Apartment CMBS Delinquencies Could Lead to Increased Evictions

When the Centers for Disease Control and Prevention’s eviction moratorium expires at the end of the year, Fitch Ratings expects to see more evictions.

Currently, multifamily mortgage delinquency levels are low and are up only slightly from pre-pandemic levels for both Fitch-rated affordable housing and market-rate housing loans in commercial mortgage-backed securities transactions. Fitch says the trend may continue to skew negative with sustained high unemployment amid slower economic recovery following 3Q20.

Right now, Fitch-rated affordable housing programs have sufficient liquidity and reserves to cover short-term cash flow disruptions. But continued revenue pressures could deplete liquidity, according to Fitch.

Fitch-rated portfolios can withstand an increase in delinquencies and increased expenses under stress scenarios without eroding the over-collateralization sufficient to cover debt service payments and cushion for higher ratings.

A recent report from Moody’s Analytics’ REIS subsidiary showed strength in the affordable sector. In the second quarter of this year, the affordable housing sector’s national vacancy rate fell by 10 basis points to 2.4%. 

CMBS loans present a different set of challenges, however. In those situations, master servicers, which are typically owned by large investment-grade rated banks, are obligated to advance against missed principal and interest, as well as taxes and insurance, thus providing liquidity if there are payment shortfalls, according to Fitch. 

So far, CMBS multifamily delinquencies have remained low, ticking up slightly to 0.56% in September, compared with 0.41% prior to the pandemic, according to Fitch. Only 1.2% of multifamily loans in the Fitch-rated universe have been granted forbearance. The majority of those are agency loans due to programmatic forbearance implemented by Freddie Mac in April. Deferral periods are generally three to six months that expire in October. Fitch expects to see a slight increase in multifamily delinquencies when deferrals end.

Fitch expects that delinquencies and evictions will be higher in areas hard hit by the recession where employment has not seen a material rebound. For the week ending Sept. 21, almost a third of renters who were delinquent on their rent payments have an annual household income of less than $25,000, according to the US Census Bureau’s Household Pulse Survey. Fitch says this will particularly impact affordable housing and could pressure lower ratings. Some affordable housing properties cannot evict tenants.

A September report from proptech company MRI Software showed that affordable housing rent collections were 77% of 2019 collections in August and 76% of collections in July 2019. The report pulled from 1.5 million affordable housing units located throughout the US.