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Financial and Lending Update_April 23, 2020

Thursday, Apr 23, 2020
by Jeff Meierhofer
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  

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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.



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