Residence CMBS Delinquencies Might Result in Elevated Evictions

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If the Centers for Disease Control and Prevention's moratorium on evictions expires later this year, Fitch Ratings expects further evictions.

Currently, multi-family home mortgage loans are low and only marginally above pre-pandemic levels for both affordable Fitch-rated homes and commercial home loans in commercial mortgage-backed securities transactions. According to Fitch, if unemployment remains high, given the slower economic recovery after Q3 20, the trend could continue to develop negatively.

Currently, the affordable housing programs as assessed by Fitch have sufficient liquidity and reserves to cover short-term cash flow disruptions. However, according to Fitch, ongoing earnings pressures could drain liquidity.

Fitch-rated portfolios can withstand spikes in arrears and costs under stressful scenarios without undermining the overcollateralization sufficient to cover debt service payments and cushion higher ratings.

A recent report from Moody's Analytics' REIS subsidiary showed strength in the affordable sector. In the second quarter of this year, the national vacancy rate in the affordable housing sector fell by 10 basis points to 2.4%.

However, CMBS loans present other challenges. In such situations, master servicers, which are usually owned by large investment grade banks, are required to take action against missing principal and interest payments as well as taxes and insurance in order to provide liquidity in the event of default, according to Fitch.

So far, CMBS multi-family crime has been low, rising slightly to 0.56% in September, compared to 0.41% before the pandemic, according to Fitch. Only 1.2% of the multi-family loans in the Fitch-rated universe have been granted leniently. Most of these are agency loans due to Programmatic Forbearance, which Freddie Mac implemented in April. The postponement periods are usually three to six months and expire in October. Fitch expects a slight spike in multi-family crime when the moratoriums end.

Fitch expects arrears and evictions to be higher in areas hit hard by the recession and where employment has not seen any significant recovery. For the week ending September 21, nearly a third of tenants who have defaulted on their rental payments have an annual household income of less than $ 25,000, according to the US Census Bureau's Household Impulse Poll. Fitch says this will particularly affect affordable housing and could put lower valuations under pressure. Tenants cannot vacate some affordable residential properties.

A September report by proptech company MRI Software showed this Affordable apartment rental collections were 77% 2019 collections in August and 76% of collections in July 2019. The report covered 1.5 million affordable housing units in the US.

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