Category: Financing

The Rush to Refinance Multifamily Properties Continues

The low rate environment continues to make it a good time to refinance apartment properties, assuming you can find a lender willing to cut a deal.

As has been the case for much of the recent crisis, borrowers are continuing to try to capitalize on favorable rates to refinance apartment properties—that is, when they can find lenders willing to close deals.

Long term interest rates—like the yield on 10-year Treasury bonds—fell below 1 percent at start of the economic crisis caused by the spread of the coronavirus in March 2020, and stayed below 1 percent well into mid-summer.

Freddie Mac and Fannie Mae lenders have proven to be consistently willing to make loans to qualified apartment properties with interest rates fixed at a spread over these historically low interest rates. Other types of lenders, including many banks and life insurance companies, have been more cautious.

Long-term interest rates fall to new historic lows
On July 28, the benchmark yield on 10-year U.S. Treasury bonds was 0.58 percent. It has hovered around 0.6 percent and 0.7 percent for several months. In comparison, in the months before the crisis, the benchmark yield hovered between 1.5 percent and 2 percent.

“The outlook is for a continuation of low rates through the end of the year,” says Tony Solomon, senior vice president and national director of Marcus & Millichap Capital Corp. “Could rates fall even lower? Sure, maybe a little, but they are very low now and we know that there is an ‘open window’ of various capital sources for the right asset and borrower.”

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Credit Unions are Making a Bigger Play for CRE Loans

Credit unions are an attractive option for borrowers who are seeing fewer lender bids, particularly from banks and debt funds.

Credit unions that have been working to grow market share in the commercial real estate lending space in recent years are taking advantage of open runway as other capital sources have pulled back in recent months. In fact, these institutions are willing to offer competitive terms and creative solutions.

“What we have seen from credit unions is that they are willing to finance property types that others aren’t doing,” says Pat Minea, executive vice president, debt and equity at NorthMarq. NorthMarq estimates that its financing activity with credit unions is about 50 percent higher this year compared to last year. Since March, the firm has closed more than two dozen financing transactions with credit unions as the lender for borrowers across the board involving multifamily, industrial, retail and office projects.

There are plenty of capital sources still willing to finance multifamily and industrial assets. Interest drops off, however, for office and retail properties with financing that has become tougher because of COVID-19.

“We are having to dig a little deeper to find the terms that borrowers want in the current climate, and credit unions are a great example of that alternative,” says Minea. “They are more receptive, for whatever reason, to doing these deals that, in today’s world, are a little more on the edge.”

For example, credit unions are still willing to finance single-tenant retail and unanchored retail properties. That may be because credit unions don’t have as large of a loan portfolio and potential concentration risk to that sector as other lenders might have, notes Minea.

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Commercial mortgage delinquencies surged at record monthly rate in June

Delinquencies in commercial mortgage-backed securities jumped by 213 basis points in June to 3.59% from 1.46%.

Delinquencies in commercial mortgage-backed securities last month had their largest one-month surge since Fitch Ratings began tracking the metric nearly 16 years ago.

The delinquency rate hit 3.59% in June, an increase from 1.46% in May. New delinquencies totaled $10.8 billion in June, raising the total delinquent pool to $17.2 billion.

It may not be surprising, given the massive economic impact of the coronavirus pandemic, but the numbers are still remarkable. And this is just the beginning. Fitch analysts are projecting that the impact from the coronavirus pandemic will drive the delinquency rate to between 8.25% and 8.75% by the end of the third quarter of this year.

“Delinquencies are concerning because they could have a negative impact to property valuations which could ultimately result in losses to the CMBS investors,” said Melissa Che, Fitch’s senior director, CMBS.

CMBS investors tend to be large, institutional investors, like pension funds, banks, insurance companies and mutual funds.

Shorter-term, 30-day delinquencies are now becoming 60-day delinquencies at a much faster rate, and that is expected to continue throughout the summer.

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Borrowers Pony Up More Cash Reserves to Move Loans Forward

Some underwriting standards across the board have being tightened up as lenders begin to finance deals again.

Many lenders that hit the pause button on new originations at the start of the pandemic are stepping back into action, albeit with a more conservative playbook than they had at the start of the year.

One big difference: lenders have new requirements for debt service reserves. Pre-COVID-19, reserves were not required on stabilized assets and generally only used to reduce risk on properties in transition, such as major rehabs or redevelopments. Now debt service reserves ranging between six and 18 months are a standard requirement on new commercial and multifamily mortgages—even those backed by the GSEs.

“Across the spectrum, you’re seeing borrowers being asked to produce higher cash reserves. Some of the underwriting standards across the board are also being tightened up,” says Lonnie Hendry Jr., MSRE, vice president, CRE Product Management at Trepp. Metrics being used to evaluate the underlying collateral, loan-to-value ratios, debt yields and debt service coverage ratios are all being underwritten more conservatively, he says.

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Mortgage bailout swells to 4.1 million borrowers, but demand is slowing

In the past week, 225,000 more borrowers took advantage of government and bank mortgage forbearance programs, according to data firm Black Knight.

The rise brings the total to nearly 4.1 million homeowners not making their monthly mortgage payments, representing 7.7% of all active mortgages.

While the numbers are far higher already than federal regulators predicted, borrower demand for help during the coronavirus crisis is actually slowing. About half as many borrowers asked for forbearance in the past week, compared with the previous week.

“After surging at the beginning of April and then rising again near the 15th — when most mortgages become past due and late fees are charged — the number of new forbearance requests has declined in recent weeks,” said Ben Graboske, president of Black Knight Data & Analytics.

