I
received a good update on the financial markets from Berkshire Hathaway and
Jefferies Financial Group that I wanted to share.
If you'd like to discuss how we can help on one of your transactions, I'm ready
to go over the details. Stay safe out there, and let's all get through this one
day at a time.
Jeff Meierhofer
Director of Finance
The Madison Group
_________________________________________________________________
Market
News
·
U.S.
equity markets are trading higher today as investors digest the latest round of
corporate earnings.
·
DUS
MBS levels continue to trade at levels last seen in February with the Fed
stimulus program continuing.
U.S. equity markets are trading
higher today as investors digest the latest round of corporate earnings. Oil prices rebound as the U.S. escalates tensions with Iran, but
the glut of oil in the market threatens to keep prices down for the foreseeable
future. Almost three dozen oil tankers carrying enough crude to satisfy 20% of
the daily global demand are gathered off the California coast with nowhere to
go. The Senate passed a $484B relief package that the House may take up
tomorrow. Economists don’t think that the latest effort will be enough, but it
is a step in the right direction and more stimulus will likely be necessary to
weather the impact of the coronavirus on the U.S. economy. The White House will
push to slash federal regulations as part of its virus recovery plan to boost
the economy. The CDC director warns that a potential second wave of the virus
coming this fall is likely to be even more devastating/deadly
DUS MBS levels continue to trade at levels last seen in February
with the Fed stimulus program continuing. Yesterday’s purchase
operation saw the Fed stepping back a bit as $357M of bonds were purchased out
of a total of up to $1B available. This was the weakest DUS auction so
far, but the continued Fed operations are keeping spreads rangebound. 10-year
UST yields have declined over the last few days while the market is seeing
increased DUS volume as originators bring deals to market – flows last week
were at the highest volume since the first week of March. Freddie Mac will be
in the market with a new 10-year deal next week, and many are looking to see if
they continue the practice of wrapping all but the B-Piece in the
securitization.
Hotels & Hospitality
Industry groups such as the AHLA have been feverishly fighting
over the last month to appeal to the federal government in order to bring more
monetary assistance to the sector — specifically CMBS
Three massive CMBS hotel portfolio loans, covering 186 hotels
with a total outstanding balance of about $2 billion, were among the largest to
be transferred into special servicing so far this month, according to Trepp.
Single-borrower transactions backed by only hotels have been the hardest hit of
all. “Of the top 24 loans that were sent to special servicing with the April
remittance cycle to date, all but three have been hotel loans,” Trepp analysts
wrote in a Thursday update.
Industry groups such as the AHLA have been feverishly fighting
over the last month to appeal to the federal government in order to bring more
monetary assistance to the sector — specifically CMBS. Just last
week, the AHLA sent a letter to the Federal Reserve and Treasury Secretary that
was signed by 2,400 hoteliers — pleading for the expansion of the “Main Street”
lending program to create a hotel CMBS-specific fund to address the current
cash flow crisis plaguing the sector.
Multifamily
Research
·
April
rent payments increased 5% in the last week.
April rent payments increased 5%
in the last week. The National Multifamily Housing
Council (NMHC) determined 89% of 11.5 million surveyed apartment households
made a full or partial rent payment by April 19, up from 84% one week prior.
The latest data indicates payments were slightly off of the 93% of renters who
made full or partial payments from April 1 to 19 last year. This data
encompasses a wide variety of market-rate rental properties, which can vary by
size, type and average rental price. With financial stability uncertain for
many individuals, the NMHC is reaching out to the federal government to enact a
direct renter assistance program according to NMHC President Doug Bibby.
Fannie
Mae and Freddie Mac
·
This
week, Freddie Mac lowered its UST floor to 60 bps. Fannie Mae’s UST floor
remains at 90 bps for 10-, 12- and 15-year terms.
April closings are stronger than originally
expected due to a number of borrowers anticipating the potential impact of May
collections and advancing closing dates. We expect more detailed guidance from
Fannie Mae and Freddie Mac this week on how to address future collections. We
believe that any approach will take into account the degree of change in
collections, how specific markets and submarkets are impacted, how a sponsor’s
total REO is performing and any potential impacts on overall creditworthiness.
The addition of debt service reserves at both GSEs provides borrowers the
ability to perform through occupancy and collections dips that may occur.
Inflows have declined at both GSEs, but we continue to issue new Fannie Mae and
Freddie Mac applications, the majority being refinances. Pricing remains
competitive with 10-year term debt in the low to mid 3% range. This week,
Freddie Mac lowered its UST floor to 60 bps. Fannie Mae’s UST floor remains at
90 bps for 10-, 12- and 15-year terms.
