KBRA Releases Research – Multifamily Performance—Conduit Distress Increases as Freddie Mac Holds the Line

Published 2 months ago via Business Wire

KBRA releases research analyzing multifamily distress across CMBS conduits and Freddie Mac (FM) securitizations. Multifamily properties are facing slower rent growth, heavy supply, and inflationary operating expenses pressures, as well as higher interest and capitalization rates. However, the performance of stabilized multifamily loans in securitized CMBS has varied across securitization program type and vintage. Among the fixed rate conduit product, the distress rate—which includes both delinquent loans and loans that are current but specially serviced—climbed to 4.46% as of the end of Q3 2024 while the FM fixed rate K-series product was at just 19 basis points (bps).

The fixed rate conduit and FM K-series product are generally stabilized properties and do not face interest rate pressures during their term. In addition, they have current maturity profiles with loans that have had five to 10 years of revenue growth, which has included some record rent increase periods. That said, we note an increase in conduit multifamily distress while FM stays well under 1% despite the properties backing the loans being generally of similar quality. This KBRA report takes a closer look at the multifamily distress across these two products.

Key Observations

  • FM distressed rate is near zero as of Q3 2024 with $356.3 million in distressed loans (23 loans by count) out of $190.4 billion (7,598 loans) for a meager rate of 19 bps.
  • Conduit multifamily loans have a much higher distress rate of 4.46% (67 loans) although it is across a smaller, but still sizable, universe of $29.9 billion (1,869 loans).
  • Most multifamily loans are still paying off at or close to maturity with conduit and FM both seeing over 97% of their 2024 maturing loans through Q3 paying off. However, FM has a smaller proportion of its outstanding loans that have so far matured in 2024 compared to conduits, so the loans unable to pay off from recent maturities on the overall distress rate are much less impactful for FM.
  • Comparing the most recent vintages of 2020 to 2023 multifamily conduit performance shows an even greater divergence from FM. Multifamily conduit loans have a distress rate of 6.07% for these vintages compared to their distress rate of 3.57% for the vintages prior, while FM loans are only at 5 bps compared to 33 bps, respectively.
  • The recent disparity in performance between conduits and FM may be influenced by how FM responded to market conditions compared to conduit originators. Based on the metrics, FM loosened credit less during the low interest rate and high rent growth periods between 2020 and 2021, and then tightened credit more in 2022 to 2023 as interest rates increased and rent growth slowed.
  • 2023 vintage conduit multifamily stands out as an anomaly in performance with a distress rate of 14.21% while FM had a zero distress rate. This wide divergence of performance may be related to FM tightening origination practices to improve due diligence and reduce fraud, which improved the quality of its loans while potentially pushing some marginal borrowers or weaker properties to conduit loans.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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