By the Numbers

Rising multifamily defaults but limited losses

Mary Beth Fisher, PhD | August 18, 2023

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.

Freddie Mac’s multifamily portfolio stands on solid ground these days when it comes to credit. The portfolio shows only modestly elevated losses mainly from its most sensitive sectors: seniors housing and small balance loans. Based on history, Freddie Mac’s multifamily default rates for the vintages most heavily affected by pandemic will likely reach those of the worst years of the housing crisis. But cumulative losses will probably remain much lower due to the concentration of losses among small balance loans.

Strong performance despite overhang of loans in workout

An overall summary of Freddie’s multifamily performance through the first quarter of 2023 includes a few highlights (Exhibit 1):

Freddie reports 141 defaulted loans that have completed workout since 1994.
The average default rate over the past 30 years has been 0.45%, not including the vintages since 2020. Default risk has varied significantly across funding years, with some vintages experiencing default rates as low as 0% to 0.14%, while the vintages of 2006 through 2009 affected by the housing crisis had default rates of 1.0% to 1.6%.
Workouts of troubled loans take a long time, and there is an overhang of mostly pandemic era defaulted loans still in the resolution process. The average workout period for Freddie multifamily loans is 47 weeks.
There were 129 non-current loans at the end of the first quarter of 2023, most of which were in special servicing and in some stage of workout.
Updated projections of default rates, losses, and cumulative loss rates across vintages are shown in the three rightmost columns (highlighted in green). This assumes all of those non-current loans default and complete the workout process, with a loss severity equal to the long-term average of 27.2%.
The vintage projected to be the most heavily impacted by the pandemic is, not surprisingly, the 2018 vintage. There are 55 non-current, 2018 vintage loans, which would bring the total number of defaulted loans for that year to 84. The projected default rate for 2018 would rise to 1.51%, similar to that of the peak housing crisis years, but with projected cumulative losses of only 10 bp. That is much lower than the 22 bp to 42 bp of peak cumulative losses for the housing crisis vintages.

Exhibit 1: Freddie Mac multifamily performance summary through Q1 2023

Note: The projected default rate and projected losses assume that all non-current loans default and complete workout, with a loss severity equal the long term average severity of 27.2%. Data through first quarter of 2023. Non-current loans are those 60+ days delinquent, in foreclosure or real estate owned as of the end of the first quarter. Source: Freddie Mac, Santander US Capital Markets

One of the reasons for the lower projected cumulative losses is that 93 of the 129 non-current loans (72%) are from the small balance (FRESB) program (Exhibit 2). There are about 10,000 small balance loans currently outstanding, totaling about $25 billion of unpaid principal balance (UPB) outstanding. Comparatively there are over 15,000 loans securitized in various Freddie K-series (FHMS) deals, totaling about $325 billion of UPB.

Exhibit 2: Breakout of non-current loans

Note: Data as of first quarter 2023.
Source: Freddie Mac, Santander US Capital Markets

Of the other 36 non-current loans, 22 of them are seniors housing or assisted living centers. This subsector of multifamily housing experienced the worst distress due to the Covid pandemic and has been among the slowest to recover. Eighteen of the 22 non-current seniors housing loans are from portfolios securitized in the KS06 and KS09 deals (KS for senior housing K-deal).

A few caveats to otherwise strong performance

The loans for senior living properties in workout could potentially have higher than average loss severities, depending on the stability of the market and resolution process. This would obviously raise the cumulative loss projections modestly.

Freddie’s multifamily performance database does not identify loans that are current but have been transferred to special servicing. There are an additional 50 to 60 of such small balance loans as of the latest tape date (7/1/2023). Many of these loans contain watchlist commentary that notes the borrower is current on the loan but in some sort of distress, or in a stage of bankruptcy. These loans could also eventually default and enter workout, raising the default rate and increasing losses.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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