Multifamily Conduit Distress Soars Above Freddie Mac’s
There’s a lot of attention on commercial real estate loans and how they perform as a proxy for the health of markets and investments. CMBS typically gets extra scrutiny because these are loans with relaxed underwriting — and may be more representative of CRE that could face problems than properties purchased under strict requirements with a good likelihood of getting refinanced.
However, KBRA released an analysis of two types of loans on multifamily properties that are similar in many ways but differ enormously in their distressed rates.
One was a form of CMBS, a fixed-rate conduit, and the other, a Freddie Mac K-series securitization. Both were on stabilized properties, no growing interest rate pressures, current maturity profiles, and loans with five to 10 years of revenue growth, “including some record rent increase periods.”
Even with the property similarities, there was a huge difference in rates of distress, which are loans that are either delinquent or current but especially served. Out of 1,869 conduit loans with a collective value of $29.9 billion, the distress rate was 4.46%, or 67 loans. Compare that to the Freddie Mac securitizations — 7,598 total loans with a combined value of $190.4 billion. Of those, 23 loans, with $356.3 million in value, were distressed at a rate of 0.19%.
According to KBRA, most multifamily loans were paying off at or close to maturity, with more than 97% of both maturing conduit and K-series loans paying off through the third quarter. That said, the K-series might seem to have something of a current advantage as a smaller percentage of those loans have matured in 2024 compared to conduits, so there may be less impact from those that couldn’t pay off.
And yet, the disparity isn’t one of just a quarter. Taking debt from 2020 to 2023, multifamily conduits have a distress rate of 6.07%, versus 3.57% from earlier periods. K-series were 0.05% compared to the previous 0.33%. And looking only at 2023, conduits had a 14.21% distress rate; K-series, zero.
A number of factors appear to have had influence. Freddie Mac loosened credit between 2020 and 2021 when interest rates were low with high rent growth (and, not seemingly included in the analysis, as prices race upwards). Then in 2022 through 2023, Freddie Mac tightened credit more as interest rates rose and rent growth slowed. The government-sponsored enterprise also tightened origination practices for better due diligence and fraud reduction, “potentially pushing some marginal borrowers or weaker properties to conduit loans," according to KBRA.
Additionally, conduit loans, as forms of CMBS, carry the reputation of having relaxed credit demands, inherently creating a selection process. It might be that the multifamily conduits were backed by a greater portion of weaker operators.