CMBS Loans and Mortgage Market Performance During the Coronavirus Pandemic

State lockdowns earlier this year and high unemployment figures have affected the home market in the United States. CMBS loans (Commercial mortgage-backed security loans) and even conventional loans backed by Freddie Mac and other organizations are at risk.

Delinquencies are likely to increase, at least according to some experts. The most bearish of analysts have warned that the U.S. market for commercial loans is close to collapsing.

Take a look at the latest facts and data that can help to gauge the market today.

Why Has the Market Stalled?

Liquidity is the biggest problem in the mortgage market today. The COVID-19 health crisis has made it difficult for American businesses to get access to liquidity. This has a knock-on effect of reducing their ability to pay employee wages and benefits.

According to a whitepaper post from Thomas J. Barrack [1], a prominent equity real estate investor, “The profound impacts of both the COVID-19 pandemic and the public health measures taken in response to it on the American economy have caused high-performing mortgage loans, grounded in solid economic fundamentals, to suddenly and sharply decline in value.”

As a solution, Barrack suggests that REITs, banks, and debt funds must develop a solution that allows flexibility for borrowers so that millions of jobs and the value of the industry can be protected. Repurchasing finance could be an essential element of any strategy implemented in the coming weeks and months.

Today, many borrowers who would have been engaged in the market prior to COVID-19 are now sitting on the sidelines. Even those that can afford to borrow may be unwilling to take risks with the economy underperforming and GDP set to produce its biggest slide in years.

How Mortgage Market Companies are Responding

The larger mortgage corporations understand the fragile position of the market, and they are making changes to ensure that lenders and borrowers are protected. A mortgage market crash would slow economic recovery and cause significant hardship for individuals and businesses.

Freddie Mac, one of the largest secondary mortgage companies in America, has implemented various changes to ensure stability. It has posted regular bulletin updates with temporary provisions to support the market during the COVID-19 crisis.

One of its most recent bulletins includes a change that requires self-employed borrowers to verify that their business is open and operating within 20 days of the note date. This was previously set at 10 days but was extended to provide relief for borrowers and mortgage sellers. This is just a single example of how mortgage market companies are trying to stimulate activity in the sector [2].

The government also funded extensive protections for homeowners earlier this year. FHA, VA, HSDA, Fannie Mae, and Freddie Mac secured loans were eligible for forbearance and mortgage relief.

Under the CARES Act, lenders and loan servicers have been forbidden from foreclosing until after August 31. Borrowers experiencing financial hardship related to the Coronavirus Pandemic have the right to apply for forbearance for up to 180 days, with the option for an extension of up to 360 days.

Fees, penalties, and additional interest are forbidden under the forbearance program, but borrowers must apply through their lenders. Full details were published by the Consumer Financial Protection Bureau earlier this year [3].

What Happens Moving Forward?

Congress failed to agree on a second round of stimulus, leaving many borrowers concerned about mortgage relief programs while the COVID-19 crisis still impacts the nation. While lenders are offering some flexibility for commercial and residential loans, there’s now little legislative protection for borrowers to fall back on.

Ultimately, the resilience of the market is likely to rely entirely on how long the economic recession lasts, and how quickly Congress can enact new policies to support the mortgage market.

References

1: https://medium.com/@tombarrackjr/preventing-covid-19-from-infecting-the-commercial-mortgage-market-e7444701745e

2: http://www.freddiemac.com/learn/lo/tutorials/covid_temp_processes/index.html#/

3: https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/mortgage-relief/