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Multifamily Viewpoints

The Ruthless Defaulter

By Victor Pa
Published on September 22, 2014

Deteriorating property cash flows are never in the plan for multifamily investments, especially to the extent that property income falls below expenses. Nonetheless, this unfortunate situation happens for some properties, and they go “underwater.”

We conducted our own research on this topic to find out why some borrowers with underwater properties continue to pay and some do not. The research, “Default Ruthlessness: Examining Borrower Default Behavior,” published in CRE Finance World, found that commercial real estate borrowers are more likely to default when:

  • Economic conditions are weak
  • Loans have shorter terms
  • Property is in a volatile market

We found that if borrowers have access to capital and overall liquidity, then they are less likely to default and will support the property until the market improves.

For loans in commercial mortgage backed securities (CMBS), borrowers with terms of less than seven years were more likely to default than those with terms of seven or more years. Those with longer-term loans were more likely to keep the loan current despite weak property conditions because the borrower has more time to improve the property’s operations and performance.

In addition, the research highlighted the importance of borrower selection for lenders. Freddie Mac Multifamily borrowers are less ruthless in their default decisions. The default frequency for this subset of loans is a fraction of what it is for CMBS loans in the same condition. The results suggest that our conservative approach to purchasing multifamily loans results in a selection of borrowers with a greater ability and commitment to support an underperforming property until the market or property performance improves.

We typically buy loans backed by strong properties with experienced owners who have the ability to withstand various economic environments. Our delinquency rates are an industry low at about .05 percent, compared to CMBS delinquency rates of 5.56 percent.

To view more research, visit Market Commentary on our web site.

Victor Pa is vice president, multifamily investments and advisory
Have a question or comment? Contact Victor


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