It happens all the time, I read an article and I’m left with more questions than answers. In this series, we break down trending terms or concepts that need a little more explaining.

Today: CMBS Forbearance

There’s been a lot of talk about renters and small businesses being unable to make their mortgage payments. Now that we are in the seventh month of the pandemic reaching America, property owners are experiencing a growing inability to pay.

CMBS: Commercial Mortgage Backed Securities

When you buy a commercial property (multifamily, office, retail, industrial, or hotels), that property serves as collateral in order to get a loan. Making payments to that loan is your mortgage. When many mortgages are grouped together into one financial package (aka security) that someone else can invest in, now you have a commercial mortgage-backed security (CMBS).

These CMBS securities are rated based on their risk and investors can invest in these packages via the bond market. One rating agency is Fitch and they scale risk from “AAA” for a very safe / high quality security, to “D” for a security in default. A default means that the group of mortgages is not collecting enough payments from their tenants to pay back the money that investors gave them. It can get more complicated but this is good for now. Full Fitch ratings and their definitions can be found on their site here.

There are many pros and cons to CMBS and this previous blog post sheds light on a some of them:

Forbearance

A CMBS lender is the middle-man between the CMBS packaging discussed earlier and the landlord that wants a loan to buy a property. CMBS lenders lend money to landlords and then package those mortgages together into a conduit to sell on the bond market.

If tenants are making their payments, then landlords are able to pay their mortgage. When enough tenants stop making their payment, and the landlord doesn’t have enough cash flow to pay their mortgage, their loan is sent to a special servicer for forbearance, modification, or repayment plans. A special servicer comes into play when payment issues arise while a normal loan servicer just handles receiving and processing payments. If a loan is in trouble to the point where the special servicer and landlord cannot agree to a forbearance, modification, or repayment plan, then the landlord will be forced to give up the property.

CMBS Forbearance: “An agreement made between a mortgage lender and a delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will — over a certain time period — bring the borrower current on their payments.” — Investopedia

What does this mean for me?

Whether you’re a tenant or landlord, this pandemic is affecting everyone. Everyone is hurting. The best solution will continue to be open communication with those you do business with.

If you’re a tenant that is struggling, talk with your landlord about temporarily reducing your payments and structuring a catch up period later. If you’re a landlord, proactively reach out to your tenants with creative solutions rather than waiting for rent checks to stop coming in.

Some Interesting Stats

• In all of 2019, 674 loans went to special servicing. In March to May 2020 (3 months only), 439 loans went to special servicing.
• Of all 30-day delinquencies, 49% are from hotels and 34% are from retail.
• According to Trepp, the November 2019 CMBS delinquency rate was 2.34%.
• June 2020 was the largest one-month increase in CMBS delinquencies (3.59% from 1.46%) since Fitch Ratings started tracking 16 years ago.
• Fitch analysts project that delinquency rates will balloon to between 8.25% and 8.75% by the end of Q3 2020.
• According to NMHC, almost 25% of multifamily tenants didn’t pay in July.