Multifamily mortgage delinquencies dropped to very low levels several years ago and have remained there.
The sustained health of multifamily loans is a significant characteristic of the multifamily industry today even if rarely discussed. The near-term outlook is favorable.
An economic downturn will lead to higher delinquency rates. Many factors will influence the magnitude of delinquency deterioration during a downturn.
These include original mortgage pricing and underwriting standards (such as LTVs, DSCRs and mortgage rates), value appreciation over the life of the loan, property market conditions at loan maturity and the capital markets environment when the loans mature (investment activity, pricing, availability and pricing of new debt capital, etc.).
Past performance is not necessarily a guide to future performance. The next downturn is not likely to be as severe as the last. Underwriting standards, generally, have not returned to the “loose” levels reached in the mid 2000s. The experience of the early 2000s recession may be a better guide to possible delinquency severity during the next downturn.
Negligible Delinquency in Agency Holdings
Fannie Mae historical data reveals three principal trends. First, at the worst following the 2008 recession, delinquency rates were still less than 1%, peaking 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 2014 to the present.
Freddie Mac’s delinquency rates have also remained very low for several years. From 2014 through the present, delinquencies averaged only 0.02%. Based on available historical quarterly data, following the last recession, Freddie Mac’s delinquency rates topped out at a modest 0.36% in Q3 2011. In the early 2000s recession, delinquency peaked at only 0.15% in Q4 2001.
Bank Delinquencies Remain Stable and Low
Bank mortgages for existing multifamily assets have been very low for several years, averaging only 0.13% for the past three years. The Q1 2019 level of 0.11% is one of the lowest in at least the past three decades. Since the 2008 recession, multifamily has also experienced delinquencies lower than non-residential commercial real estate mortgages.
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%.
Statistics from the early 1990s reveal a less favorable debt environment and higher delinquencies (due to the 1980s overbuilding, rolling recessions of the late 1980s/early 1990s and to looser underwriting and less transparency in the industry in the 1980s).
The long data series provides a sense of how far the financial environment has evolved over the past three decades in reducing commercial real estate mortgage risk.
CMBS Delinquency at 0.37%
Today, the CMBS multifamily delinquency rate is well below other property types and at the low level of 0.37%.
In the last recession, the CMBS experience was different from that of the agencies and banks (likely life companies as well).
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 property sectors and declined at a faster pace.
Two years ago, CMBS multifamily delinquency levels fell under 0.5% and have remained under this level for the past two years. However, in the past few quarters, delinquencies have inched up slightly. This rise is not a concern at the moment, but worth watching.
By Jeanette Rice, Americas Head of Multifamily Research, CBRE.