Small
Loans
In response to COVID-19, Fannie Mae Small Loans and Freddie Mac
SBL have implemented similar program adjustments to the larger conventional
business
In response to COVID-19, Fannie Mae Small Loans and Freddie Mac
SBL have implemented similar program adjustments to the larger conventional
business. Forbearance programs apply just the same as they do on
conventional deals. Freddie Mac SBL is requiring a 12-month P&I reserve for
all new loans. Fannie Mae reserve requirements vary by tier, ranging from none
on a low leverage request, up to 18 months at full leverage plus tax, insurance
and replacement reserve escrows. In terms of pricing, Fannie Mae deals
under $5M are not currently eligible for asset purchase by the Treasury, so we
have seen most small loans trade slightly wide of conventional, $5M+ loans.
However, Fannie Mae pricing is still very competitive on small loans and
remains inside of Freddie Mac SBL for most terms/structures. Freddie Mac SBL
rates have been coming in as their April SB securitization was well-received by
the market.
Life
Company
·
The
vast majority of lenders are actively quoting new deals.
The good news this week is that things are
stable in the market. The vast majority of lenders are actively quoting new
deals. Debt service reserves seem to be the preferred structure to get
beyond the current uncertainty. Preferred property types continue to be
industrial and multifamily with some interest in self-storage. Pricing
range is 3.25% - 4.0% depending on LTV and term.
FHA
·
HUD
issued guidance clarifying both its reserve requirements for refinance deals
during the COVID-19 pandemic and clarifying its guidance for multifamily
forbearance agreements as needed by HUD borrowers.
Consistent with its pledge to be the liquidity provider in
difficult times, HUD issued guidance clarifying both its reserve
requirements for refinance deals during the COVID-19 pandemic and clarifying
its guidance for multifamily forbearance agreements as needed by HUD borrowers.
Among the clarifications for forbearance, were HUD's
clarification that forbearance is a negotiation between a lender and a borrower
and that forbearance agreements require the approval of HUD. To make
things easier, HUD pre-approved an MBA prepared document. So long as that
document is used without modification, HUD simply needs to be sent the
agreement and it is deemed to have approved the forbearance agreement. Any modifications
to that document require HUD's pre-approval. HUD further clarified that
construction loans that have not yet converted to permanent loans are not
eligible for forbearance.
While a borrower on a permanent loan must be granted forbearance
if requested, HUD encourages borrowers to use other means such as excess
replacement reserves, debt service reserves, and residual receipts, for
example, to avoid forbearance. While a loan in forbearance will be
considered delinquent, it will not be considered in default and HUD will not
penalize a borrower with 2530 flags if the borrower complies with the
forbearance agreement.
The debt service reserve notice issued on April 10th was further
clarified as to how the reserves are calculated and when they can be released
for all transactions. Among other items, the notice indicated that only
projects with 90% project-based rental assistance can have the escrows waived.
Affordable projects with Project Based Vouchers or LIHTC income limitations
must collecta reserve as the point of the reserve is the strength of the income
stream and not the affordability of the project.
Conduits
·
The
market remains closed for new CMBS issuance.
The market remains closed for new CMBS issuance. Some
conduits are trying to figure out what they can do with existing loan
inventory. Ideas include cutting loans into A Notes and B Notes and
securitizing just the A piece. Others are looking to do a smaller issuance with
just higher quality, low leveraged loans. Property types would be limited
to industrial, multifamily and self-storage. The hope is that this will “kick
start” the market and free up capacity. No one is making new conduit loans.
Conduits are discussing what they might be able to do when the market opens,
but it’s not programmatic at this point. Secondary market activity is still
light and mixed. AAAs have widened 5 bps. and BBBs having tightened by 100 bps.
Debt
Funds
·
Opportunistic
lending is still the primary business strategy.
A couple debt funds have expressed interest in returning to the
market, but the credit parameters are tight. Hotel and retail are not desired.
Those in the market are only looking for primary markets. Opportunistic lending
is still the primary business strategy. Additionally, those funds with “dry
powder” are looking to purchase loans from other lenders who may be facing
liquidity issues.
Banks
·
No
significant change to the bank lending market.
No significant change to the bank lending market. Most are
still fielding borrower inquiries for loan modifications and forbearance. The
second round of small business lending provided by “CARES-2” should tie up
resources as well. With no clear picture of what the economy looks like after
the crisis, credit extension remains justifiably limited.