By the Numbers

Rising delinquencies in agency multifamily

Mary Beth Fisher, PhD | October 27, 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.

Multifamily continues to outperform most other commercial real estate sectors, with only industrial properties consistently having a lower delinquency rate over the past decade. However, delinquency and special servicing rates have been inching up across all sectors, except industrial, for most of 2023. Agency multifamily is no exception. After spiking during the pandemic, agency multifamily delinquency rates hit a local trough around the end of 2022, but have since marched steadily higher. Using Fannie Mae as a benchmark, fixed-rate loans maturing over the next two years and floating-rate loans are heavily represented in delinquent pools. The deterioration in performance is likely to persist and perhaps worsen while the Fed sticks to higher-for-longer.

Overall delinquency rates at Fannie Mae are beginning to approach those seen during the financial crisis but remain far below the peak hit early in the pandemic (Exhibit 1).

In the wake of the financial crisis, total delinquency rates hit 79 bp in June of 2010, with 90+ day delinquencies representing just over half of the total at 42 bp. As 30- and 60-day delinquencies either cured or transitioned to 90+ days delinquent, the 90+ day delinquency rate peaked during that cycle at 51 bp in November of 2011.

Exhibit 1: Fannie Mae multifamily delinquency rates are rising

Note: Data is monthly thru 6/30/2023, from Fannie Mae multifamily loan performance database.
Source: Fannie Mae, Santander US Capital Markets

At the onset of the pandemic, delinquency and forbearance rates soared to 1.37% in June of 2020, then began to moderate over the next three years as most of those loans cured and exited forbearance. The recent trough in rates was in January of 2023, as overall delinquencies dropped to 27 bp of outstanding unpaid principal balance (UPB). Although an impressive recovery, it’s worth noting that from 2014 through March of 2020, Fannie Mae’s multifamily delinquency rates averaged 8 bp.
The loans lingering in workout in January were heavily seniors or student housing, which were badly affected by the pandemic.

A renewed deterioration in performance

Since January, delinquency rates have been steadily rising, touching 51 bp by the end of the second quarter of 2023, the last date for which complete data is available from Fannie Mae. This is similar to the trend seen in multifamily non-agency CMBS and multifamily loans in CRE CLOs, as detailed in CRE CLO collateral performance weakens a bit.

Multifamily non-agency CMBS collateral has an overall delinquency rate of 1.3%;
While multifamily CRE CLO collateral delinquencies are at 0.8%, both as of September 2023.

Agency multifamily delinquency rates are in-line to slightly better than non-agency (Exhibit 2):

Freddie Mac has the lowest delinquency rates at 44 bp of total multifamily securitized collateral on FHMS (K-deals) and FRESB (small balance loan) shelves, as of October 26. The bulk of these delinquencies continue to emanate from the small balance loan program, with a delinquency rate of 2.28% compared to 0.30% across all K-deals.
Ginnie Mae project loans currently have a 0.81% delinquency rate as of October 26.

Exhibit 2: Comparison of agency multifamily delinquency rates

Note: UPB in millions. Fannie Mae and Ginnie Mae rates are 30, 60 and 90+ days delinquencies. Freddie Mac rates include non-performing matured, mixed, special, bankrupt, REO and foreclosures. This primarily reflects a difference in the way the delinquencies are recorded by servicers and how the data is transmitted in Bloomberg.
Source: Fannie Mae, Bloomberg, Santander US Capital Markets

Fannie Mae’s delinquency rate of 0.51% is as of June 30 this year, but has likely continued to tick a bit higher over the past few months.

Pressure points: floating rate loans and those approaching maturity

Floating-rate loans are under particular pressure from Fed rate hikes, as their interest rates and debt costs have surged. Most floating-rate mortgage borrowers are also required to purchase interest rate caps at the strike set at loan origination. These caps are now deeply in-the-money and have increased in cost up to 10 times.

For example, adjustable-rate mortgages (ARMs) comprise 9% of outstanding Fannie Mae multifamily collateral, but represent 34% of delinquent UPB (Exhibit 3). The delinquency rate for ARMs is 1.93% compared to a delinquency rate of 0.37% for fixed-rate loans.

Exhibit 3: Fannie Mae’s delinquencies are overweight floating-rate loans

Note: Data is thru 6/30/2023.
Source: Fannie Mae, Santander US Capital Markets

The maturity wall of Fannie Mae’s delinquent loans is also likely representative of that seen across the multifamily space. Floating-rate loan borrowers generally prefer shorter-maturity loans, focused on 5- and 7-year finals. The bulk of floating-rate loans that are now delinquent were originated from 2020 through 2022, giving them maturity dates from 2025 through 2027 (Exhibit 3, blue bars).

Exhibit 4: Maturity wall of Fannie Mae multifamily fixed vs floating rate delinquent loans

Note: Data thru 6/30/2023.
Source: Fannie Mae, Santander US Capital Markets

The delinquent fixed-rate loans tend to be more spread out across maturities, but there is a definite maturity wall that is approaching in 2024 – 2026 which is likely contributing to pressure on these loans. Increases in operating expenses, high refinancing rates and a moribund sales market aren’t giving these borrowers a lot of options. In prior years many of these borrowers may have sold the properties before maturity or refinanced at similar or lower rates, but that’s not tenable in the current environment.

A weakening in multifamily specifically

Fannie Mae’s multifamily portfolio is made up of a variety of subtypes (Exhibit 5). The hangover from the pandemic – the 37 bp of mostly 90+ day delinquencies that’s been lingering since January 2023 – was heavily weighted towards seniors and student housing. Seniors housing has an overall delinquency rate of 3.69% and student housing clocks in at 2.12%. Both categories comprise 2% each of outstanding UPB. The primary driver of the weakening performance since January has been pure multifamily, which comprises 79% of the portfolio and where delinquencies have ticked up to 0.23% from the low single digits (not shown).

Exhibit 5: Fannie Mae multifamily performance by property type

Note: Data thru 6/30/2023.
Source: Fannie Mae, Santander US Capital Markets

This is in-line with the trend higher in delinquency rates seen in non-agency CMBS and multifamily CRE CLOs, though the overall performance of agency multifamily is better.

The good news is that multifamily is faring much better than office, retail and even lodging, but pressure from higher rates and declining property prices are beginning to catch up to the sector. As long as the Fed keeps rates higher for longer and the market is unclear if the hiking cycle is complete, chances are that the commercial real estate sales market will remain anemic, multifamily property prices will continue to decline, and performance will continue to deteriorate, though hopefully modestly. The multifamily market is probably still six to 18 months away from a trough. Watch the curbs.

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

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