Category: Financing

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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Freddie Mac, Fannie Mae move to protect renters from eviction during coronavirus crisis

GSEs will offer forbearance to multifamily property owners as long as they suspend evictions

Fannie Mae and Freddie Mac last week suspended foreclosures and evictions on single-family homes as the coronavirus continues to spread, but that policy will only help those living in a house, leaving many renters vulnerable to being evicted.

Not anymore.

The Federal Housing Finance Agency announced Monday that Fannie and Freddie are moving to protect renters from being evicted if they’re unable to pay their rent due to the impact of the coronavirus.

Specifically, Fannie and Freddie will begin offering mortgage forbearance to multifamily property owners on the condition that they suspend all evictions for renters who can’t pay their rent because of the coronavirus.

Because Fannie and Freddie back the mortgages on multifamily properties, but have no contact with individual renters, the only way for the GSEs to provide relief to renters is by providing relief to the property owners themselves. Missed rent payments mean that multifamily property owners wouldn’t be able to make their mortgage payments and the entire property would go into foreclosure.

As a result of the GSEs’ action, property owners now have the ability to delay their mortgage payments if their property is negatively affected by the coronavirus national emergency.

According to the GSEs, property owners can delay their mortgage payments for up to 90 days by showing hardship as a consequence of COVID-19 and by gaining lender approval.

The condition the GSEs included — that property owners can’t use the forbearance option unless they agree to suspend evictions — should have a sizable impact on the market, considering how much of the multifamily market Fannie and Freddie support.

According to the most recent data from the Mortgage Bankers Association, Fannie and Freddie hold or back approximately 48.6% of the entire outstanding multifamily mortgage debt.

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Looking at HUD’s New Financing Opportunity for Multifamily Investors

HUD has permanently relaxed its three-year rule for Section 223(f) mortgage refinancing applications.

On March 2nd, HUD relaxed its three-year rule for Section 223(f) refinancing mortgage loan applications.

The three-year rule required that properties be seasoned for three years from certificate of occupancy before being eligible for a HUD 223(f) mortgage loan application. HUD temporarily waived this rule during the recession from 2009 to 2013, but has now permanently changed the rule. Section 223(f) insures mortgage loans for the purchase or refinancing of existing multifamily properties.

We will need to see if HUD’s 2020 multifamily accelerated processing (MAP) guide affirms the approach. In the meantime, the just released Mortgagee Letter states that multifamily real estate investors now have the ability to apply for long-term HUD financing for multifamily properties without having to wait three years for the property to season. Under the relaxed rule, HUD offers borrowers the ability to secure permanent, non-recourse fixed rate debt at low interest rates.

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Affordable Housing Lenders Anticipate 2020 Growth

Citi Community Capital remains on top of AHF’s annual ranking of construction and permanent lending volume.

With the high demand for affordable and workforce housing across the nation, lenders’ volumes were robust in 2019, with anticipated continued growth in the year ahead. According to a survey by sister publication Affordable Housing Finance, the AHF Top 25 affordable housing lenders provided over $41 billion in permanent and construction loans to developments that serve up to 80% of the area median income in 2019. This is up from the AHF Top 25 lenders’ $35.2 billion in 2018 and $30.5 billion in 2017.

Citi Community Capital remains at the top of our lender list, having lent almost $6.1 billion to affordable properties in 2019. That is down from the almost $7 billion in 2018.

“2019 was a surprisingly strong year. We went into 2019 thinking that interest rates would rise and that it would be more difficult for some projects to pencil,” says Richard Gerwitz, co-head of Citi Community Capital. “But not only was that not the case, but as the year went on, it became increasingly apparent that private-activity bond allocation was going to run out in a few more states, driving some developers to advance their projects. As a result, the last months of the year were even busier than they usually are.”

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