“What remains an open question at this point is to what degree forbearance requests will look like at the beginning of May — when the next round of mortgage payments become due, and with nearly 30 million Americans newly unemployed in the last month.”

Under the government mortgage bailout, part of the CARES Act, borrowers can initially miss payments for up to 90 days and then can apply for extensions of up to a year. They eventually have to go into repayment plans or mortgage modifications.

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Working With HUD

What multifamily developers need to know about working with the federal government.

Trying to connect the dots on multifamily financing deals often hinges on some help from Uncle Sam in the form of the Department of Housing and Urban Development (HUD). Developers already acquainted with the Rental Assistance Demonstration (RAD) program, low-income housing tax credits (LIHTCs), Opportunity Zones, and, of course, the Section 221(d)(4) program know how the process works. But to shed some light on the process for those uninitiated, Multifamily Executive posed some questions to James Rice, vice president of HUD AEC Services at AEI Consultants, based in San Francisco.

MFE: Why has HUD raised its allocations for affordable housing, and what types of projects is it looking to invest in?

Rice: HUD raised allocations because as the economy expands, multifamily owners are looking to increase rent due to increased operating costs. HUD offers multiple programs to allow private investors to invest in affordable housing. Of note are the RAD program, the LIHTC program, and Opportunity Zones, which allow public housing agencies to leverage public and private debt and equity in order to reinvest in public housing.

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Seven Rules for Lenders Navigating Workouts During Uncertain Times

It’s time to go back to basics and adhere to some key guidelines to help navigate the choppy waters facing commercial real estate financing.

If the current coronavirus (COVID-19) situation persists, real estate lenders increasingly will be faced with the need to restructure loans in their portfolios. Lenders that held non-performing real estate loans during prior real estate downturns (e.g., 2008, 1990s) have no doubt embarked on the real estate workout process countless times before. However, with the passage of time, the lessons learned by real estate lenders of earlier eras may have faded from memory. Moreover, many of the lenders active in real estate finance today were not even on the scene during prior recessions. Accordingly, it may be best to go back to the basics–to return to general guidelines on how best to approach a problem real estate loan.

For those without prior experience, and even for those who have survived the workout wars of earlier generations but who have not yet drawn up a general roadmap for handling their troubled real estate loans today, here are seven rules on how to minimize the bumps in the road on the next real estate workout journey.

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Do Recent Interest Rates Cuts Portend a Refi Windfall? Maybe Not

Banks, life insurance companies and the GSEs are still quoting deals on a selective basis, although spreads are higher and leverage is lower.

Commercial real estate borrowers who were hoping to capitalize on dramatic Fed rate cuts and a drop in the 10-year Treasury to refinance loans at record low rates may have missed their window of opportunity—at least for now.

Borrowers that were able to move quickly did access some incredibly cheap capital. In some cases, financing rates dipped below 3 percent as interest rates plummeted and spreads remained relatively stable. Yet lenders have since tightened their grip on capital given the market volatility and uncertain outlooks for the economy and commercial real estate properties amid the spread of COVID-19.

The low benchmark rates have been countered with higher spreads and rate floors from many lenders. Rates today are in line with those found in December 2018, generally in the high 3- to low 4-percent range, notes Brian Stoffers, global president, debt & structured finance at CBRE. “Many borrowers are taking a ‘wait and see’ approach and hoping for lower spreads once the market settles down,” he says. Meanwhile, those borrowers with maturing loans or 1031 exchanges that require timely closings are moving forward, he adds.

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Fannie Mae, Freddie Mac relax appraisal, employment verification standards in wake of coronavirus

Will allow drive-by and desktop appraisals in certain circumstances

Citing the extraordinary circumstances that the country is facing with the ongoing spread of the coronavirus, the Federal Housing Finance Agency announced Monday that it is directing Fannie Mae and Freddie Mac to ease their standards for both property appraisals and verification of employment.

The moves are part of a growing effort to “facilitate liquidity in the mortgage market during the coronavirus national emergency,” the FHFA said in an announcement.

According to the FHFA, Fannie Mae and Freddie Mac will use “appraisal alternatives to reduce the need for appraisers to inspect the interior of a home for eligible mortgages.” The issue of appraisers needing to inspect homes as part of the mortgage process has been a mounting concern as the virus has continued to spread throughout the nation.

Considering that new research shows that the virus can live for “several hours to days in aerosols and on surfaces,” appraisers entering homes to inspect may lead to increased spread of the virus. Beyond that, cities and even entire states are going into lockdowns, thereby prohibiting appraisers from traveling to houses to inspect them.

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Multifamily Lenders Highlight Challenges During Coronavirus Crisis

On-the-ground issues may keep liquidity from flowing into the market.

The situation for the affordable and market-rate lending environment remains very fluid during the nation’s coronavirus outbreak, and it’s changing hour by hour, not even day by day, says Don King, executive vice president and head of the Multifamily Finance Groupat Walker & Dunlop.

“A lot of sponsors are anxious to take advantage of the low interest rates so we have seen an uptick in calls, interest, and potential activity,” says Philip Melton, executive vice president and national director of affordable and Federal Housing Administration lending at Bellwether Enterprise. “At the same time, we have concerns.”

One of the big roadblocks for lenders is on the ground, with shelter-in-place orders, lockdowns, and social distancing affecting physical inspections and third-party vendors doing on-site work.

“Right now we are struggling with how to prudently lend when we can’t get in to inspect units,” King says. “How do you prudently assess risk?”

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