Portfolio Strategy

February 5, 2021

By the Numbers

Fannie Mae multifamily delinquencies hit historic high

Mary Beth Fisher, PhD | February 5, 2021

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.

Forbearance programs, essential for many borrowers during the pandemic, have resulted in Fannie Mae multifamily delinquency rates far exceeding the peaks reached after the 2008 housing crisis. The US has recently extended federal eviction moratoriums through March 31 with many state and local jurisdictions pushing them out even further. Without an extension of the Fannie Mae and Freddie Mac forbearance program, many multifamily borrowers will likely be pushed into default. Involuntary prepayments could hurt investors in agency CMBS trading well above par with elevated levels of loans in forbearance.

The extension of the federal moratorium on evictions helps multifamily tenants. But unless that is also matched by an extension of the agency forbearance programs for multifamily property owners, the financial stress will likely translate into a greater percentage of loans currently in forbearance migrating into default. Fannie Mae recently updated their multifamily loan performance database through the third quarter of 2020. The total percentage of delinquent loans, which includes all loans in forbearance, was 1.3% as of the end of the third quarter 2020 (Exhibit 1). This far exceeded the peak of 0.8% reached during the housing crisis.

Exhibit 1: Fannie Mae multifamily delinquency rates

Note: Data as of 9/30/3030.
Source: Fannie Mae, Amherst Pierpont Securities

Agency forbearance programs, which began in April 2020, ultimately allowed multifamily borrowers to have their loans in forbearance for six months. For borrowers that entered forbearance in April, those loans were 90+ days delinquent by June 2020. The 6-month forbearance period ended September 30, with a payment on their loan due October 1. As of the end of June, nearly 1.4% of outstanding Fannie Mae multifamily loans were in forbearance and technically delinquent (Exhibit 2).

Exhibit 2: Fannie Mae multifamily total delinquencies

Note: Data as of 9/30/3030.
Source: Fannie Mae, Amherst Pierpont Securities

The good news is that by September 2020, Fannie Mae had some multifamily borrowers that began to cure their forbearance as overall delinquency rates fell slightly from 1.4% to 1.3%. The bad news is that – after reaching a trough in new delinquencies in July – a handful of new loans began to fall into delinquency or enter forbearance in August and September.

Delinquencies have increased

Since September the number of loans in forbearance has increased. As of Fannie Mae’s January 28, 2021, forbearance report, the unpaid principal balance of DUS loans in forbearance is $4.3 billion, or 1.2% of total multifamily UPB outstanding. In September, DUS loans in any stage of delinquency totaled $3.6 billion, or 1.0% of total Fannie Mae multifamily loans outstanding. Overall, the percentage of Fannie Mae’s multifamily UPB that is currently in some stage of delinquency has likely increased from 1.3% in September 2020 to 1.5% by January 2021. This is also consistent with delinquency and forbearance trends in Freddie Mac and Ginnie Mae multifamily programs.

Involuntary prepayments could hurt performance

The issue for agency CMBS investors is obviously not one of credit, but the potential for loans in delinquency and forbearance to roll over into default. High dollar priced securities can underperform when a significant amount of principal is repaid without penalty. If agency multifamily forbearance programs are not extended to match the extension in tenant forbearance, a much larger percentage of currently delinquent loans could enter workout. The return of principal in high dollar price agency CMBS will lower total returns.

Mary Beth Fisher, PhD
1 (646) 776-7872
mfisher@apsec.com

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