Multifamily Mortgage Market Stable; Fannie, GSE’s Share Growing

by REIT Wrecks on June 20, 2008

Delinquencies Remain Low in the Multifamily Sector; Level of Outstanding Debt Grew in the First Quarter

At least one corner of the mortgage market remains healthy: multifamily mortgages, which is good news for those mortgage REITs diversified among the four commerical real estate “food” groups. It is also a huge market, and one that is vitally important to our economy for a number of reasons, so good numbers are just that, good.

Most importantly, The Mortgage Bankers Association says that delinquency rates on commercial/multifamily mortgages remain low – up slightly from the fourth quarter of 2007 but still finishing the first quarter of 2008 near record lows.

These numbers come from figures reported by five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, Fannie Mae and Freddie Mac. Together these groups hold more than 80 percent of commercial/multifamily mortgage debt outstanding.

“In contrast to mortgages for single-family residential properties, commercial/multifamily mortgages continue to perform very well,” said Jamie Woodwell, MBA’s Senior Director of Commercial/Multifamily Research. “Most investor groups saw delinquency rates rise slightly in the first quarter, but they remain at the low end of their historical range.”

The 30+ day delinquency rate on loans held in CMBS transactions rose less than one tenth of one percent (to 0.48 percent), while the 60+ day delinquency rate on loans held in life company portfolios remained flat at an incredibly low 0.01 percent. The delinquency rate on multifamily loans held or insured by Fannie Mae and Freddie remain under 1%, while the 90+day delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.21 percentage points to 1.01 percent.

The delinquency figures also illustrate the success of the low leverage model employed by the life insurance companies – they typically underwrite loans with using lower LTV ratios and much better debt coverage. That was a difficult business model in the credit bubble, and their portfolios barely grew, but they stuck to their knitting and widows and orphans cashing those annuity checks can continue to sleep at night: of the 35,192 commercial/multifamily loans in life company portfolios, only 10 loans were 60+ days delinquent at the end of the quarter. These 10 loans had an aggregate unpaid principal balance of just $29 million, a virtual rain drop in the Pacific Ocean in comparison to the over $300 billion in multi-family loans held by insurance companies.

Based on the unpaid principal balance of loans, delinquency rates for each group at the end of the fourth quarter were as follows:

• CMBS: 0.48 percent (30+ days delinquent or in REO);
• Life company portfolios: 0.01 percent (60+days delinquent);
• Fannie Mae: 0.09 percent (60 or more days delinquent)
• Freddie Mac: 0.04 percent (60 or more days delinquent);
• Banks and thrifts: 1.01 percent (90+ days delinquent or in non-accrual).

Meanwhile, despite the contraction in the overall CMBS market, and almost every other credit market including, astonishingly enough, even the municipal bond market, the total level of commercial/multifamily mortgage debt outstanding managed to grow by 1.8 percent in the first quarter, to $3.4 trillion, according to Federal Reserve Board Flow of Funds data.

The $3.4 trillion in commercial/multifamily mortgage debt outstanding recorded by the Federal Reserve was an increase of $60.8 billion from the fourth quarter 2007. Multifamily mortgage debt outstanding grew to $856 billion, an increase of $18.5 billion or 2.2 percent from the fourth quarter.

“Investors continue to increase their holdings of commercial/multifamily mortgages,” said the MBA’s Woodwell. “The global credit crunch meant a net decline in the balance of mortgages held in CMBS, CDO and other ABS, but banks, thrifts, life insurance companies, Fannie Mae, Freddie Mac and nearly every other investor group increased their holdings of commercial and multifamily mortgages during the quarter.”

The Federal Reserve’s Flow of Funds data indicate that commercial banks continue to hold the largest share of commercial/multifamily mortgages, $1.43 trillion, or 42 percent of the “total”, but many of these loans are actually corporate loans in which a piece of commercial property has been pledged as collateral. However, because the other loans reported are generally income property loans, meaning that the debt service comes only from rent payments, the commercial bank numbers are not strictly comparable.

Thus, the CMBS, CDO and other ABS issues are the largest holders of “pure” income producing commercial/multifamily mortgages, with $777 billion outstanding, according the the Fed (everybody reports this number differently, but it is a huge market no matter how it’s measured). Life insurance companies hold $309 billion, and savings institutions hold $226 billion.

Government Sponsored Enterprises (GSEs) and GSE-backed mortgage pools, including Fannie Mae, Freddie Mac and Ginnie Mae, hold the largest share of multifamily mortgages, with $143 billion in securitized multifamily loans and an additional $158 billion “whole” loans in their own portfolios, or 35% of the total. (N.B., for you number fact freaks – I am one – many life insurance companies, banks and the GSEs also purchase and hold a large number of CMBS, CDO and other ABS issues. These loans are covered in the CMBS, CDO and other ABS category.)


In this “new” credit environment, The GSEs (Fannie Mae, Freddie Mac, etc.,) and Ginnie Mae are now an even bigger factor in supporting our nation’s housing stock. Not only do they hold the largest share of multi-family debt outstanding, but Fannie Mae is now almost the only game in town when it comes to financing multi-family property. Fannie Mae is there, and I can tell you they are writing checks.

This has been incredibly important in relieving at least some pressure on the demand for new commercial real estate credit, and probably for reducing overall default rates in CMBS pools, which still remain at historic lows. As I wrote in another post, High Yield Mortgage REITs, the Perfect Storm?, the low levels of CMBS debt scheduled to mature in 2008/2009 is also a big factor. Combined, these two supply inputs undoubtedly contributed to that fact that, according to Fitch Ratings, 99% of all maturing CMBS loans since August 2007 have been successfully refinanced.

Consequently, GSE’s share of multi-family debt will only increase in the coming quarters, since credit officers at commercial banks, which hold $173 billion, or 20 percent of total outstanding multi-family debt, are spending more time calculating portfolio write downs than assessing new risk. And of course, the CMBS, CDO and ABS markets, which had been approaching $250 billion a year in new origination volume, now look unlikey to match even half that in 2008.

Indeed, of $18 billion increase in multifamily mortgage debt outstanding between the fourth quarter 2007 and first quarter 2008, Government Sponsored Enterprises underwrote $10 billion, or 54 percent of the total increase. Agency and GSE-backed mortgage pools increased their holdings by $3.4 billion and commercial banks increased their holdings by $4 billion. Nobody would be surprised to learn that the CMBS, CDO and ABS categories saw the biggest drop in their holdings of multifamily mortgage debt: a decrease of $9 billion.

In spite of the implosion in the CMBS,CDO and ABS markets, these figures show that at least one segment of the commercial real estate mortgage market is holding up well, possibly even thriving, and they are demonstrative of one of the underlying, basic truths of commercial real estate: Assets that produce reliably monthly income will survive, and so will the mortgages that support them. Click here for an updated list of Mortgage REITS”, including current yields.

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