Surging Distress In CRE CLO LoansĀ Spurs Lender Rush To Repurchase Delinquent Multifamily Mortgages
The commercial real estate sector continues to experience elevated stress (seeĀ theĀ state of the industry in charts). The latestĀ crack to emerge is the increasing number of delinquencies on multifamily mortgages.Ā
In April, aboutĀ 8.6% of commercial real estate loans bundled into collateralized loan obligations were distressed, reaching the record high set inĀ January, according toĀ Bloomberg, citing new data fromĀ analytics firm CRED iQ.Ā
The loans bundled into CRE CLOs wereĀ merged with funds from individual investors to acquire multifamily housing during the Covid era.Ā After that, borrowing rates surged, catching many off guard. A significant portion of the deteriorating loans hadĀ floating-rate interest rates, putting massive pressure onĀ landlords’ cash flows,Ā diminishing the market worth of the properties, and obliterating equity in a large number of investments.Ā
According to data provider Trepp, $78.5 billion of CRE CLO loans are outstanding.Ā ThisĀ means many CRE CLOĀ issuers are racing to find ways to prevent aĀ tsunami of bad loans from defaulting or risk losing the fees they collect on the securities.Ā
Recent estimates fromĀ JPMorgan show lenders purchasedĀ $520 million ofĀ delinquent loans in the first quarter of this year. Lenders have been ramping up the number of buyouts over the last four quarters because of mounting bad loans in a period of elevated rates.Ā
JPMorgan strategistĀ Chong Sin said he’s surprised by lenders’ ability to obtain warehouse lines to purchaseĀ badĀ debt, given tightening credit conditions.Ā
“The reason these managers are engaged in buyouts is to limit delinquencies,” Sin said, adding, “The wild card here is, how long will financing costs remain low enough for them to do that?”
Anuj Jain, an analyst at Barclays Plc, expectsĀ buyouts to continue as distress increases across the CRE CLO space.Ā Ā
“If the outlook for the Fed shifts materially to hikes or no rate cuts for a while, that might lead to a sharp increase in delinquencies, which can stifle issuers’ ability to buy out loans,” Jain said.Ā
BloombergĀ explains much of the CLO space derives from multifamily bridge loans originated around 2021-2022:Ā
CRE CLO issuance surged to $45 billion in 2021, a 137% increase from two years earlier, when buyers of apartment blocks sought to profit from the wave of workers moving to the Sun Belt from big cities.Ā Three-year loans would give them time to complete upgrades and refinance, the thinking went.
Fast forward to todayĀ andĀ the debt underpinning many of the bonds is coming due for repayment at a time when there’s less appetite for real estate lending, insurance costs have skyrocketedĀ andĀ monetary policy remains tight.Ā Hedges against borrowing cost increases are also expiring andĀ costĀ significantly more to purchase now.
Those blows helped increase multifamily assets classed as distressed to almost $10 billion at the end of March, a 33% rise since the end of September, according to data compiled by MSCI Real Assets.
Last Wednesday, the Fed left interest ratesĀ unchanged at around 550bpsĀ as inflation data reaccelerates and economic growth tilts to the downside, stoking stagflation fears.Ā
Fed swaps are pricing in just under two cutsĀ – this isĀ down from nearly seven earlier this year and about 1.14 before last week’s FOMC.Ā
Meanwhile, bears areĀ piling in onĀ CRE CLO issuer Arbor Realty Trust Inc., with 40.3% of the float short, equivalent to 73 million shares short.Ā
“The multifamily CRE CLO marketĀ was not preparedĀ for rate volatility,” said Fraser Perring, the founder of Viceroy Research, which has placed bear bets againstĀ Arbor, adding, “The result is significant distress.”Ā
The longer the Fed delays rate cuts, the worse the CRE mess will get.Ā
Tyler Durden
Tue, 05/07/2024 – 06:55
ZeroHedge News
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