only rise by a basis point.

Fannie Mae’s multifamily performance shows a resilient sector with a few lingering areas of concern. On one hand, loss severities have trended higher, particularly for loans liquidated through foreclosure. On the other hand, strong property appreciation could reverse that trend, causing severities to revert to historical averages. Projected losses from Fannie Mae’s loans currently in foreclosure would add a mere 1 bp to cumulative losses, from 14 bp to 15 bp of total UPB. The most heavily affected vintages will likely be 2014 and 2015, but even those have projected losses of only 9 bp to 11 bp—a stronger showing than even the strongest vintages of the early 2000s.

Rising loss severities

Fannie Mae is one of the largest multifamily lenders, acquiring and guaranteeing $70 billion to $75 billion in balances—4,000 to 5,000 loans—in each of the last three years. Their performance and loss mitigation history can serve as a benchmark for the agency CMBS sector, and potentially that of CMBS portfolios of some banks. Before and through the Covid crisis, defaults remained relatively rare but average loss severities rose. Across the agency multifamily universe, there is a mini wave of defaults from borrowers unable to cure forbearance.

The workout and liquidation process is slow, so very few of the loans that entered forbearance and eventually defaulted have recorded losses yet. Of the 10 Fannie Mae multifamily loans liquidated during the pandemic, none had entered forbearance because most were in workout prior to March 2020. Eight of the loans liquidated through foreclosure and the average loss severity was 47%, above the long-term average of about 36% (Exhibit 1).

Exhibit 1: Fannie Mae multifamily loan loss summary

Note: The credit event date is either the date on which a foreclosed property is disposed of through an REO sale, or the date a credit event took place for a non-REO property (e.g. the date of a third-party sale). Credit losses are not reported until foreclosure or a resolved credit event. Some loans with a credit event may not have a reported default amount or reported losses, often because they have been repurchased; these loans are excluded from some loss severity calculations.
Source: Fannie Mae, Amherst Pierpont Santander

Foreclosure has by far the highest average loss severity of any disposal method, and those losses have been trending higher both over the past few years, and for more recent vintage loans, despite strong multifamily price appreciation (Exhibit 2).

Exhibit 2: Fannie Mae multifamily loss severities by liquidation method

Note: Loss severities are calculated as the lifetime credit loss amount divided by the original UPB of the loan. Negative loss severities indicate that the amount recovered from disposal of the property was greater than the amount owed. Other liquidation includes dissolution.
Source: Fannie Mae, Amherst Pierpont Santander

Tracking the resolution of forbearance

The majority of Fannie Mae multifamily loans that entered Covid-related forbearance have completed repayment and resolved—245 loans or 65% of the 377 that entered forbearance. There have been 56 loans, or 15% of those in forbearance, that have been repurchased from securities. Currently 22 of those loans, or $238 million in current UPB, that defaulted are now in foreclosure. Another 34 loans, or $320 million in UPB, that were in forbearance are currently in workout—some of which could end up in foreclosure (Exhibit 3).

Exhibit 3: Current status of Fannie Mae loans that entered forbearance

Note: There were 377 loans that entered Fannie Mae’s forbearance program. This data is combined with records from Fannie’s multifamily database, which tracks 365 of those.
Source: Fannie Mae, Amherst Pierpont Santander

Given the strong multifamily property price appreciation during the pandemic, it’s reasonable to assume that loss severities may not follow the recent trend higher and instead return to the long-term average of 36%. Using that assumption, the projected losses from the 22 loans currently in foreclosure can be integrated into Fannie Mae’s multifamily performance summary (Exhibit 4).

Exhibit 4: Fannie Mae multifamily loan performance summary and projected losses

Note: Loss severities for loans in foreclosure use UPB at acquisition ($261 million) instead of defaulted UPB ($238 million).
Source: Fannie Mae, Amherst Pierpont Santander

These pandemic-driven losses from loans in forbearance will increase losses, most heavily affecting performance of the 2014 and 2015 vintages. Losses are projected to increase from 2 bp to 11 bp for 2014 vintage loans, and from 1 bp to 9 bp for 2015 vintage loans. Overall, the projected impact is quite modest, raising overall losses to Fannie Mae from 14 bp to 15 bp based on total acquisition UPB since 2000.

Although some of the remaining 34 loans which are currently in default will likely be liquidated and produce losses, it seems probable that total losses across the post-housing crisis vintages will be consistent with, if not well below, losses experienced in the early 2000 vintages of 2000 to 2005, which ranged from 24 bp to a high of 73 bp.

All of the above data is compiled from Fannie Mae’s Covid-19 forbearance reports and their multifamily performance database.