The 60 day delinquency rate for multifamily CMBS loans is skyrocketing. From a Fitch release:
Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.
Fitch seems to suggest the problem is the asset class, but there’s something else at work – delinquency rates on Fannie and Freddie multifamily loans are less than a tenth of the CMBS figure. From an MBA release on June 2:
Fannie Mae: 0.34 percent (60 or more days delinquent)
Freddie Mac: 0.09 percent (90 or more days delinquent)
Why are the agency loans performing so much better? I think there are several factors at work, but the main reason is the originators of Fannie Mae and Freddie Mac loans had much to lose by selling bad loans to the agencies.
Most of Fannie’s multifamily business has been originated through their Delegated Underwriting and Servicing program. Fannie agreed to buy multifamily loans which were within their underwriting parameters without prior review. The originating lenders retained the top 5% loss exposure, and shared losses after that to a maximum of 20%. A very limited number of lenders were allowed to participate (never more than 30 nationwide). Sell a bad multifamily loan to Fannie under the DUS program, and you not only shared in the loss, you risked losing a valuable franchise.
Freddie took a different approach. They didn’t require originating lenders to share in the loss, but the ability to sell to Freddie was if anything even more tightly controlled, with a limited number of lenders restricted to specific geographic areas (see current list here). Again, sell a bad loan to Freddie, and you risk losing your franchise.
By contrast, CMBS origination was wide open. But, that may be changing. The lead story in yesterday’s Financial Times:
Treasury plans strict rules for securitisation
The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors…
The Treasury plans to force lenders to retain at least 5 per cent of the credit risk of loans that are securitised, ensuring that they have what investors call “skin in the game”. The 5 per cent rule – which looks set to be applied in Europe as well – is less draconian than some bankers feared.
Would such a rule have prevented bad CMBS loans? Probably not; I believe the risk of franchise loss was a much more important determinant of lender behavior. But, it’s a start.
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