By the Numbers
Monitoring workouts as delinquencies rise
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.
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%.
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