Multifamily Agency Lending in the time of COVID

[Chris Davis]

This is my day job, and it's been both horrifying and interesting watching our healthy capital markets gradually deteriorate into a Michael Lewis financial disaster book.  Thought it might be interesting to share war stories, from whatever perspective anyone happens to have (i.e. lender/sponsor/attorney/vendor etc).

In terms of actual  market impact, here's what I've seen:

- New debt service reserve requirements at closing (killer for a lot of acquisitions that need max leverage)

- Apprehensive lenders, due to loss sharing and/or buyback requirements.  Haircutting transactions above and beyond whatever restrictions are put in place by the GSE's.

- Decreasing appetite for cash out refinances, high leverage, interest-only, and peculiar deals (scattered site, low liquidity, nonlocal sponsors)

- Mixed-use deals having their retail income underwritten at $0 unless big national credit tenants.

- Falling collections at properties playing hell with deals in process.  If your collections drop the month before closing, usually the Agencies are going to want to go even farther to "catch the falling knife" and you get whacked on debt service coverage ratio.

- Subsidized deals are king right now, nothing like having tenants that don't have jobs to lose, so HAP contracts or Section 8 voucher transactions or anything like that are largely immune to the current sturm und drang.

In terms of actual horror stories:

- Big sponsor with lots of workforce housing that included many undocumented immigrants who can't collect unemployment, most of whom work retail or domestic services and none of whom are working now. Reported something like 8% collections in April (i.e. 92% collections loss). On a CMBS loan so no forbearance, nightmare scenario.

- Fannie/Freddie announced loan forbearance for existing borrowers but the process is a bit clumsy, which has led to some downright irate exchanges between sponsors and servicing folks.

- People being eaten alive by hard money shops turned loan-to-own operations when their GSE takeout financing falls apart and they run up against hard maturities.

What's everyone else seeing out there?