Disappearing Delinquency

Very low mortgage delinquency rates have characterized the multifamily sector for many years, a sign of the sector’s sustained health. It is a characteristic that should be celebrated by industry participants of all types.

Yet, the question has arisen in recent months as to what happened during the last downturn – perhaps as a guide to the next downturn whenever that may occur.

Many factors will influence the level of multifamily delinquency rates in the future. These factors include underwriting standards, investment volumes, pricing trends, value appreciation over the life of loans, interest rates, availability and pricing of new debt capital and, of course, market conditions.

Past performance is not necessarily a guide to future performance; there is a low probability of the next downturn being as severe as the last. The early 2000s experience may be a better guide. In either case, the delinquency history is interesting and illuminating.

Agency Delinquency Rates Extraordinarily Low 

Historical data for Fannie Mae reveals three principal trends. First, even in the worst of the late 2000s recession, delinquency rates were still less than 1%; they peaked at 0.8% in June 2010. Second, during the early 2000s recession, delinquencies reached only 0.3% at the highest in late 2001. Third, over the past four years, delinquency levels have remained very low, averaging only 0.07% from October 2013 to the present.

For Freddie Mac, delinquencies have also remained at very low levels for the past several years. In the four-year period from October 2013 to October 2017, delinquency rates averaged 0.03%. Based on the Q4 data series available, in the last recession, Freddie Mac’s delinquency rates topped out at only 0.26% in Q4 2010. In the early 2000s recession, delinquency peaked at 0.15% in Q4 2001.

CMBS Rate Falls to Historical Low

The CMBS experience was different during the last recession – multifamily delinquency soared (arguably due to the looser underwriting and lower quality of multifamily product originated by conduit lenders compared to other lender types) and exceeded that for all commercial real estate.

Yet, multifamily delinquency began to recover earlier than the other sectors and declined at a faster pace.

CMBS multifamily delinquency levels fell under 1% two years ago and have remained low since. The current rate of 0.42% ties April 2017 for the lowest level in the 10-year history available.

Bank Delinquency Continues to Fall

Delinquency rates for bank-held multifamily mortgages have been very low for several years, averaging only 0.24% from Q3 2013 to Q3 2017. The Q3 2017 level of 0.10% is the lowest in at least the past 26 years. Since the past recession, multifamily has also experienced lower delinquencies than the other commercial real estate categories.

In the last recession, bank multifamily delinquencies peaked at 1.76% in Q1 2010. In the early 2000s recession, delinquency reached a more moderate high of 0.56%. The early 1990s statistics reveal a less favorable debt environment (due largely to the 1980s overbuilding and the rolling recessions of the late 1980s/early 1990s). They provide a sense of how far the financial environment has evolved over the past three decades in reducing commercial real estate mortgage risk.

By Jeanette I. Rice, Americas head of Multifamily research, CBRE.