Multifamily Waits for Forbearance

WASHINGTON, DC—Last month Treasury Secretary Steven Mnuchin formed a task force of regulators to address how to ease the expected liquidity shortfall for mortgage firms. He asked the task force to offer recommendations by March 30. Since then little has been said about the task force other than a press release that it convened and that “Ginnie Mae and the Federal Housing Finance Agency will continue to monitor closely the markets and the condition of the nonbank entities that service Ginnie Mae, Fannie Mae and Freddie Mac MBS.”

Tired of waiting, this past weekend 15 real estate trade associations and affordable housing advocate groups called on the Federal Housing Finance Agency, the Federal Reserve and the Department of the Treasury to establish a liquidity facility for servicers that would support the foreclosure moratorium established in the CARES Act.

A liquidity facility for single-family and multifamily servicers is necessary “to ensure that the entire industry can deliver much-needed economic relief to consumers through this unprecedented forbearance plan. While some servicers will not need assistance, many others will require temporary support to deliver forbearance at the scale and for the duration required,” the trade associations said in their letter to regulators.

The trade associations noted that Ginnie Mae’s recently-announced plan to establish a liquidity facility for single- and multifamily mortgage forbearance, while appreciated…”will not address servicing advances associated with loans backing Fannie Mae, Freddie Mac, or private-label securities, nor will it address advances of taxes and insurance on loans backing Ginnie Mae securities.”

The situation is becoming increasingly urgent for the multifamily sector as numerous local and state governments have put in place temporary eviction moratoriums. Even when these pass, the industry will still experience hardship as unemployment continues to mount. Bank of America projects that between 16 million and 20 million jobs could be lost over the next two months, bringing the unemployment rate to over 15%.

The good news is that both Fannie Mae and Freddie Mac have announced forbearance measures but they differ, according to Walker & Dunlop CEO Willy Walker.

Freddie Mac gives borrowers three months of forbearance and the borrower needs to show distress in the property, although it hasn’t released a specific number for debt service. As part of the forbearance property owners cannot evict a tenant during that time.

Fannie Mae is asking servicers to document a borrower’s hardship due to the COVID-19 emergency. Its program requires the borrower to suspend tenant evictions based on failure to pay rent during the borrower’s forbearance period, plus any longer period required by the CARES Act or any state or local law.

On the other hand, multifamily landlords will find that private label CMBS—including conduits and CRE CLOs—servicers, special servicers, and controlling parties are generally not offering broad relief to borrowers, according to a research note by KBRA.

Instead, relief requests will be evaluated on a case-by-case basis by the appropriate parties, it said.

In CMBS securitizations, certain types of requests may be approved without a special servicing transfer, although special servicer approval may still be required, according to KBRA.

“For example, a borrower’s request for the use of capital reserves to help cover general expenses may be granted by a master servicer and special servicer but remain a performing loan and continue to be serviced by the master servicer. However, any approval of forbearance or loan modification that would impact debt service payments would generally require the loan to be transferred to the special servicer. If the loan were transferred and modified, including a forbearance, there would typically be workout fees that, if not collected from the borrower, could potentially come out of the trust. These costs (if paid by the trust) would generally result in a shortfall to the most junior certificateholders.”

KBRA said it has heard some servicers might consider waiving or reducing fees under certain circumstances.

In CRE CLOs, the process for a borrower seeking relief is generally the same as in a CMBS conduit. However, special servicers have wider discretion in modifying performing loans, according to KBRA. “Furthermore, some CRE CLOs have relatively high multifamily exposures, and distress in that sector can have a meaningful impact to the transactions. A high level of delinquencies could lead to a breach of note protection tests, which generally cause payments from junior, and in some cases mezzanine classes, to be redirected to senior classes.”

In addition, if a large number of loans were to enter into a temporary forbearance, the transaction could trigger the interest coverage test (one of the two note protection tests), KBRA continued, and meaningful amounts of modifications could adversely impact the other trigger, the par value test, if collateral property values declined significantly from origination.

“Upon a modification, a new appraisal may be required and used to mark the loan down for the calculation of par value test. If enough loans are marked down, the par value test could fail.”