March 27th Capital Markets Update
Wow, what a difference a week makes. While the stock market is running, the capital markets have aggressively shifted to the negative with spreads continuing to be wide. The Fed’s recent actions seemed to have stopped some of the bleeding. Corporate and Ginnie Mae spreads have tightened. CMBS spreads have come off their highs of around 330bps. While the bond market has found some footing, CMBS lending remains to be on hold indefinitely.
The good news is that any Life co or Freddie SBL deal under application prior to this meltdown is being honored by our lenders. Further, any deal that was rate locked, is also being honored with a few fortunate clients locking in low 3% rates for 15-year fixed rate paper. Unfortunately, these rates are not available today but it’s important to note, lenders are honoring rate locks and closing at these levels.
Let’s talk about what everyone is curious about…..lender forbearance. Lender focus has shifted from new loan origination to determining how to handle the influx of imminent defaults and potential missed payments. We are seeing wide ranging responses to the cash flow disruption caused by the COVID-19 pandemic. Leading the way with the most direct response has been the FHFA. Both Fannie and Freddie have released clear guidelines to landlord forbearance. Here is the latest scoop:
Agency: The most significant change out of Fannie Mae is to their underwriting for any new deal going forward. Starting immediately, any Tier II deal greater than $6M in loan amount, Fannie will require a 12-month upfront reserve for Principal, Interest, taxes, insurance and replacement reserve. If the loan is less than $6M the same reserve will be for 18-months. The intent is for the reserve to be used if the property operations are insufficient to cover costs. While we have not seen any guidance on underwriting parameters, we have heard that Freddie will take a similar 12-month reserve structure similar to what Fannie Mae is requiring. With respect to lender forbearance, both Fannie and Freddie are adopting the following:
Fannie Mae is delegating authority to Lenders to grant forbearances, if requested by a Borrower, for up to 3 months of missed payments if the Lender determines that the relief is warranted or needed due to the impact of the coronavirus national emergency. In return for forbearance, Borrowers must:
- Repay the missed payments in equal monthly installments over 12 months beginning at the end of the forbearance period.
- Prepay the amounts owed upon receipt of any business interruption insurance proceeds or other assistance funds; and agree to suspend evictions of tenants who are facing financial hardship due to the current crisis.
- Permit the affected tenants to repay any missed rent payments over a period of no more than 12 equal monthly installments, without late charges, together with the affected tenant's regular monthly rent, to the extent permitted by applicable law.
- The Borrower’s eviction suspension will remain in place for the longer of 3 months or until the borrower has brought its loan current under the repayment terms above. It’s important to note that under Freddie Mac, evictions can resume after the 3-month period, regardless if borrower hasn’t fully paid back the forborne amounts. This is a significant difference over the Fannie forbearance offering. Freddie is allowing landlords to maintain control of their rent roll after the 3-month period. Fannie requires the loan be current. This could potentially be problematic if the property has significant delinquencies that require an extended period to repay the shortfall.
Life Companies: Balance sheet lenders have been receptive to open dialogue regarding properties demonstrating a hardship on a case-by-case basis. It should be noted that most life companies are strongly encouraging borrowers to comply with their loan documents and make their April monthly payment, regardless of their tenants' inability to pay. With pre-pandemic cash flows at historic highs, it is most lender's position that borrowers have been afforded the ability to absorb a short-term cash flow disruption. District Capital believes that any borrower failing to make their April payment will put themselves in a worse position when it comes time to negotiate a modification or forbearance agreement. Time will tell a story over the coming weeks as the situation changes by the day as additional clarification is expected from the government and regulators.
CMBS: CMBS servicers are playing the wait and see game. In typical fashion, CMBS servicing communication is difficult to ascertain. We expect Special Servicers to look to each deal on a case-by-case basis with very little latitude to do much of anything until there is further governmental guidance. If history taught us anything, it’s that CMBS servicing is a nightmare. In the past, you had to miss a payment to get their attention. We expect more of the same as CMBS servicing shops are not properly staffed or prepared for what they are about to experience. Luckily, District Capital is prepared, as we have the best and brightest servicing expert in the business with Crystal Kalinowski. Crystal has been servicing CMBS loans since the late 90’s so she’s seen a thing or two. District Capital is fully prepared to go to bat for clients or non-clients who simply need to get their lenders attention. Crystal’s 20+ years’ experience has helped her build a deep rolodex (does anyone use that term anymore) of servicing professionals who personally know Crystal and appreciate her expertise and ability to work through problems. I highly advise reaching out to Crystal today before things worsen to discuss the best approach for your specific deal.
We hope everyone is staying sane and keeping busy during this unprecedented time. For most of us in this business, it’s been an abrupt change of pace. While it’s no fun to be working from home or out of work completely, this temporary disruption does provide us all with an opportunity to recharge, refocus and reconnect. This will all be over soon, and we will be right back to our old ways of working long hours, spending too much time on our phones and taxing our minds and bodies. I hope everyone continues to stay healthy as we ride this out together. I heard a quote (in one of the fifty webinars I’ve listened to this week) that really stuck with me. “Adversity doesn’t create character, it reveals it” Think about that as we all deal with the issues we are currently faced with.