By the Numbers

Monitoring workouts as delinquencies rise

| February 2, 2024

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 mortgage delinquency rates began rising in early 2023 and accelerated in the final two months of the year. Fannie Mae DUS investors don’t face credit risk from the loans, but the timing of involuntary prepayments can affect performance, particularly for securities trading away from par. And the timing of these prepayments can be quite variable. The median time from initial delinquency to workout is eight months, but some workouts can take up to 10 years.

Fannie Mae’s delinquency rate was 58 bp of outstanding loans at the end of the third quarter of 2023, the last date for which complete data is available (Exhibit 1). With the surge in delinquencies seen in non-agency multi-family late last year, the Fannie Mae pace may have picked up, too.

Exhibit 1: Fannie Mae delinquencies continue rising

Note: Data through Q3 2023.
Source: Fannie Mae, Santander US Capital Markets

The distribution of time it takes for Fannie to buy a delinquent loan out of a pool varies from one month to 10 years (Exhibit 2). The median workout time from initial delinquency until the loans is bought out from the pool is eight months (Exhibit 3). The average is higher, at 11 months, due to the long tail on the right side of the graph.

Exhibit 2: Historical workout times for Fannie Mae multifamily loans

Note: Data from Q1 2000 through Q3 2023. A few loans whose workouts exceeded 120 months not shown.
Source: Fannie Mae, Santander US Capital Markets.

Based on the analysis, Fannie Mae DUS investors can assume that the average time to prepayment of the delinquent balance is well under one year. Unfortunately, longer-term workout processes are not uncommon, and can stretch out considerably longer. The distribution appears to be bimodal, with a second clustering of loans that workout at the 18-month mark. Conservative investors with large portfolios could use this as an average prepayment horizon for loans that may be particularly complex or troubled.

Unlike commercial real estate loans in other securitized products, agency multifamily loans don’t tend to default at maturity. The average age of a loan at workout is 5.3 years. Given an 8-month median workout process, that puts the average age of default at about 4.5 years for a typically 10-year loan. This has remained fairly consistent throughout the 2000s, including for the heavily impacted 2006-to-2009 vintage loans, which had the highest default rates during the GFC.

Exhibit 3: Workout times haven’t changed much over the years

Note: Data from Q1 2000 through Q3 2023.
Source: Fannie Mae, Santander US Capital Markets.

The most common method of liquidation is through foreclosure, though a variety of workout processes can be used. Foreclosures tend to have the highest average loss severities and those severities appear to be rising, though workouts for recent vintage loans have so far been sparse (Exhibit 4).

Exhibit 4: Loss severities by vintage and workout method

Note: A negative loss severity means that more money was recovered through the disposition of the property than the defaulted amount. Data from Q1 2000 through Q3 2023.
Source: Fannie Mae, Santander US Capital Markets.

Delinquency trends across all three government agencies tend to be quite similar. Fannie Mae has the largest footprint and their delinquency rates are typically in between Ginnie Mae’s, which is a bit weaker, and Freddie’s which is somewhat stronger. Currently Freddie’s problem loans are heavily concentrated in their small balance program, seniors housing and floating-rate loans. Many seniors housing portfolios are also floating rate, so there is considerable overlap between the two. Healthcare is a particular weak spot across all of the GSEs since the pandemic; and floating rate loans of all property types have been at the nexis of troubled CRE loans since the Fed raised interest rates by 5.25%.

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

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles