Commercial, Multifamily Mortgage Market Gets Conflicting Reviews

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It may be the best of times to be a commercial, multifamily banker and the worst of times to be a servicer of securitized multifamily loans.

A Mortgage Bankers Association analysis of data from the Federal Deposit Insurance Corp. shows that commercial and multifamily mortgages “have fared better through the credit crunch and recession than any other major type of loan held by banks and thrifts.”

The MBA reports commercial and multifamily mortgage delinquency rates declined during the fourth quarter of 2011.

Counter to predictions that commercial mortgages would be “the next shoe to drop” or a “ticking time bomb” for the banking sector or the economy as a whole, said Jamie Woodwell, MBA's VP of commercial real estate research, declines are a sign of continuing stabilization of commercial and multifamily mortgage delinquency rates.

The rate of loans over 60 days delinquent fell 0.02 percentage points to 0.17% for loans held in life company portfolios and 0.11 percentage points to 0.22% for multifamily loans held or insured by Freddie Mac.

The over 90 days delinquency rate for loans held by FDIC-insured banks and thrifts fell 0.20% to 3.55%. Also, the rate of securitized commercial mortgage loans that were over 30 days past due fell 0.36 percentage points to 8.56%.

More specifically, at the end of the fourth quarter, the delinquency rate for multifamily loans held by Freddie Mac was 6.59 percentage points lower than the series high of 6.81% in the fourth quarter of 1992, while the rate for multifamily loans held by Fannie Mae was 3.03 percentage points below the series high of 3.62% in the fourth quarter of 1991.

The fourth-quarter 2011 delinquency rate for commercial and multifamily mortgages held by banks and thrifts was 3.03 percentage points lower than the series high of 6.58%, reached in the second quarter of 1991. The rate for loans held in CMBS was 0.46 percentage points below the series high of 9.02% in the second quarter of 2011. (The analysis incorporates individual investor loan performance tracking criteria that vary between groups.)

In addition, “Over the course of 2011 and throughout the credit crunch and recession,” commercial and multifamily mortgages have had the lowest charge-off rates of any type of loan held by commercial banks and thrifts at 0.84% of their balance of commercial mortgages and 0.74% of their multifamily mortgages, down from 1.22% and 1.24% respectively, in 2010.

At $35 billion in commercial mortgages and $8 billion in multifamily mortgages in aggregate dollars—in 2011 and throughout the recession starting in 2007—commercial and multifamily mortgages have had the lowest charge-off rates of any type of loan held by commercial banks and thrifts. By contrast, the MBA found, over the same period, they charged-off $181 billion of single-family mortgages, $178 billion of credit card loans, $88 billion of commercial and industrial loans, $81 billion of construction loans and $65 billion of other loans to individuals.

Not all is good news.

The rate of multifamily loans held or insured by Fannie Mae that were 60 days or more past due increased 0.02 percentage points to 0.59%, according to MBA's Commercial Real Estate/Multifamily Finance Mortgage Delinquency Rates for Major Investor Groups report. (It analyzes delinquency rates for five of the largest commercial and multifamily investor categories: commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae and Freddie Mac—which together hold over 80% of commercial/multifamily mortgage debt outstanding.)

Other data challenge the MBA’s mostly positive outlook.

In a report on the “contradictions” of U.S. multifamily CMBS, Fitch Ratings warns about “an apparent” inconsistency in the performance of securitized, multifamily loans that has emerged over the last few years.

It is a renters market fueled by growing occupancy rates of multifamily apartment units and new demand for multifamily housing construction lending.

The multifamily commercial mortgage-backed security asset class has been “one of the fastest types of commercial property to bounce back” from the effects of the recent crisis, Fitch analysts wrote, at the same time it has been “one of the worst performing property types” in the CMBS space.

According to Fitch, New York is “a notable example” of said contradictions since despite being the second best performing city in the Case-Shiller index, “the city has four big problems” in underperforming multifamily CMBS that total $3.6 billion.

“One theory” analysts wrote, is that “multifamily housing in CMBS transactions should be performing inversely to residential housing in the same geographic area,” meaning multifamily performance should be stronger where residential performance is weaker and vice versa.

Data also indicate local deviations in performance may not be that pronounced and support overall improvements.

New research from the National Association of Real Estate Investment Trusts shows scarcity of new apartment construction, coupled with a record level of pent-up demand for apartment space, has created an approximately 2.5-million unit supply-demand imbalance in apartment inventory “likely to support strong financial performance by apartment REITs in 2012 and well beyond.”

“The distortion in supply and demand fundamentals for the U.S. multifamily housing market” caused by the financial crisis will support further declines in vacancies and rent increases even though new construction now is increasing to meet demand, said Calvin Schnure, NAREIT VP of research and industry information. “It will take several years” to fill that gap and stabilize the apartment REIT operating fundamentals.

The apartment sector has been one of the best performing segments of the REIT market, the association said, price returns are up 225% in February compared to “the REIT market’s trough in March 2009.”

According to NAREIT, today’s drastic imbalance in supply and demand is expected to support apartment REIT construction beyond 2012.

Between 2008 and 2010 alone, construction of multifamily units fell 70% helping to produce a shortfall of over 500,000 apartment units compared to average demand, Schnure said. “There is nothing normal” neither in the demand for apartment units, nor in the annual household formation growth rate which over the last four years has fallen from the traditional 1.2% to approximately 0.5%.

NAREIT’s review of 50 years of data indicates the current level of pent-up demand for new households is three times higher compared to past recoveries bringing the level of unmet demand to approximately 2 million households.

In two or three years, Schnure said, as the job market improves and confidence rises, “that demand for new households will be released into the market,” while there is a total supply-demand imbalance of approximately 2.5 million apartment units.