Category: Financing

BLACK KNIGHT’S FIRST LOOK AT NOVEMBER 2020 MORTGAGE DATA

Delinquencies Improved Again in November 2020, But Nearly 2.2 Million Seriously Past-Due Mortgages Remain

  • Despite seasonal headwinds, mortgage delinquencies improved for the sixth consecutive month in November 2020, falling to 6.33% from 6.44% in the month prior
  • The national delinquency rate is now down 1.5 percentage points from its peak of 7.8% in May but remains a full three percentage points (+93%) above pre-pandemic levels
  • While early-stage delinquencies – borrowers one or two payments past due – have fallen back below pre-pandemic levels, seriously past-due (90+ days) mortgages remain 1.8 million above pre-pandemic levels
  • Foreclosure activity remains muted as widespread moratoriums remain in place
  • November’s 4,400 foreclosure starts and 176,000 loans in active foreclosure are both at their lowest levels on record since Black Knight began reporting the metrics in 2000
  • Prepayments fell 11% from October’s 16-year high; however, with interest rates at record lows and refinance incentive at an all-time high, prepay activity is likely to remain elevated in the coming months

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    BLACK KNIGHT’S FIRST LOOK AT OCTOBER 2020 MORTGAGE DATA

    Mortgage Delinquencies Decline for Fifth Consecutive Month in October; Record-Low Rates Push Prepayment Activity to 16-Year High

    • Mortgage delinquencies improved again in October, falling to 6.44%, the lowest level since March
    • Despite five consecutive months of improvement, there are still more than 3.4 million delinquent mortgages, nearly twice as many as there were entering the year
    • Serious delinquencies – loans 90 or more days past due – improved in October as well, but volumes remain at more than five times (+1.8 million) pre-pandemic levels
    • October’s 4,700 foreclosure starts marked a nearly 90% year-over-year reduction as widespread moratoriums remain in place, while active foreclosure inventory set yet another record low at 178,000
    • Record-low interest rates again pushed prepayment activity higher, with October’s prepayment rate of 3.17% setting the highest single-month mark in more than 16 years

    ACKSONVILLE, Fla. – November 23, 2020 – Black Knight, Inc. (NYSE:BKI) reports the following “first look” at October 2020 month-end mortgage performance statistics derived from its loan-level database representing approximately two thirds of the national mortgage market. Data is then extrapolated to reflect the entirety of the active mortgage universe.

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      A $50 Billion Housing Bond Market Is Stuck in Regulatory Limbo

      Questions are arising about the long-term viability for agency-backed credit-risk-transfer securities.

      (Bloomberg) — A $50 billion bond market once heralded as the future of housing finance has been stuck in limbo since the start of the coronavirus crisis, and now proposed regulatory changes have left investors worrying that they might be left holding the bag.

      At issue are so-called credit-risk-transfer securities offered by Fannie Mae and Freddie Mac. They are tied to Fannie and Freddie’s mortgage-backed securities and pay investors principal and interest as long as the borrowers don’t default.

      Fannie hasn’t issued the bonds since the pandemic began, and the company’s executives are privately telling some investors that it has doubts about the market’s longterm viability. Freddie, meanwhile, has resumed issuing the bonds after a pause near the start of the pandemic. The lack of activity is starting to worry investors that they will be saddled with securities that are akin to museum pieces that no one is interested in buying.

      The uncertainty stems from a proposal by Federal Housing Finance Agency Director Mark Calabria that many say would make it uneconomic in some cases for Fannie and Freddie to keep issuing the securities. Calabria’s plan would reduce the capital relief the companies get by issuing CRT by about half in some circumstances, according to Chris Helwig, a managing director at Amherst Pierpont Securities.

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        Some Multifamily Borrowers are Struggling to Find Small Balance Loans

        Terms are becoming more stringent on the financing deals that are closing amid the COVID-19 crisis.

        Amid the broader challenges facing the commercial real estate market, many investors who own smaller apartment buildings are struggling to find financing in the current climate.

        Many of the banks these sorts of investors rely on to finace deals have become more cautious in the pandemic—especially because smaller apartment buildings are more likely than larger properties to have residents hurt by the crisis that are falling behind in rent. Facing potential distress on existng loans, some banks are lowering origination volumes and hesitating to make new loans. Meanwhile, for the deals that are getting done, terms are becoming more stringent.

        “They are cautious… They make the loan-to-value ratio much lower,” says Richard Katzenstein, senior vice president and national director of Marcus & Millichap Capital Corp., working in the firm’s offices in New York City.

        Some owners of small properties work with lenders that offer programs like Freddie Mac’s Small Balance Loan program, or CMBS lenders—but all multifamily lenders are being extra careful in the crisis.

        Local banks still lead with small balance loans

        Community banks remain the most important source of financing for apartment investors with tiny portfolios. These apartment companies also tend to own smaller buildings and rely on the same bank they use for everyday financial needs to also arrange small balance apartment loans.

        Overall, banks, thrifts and credit unions provide a third ($124.1 billion) of the $364 billion of multifamily mortgages originated in 2019. The size of their average apartment loan was just $2.7 million, according to the Mortgage Bankers Association. Commercial banks remain the biggest players.

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          Debt Funds Like Blackstone’s Begin to Play a Bigger Role in CRE Lending as CMBS Steps Back

          The lending market “is not cautiously pessimistic, it’s not cautiously optimistic. It’s just in a quiet place where it doesn’t know which direction to go,” says one source.

          In the commercial real estate lending arena, many debt funds and smaller banks are stepping up during the coronavirus pandemic, while many CMBS lenders and big banks are stepping aside.

          Although lenders as a whole haven’t given up on commercial real estate loans, a lot of them have tiptoed toward the sidelines. Debt funds and smaller banks will likely become increasingly active in commercial real estate lending to fill the void left by CMBS lenders and big banks, according to Omar Eltorai, lead market analyst at New York City-based commercial real estate platform Reonomy.

          “Everybody is yield-hungry, and commercial real estate still has a pretty attractive profile. So, I think there’s going to be a lot of money chasing that exposure,” Eltorai says. “But where’s that money going to be coming from? I think it’s going to generally be from the lenders that have fewer headwinds and fewer restrictions.”

          Because of the headwinds faced by many lenders, it’s no surprise that U.S. real estate deal volume tumbled 68 percent this August compared with last August, according to New York City-based data provider Real Capital Analytics Inc. (RCA).

          “Before the pandemic, most borrowers had many financing options. Now, options are much more limited and lenders can be more selective,” says Rob Weil, principal at JDI Loans, the lending division of Chicago-based private equity real estate firm JDI Realty LLC. “Lenders now have the opportunity to use more conservative underwriting standards, or charge a premium if the lender is willing to expand the underwriting standards.”

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            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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