WASHINGTON DC—There has been plenty of talk coming out of Washington, DC that attention will finally turn to Fannie Mae and Freddie Mac to bring them out of conservatorship. Head of the Federal Housing Finance Agency Mark Calabria, in particular, has been very vocal about the GSEs' need for an overhaul. These signals are already having an impact on borrowing costs, as the Wall Street Journal recently reported: Securities issued by Fannie Mae and Freddie Mac are trading at a growing discount compared with securities sold by Ginnie Mae and this widening gap is attributed to investor anxiety about a change. The multifamily market is a small piece of GSE activity, but it is vital to the commercial real estate industry. So far, there has not been any concrete proposals about what will happen with that piece of GSE lending. But as the debate in the White House intensifies and multifamily is brought into the loop, it is hoped that the GSEs' track record on delinquencies will have some influence on any decisions the Administration makes. A newly-released CBRE report helps to make this case.

Low Levels of Delinquencies

The report, authored by Jeanette Rice, CBRE's Head of Multifamily Research for the Americas, shows that multifamily mortgage delinquency rates remain at very low levels, a healthy—and underappreciated—performance metric for the sector. Delinquency rates for all commercial real estate are also favorable, but multifamily rates remain under the broader averages. "Multifamily mortgage delinquencies dropped to very low levels several years ago and have remained there," Rice writes. "The sustained health of multifamily loans is a significant characteristic of the multifamily industry today even if rarely discussed." The report adds that the near-term outlook is favorable but that an economic downturn will lead to higher delinquency rates. That said, the next recession is unlikely to be a repeat of the 2009 downturn. Rather, according to CBRE, "the experience of the early 2000s recession may be a better guide to possible delinquency severity during the next downturn." With that in mind CBRE did a deeper dive into the GSEs' track record. Fannie Mae historical data reveals three principal trends, the report said. First, at the worst following the 2008 recession, delinquency rates were still less than 1%, peaking at 0.8% in June 2010. Second, during the early 2000s recession, delinquencies reached only 0.3% at the highest in late 2001. Third, over the past four years, delinquency levels have remained very low, averaging only 0.07% from 2014 to the present. Freddie Mac's delinquency rates have also remained very low for several years, the report noted. From 2014 through the present, delinquencies averaged only 0.02%. Based on available historical quarterly data, following the last recession, Freddie Mac's delinquency rates topped out at a modest 0.36% in Q3 2011. In the early 2000s recession, delinquency peaked at only 0.15% in Q4 2001.

Other Lending Channels

CBRE took a look at other forms of finance such as bank lending and CMBS. For banks, since the 2008 recession, multifamily posted lower delinquencies than nonresidential commercial real estate mortgages. In the last recession, bank multifamily delinquencies peaked at 1.76% in Q1 2010. In the early 2000s recession, delinquency reached a more moderate high of 0.56%, CBRE said. As for CMBS, today its multifamily delinquency rate is well below other property types at the low level of 0.37%. But in the last recession, the CMBS experience was different from that of the agencies and banks and likely life companies as well, CBRE said. "Multifamily delinquency soared, arguably due to the looser underwriting and lower quality of multifamily product originated by conduit lenders compared to other lender types, and exceeded that for all commercial real estate," Rice wrote. However, multifamily delinquency began to recover earlier than the other property sectors and declined at a faster pace, the report noted. "Two years ago, CMBS multifamily delinquency levels fell under 0.5% and have remained under this level for the past two years. However, in the past few quarters, delinquencies have inched up slightly. This rise is not a concern at the moment, but worth watching."