Cracks begin to show in multifamily lending

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Multifamily has been one of the most reliable and best-performing commercial real estate sectors in recent years, benefiting from mass migration to cities and a greater shift toward renting over buying.

But as the coronavirus pandemic gives people more reason to flee cities, and with a government-imposed moratorium on evictions set to end this week, multifamily lending is beginning to look a bit more risky to banks.

Capital One Financial, an active multifamily lender in and around New York City, said this week that multifamily loan delinquencies have been rising since the start of the pandemic and could increase even more unless more government stimulus is extended to renters and landlords. The Coronavirus Aid, Relief, and Economic Security Act passed by Congress in March allowed for tenants to skip loan payments for up to 90 days without fear of being evicted, but those benefits officially end on July 24.

“We have an eye out on the multifamily side just for what happens with the forbearance programs,” Capital One Chairman, President and CEO Richard Fairbank said on an earnings call with analysts late Tuesday. He noted, too, that unemployment benefits, which have helped many unemployed workers make rent payments, are set to expire at the end of the month.

“There is uncertainty there,” he said.

Multifamily lending has boomed in recent years, with loan balances held by banks more than doubling since the start of 2013, to nearly $470 billion at March 31, according to data from the Federal Deposit Insurance Corp.

It’s also been among the safest bets. Industrywide, the rate of noncurrent multifamily loans to total loans has stayed below 0.2% since the third quarter of 2016, compared with around 1% on loans secured by office, retail and other properties in that same time frame, according to the FDIC.

But cracks are beginning to show.

The $421 billion-asset Capital One does not break out multifamily as a line item in its earnings, but it said its ratio of nonperforming commercial and multifamily loans to total loans climbed to 0.54%, from 0.22% on March 31 and 0.12% on Dec. 31. Multifamily loans account for about 40% of Capital One’s $31 billion commercial real estate portfolio, according to FDIC data.

Capital One reported a net loss of $981 million in the second quarter, compared with a loss of $1.3 billion in the first quarter and net income of $1.6 billion a year ago. The loss was driven largely by a $4.2 billion provision for credit losses, which was up from $1.3 billion in the same quarter last year but down from the $5.4 billion it set aside in the first quarter.

On the heels of back-to-back quarterly losses, the McLean, Va., company said it will cut its third-quarter dividend to 10 cents from what was expected to be 40 cents. The company declined to give guidance on its fourth-quarter dividend.

In a research note to investors, Piper Sandler analysts say that they believe Capital One is close to its peak reserve level and that the company would soon report positive earnings.

Besides a COVID-related increase in loan loss provisions, Capital One also recorded a $265 million legal reserve build and an $11 million expense tied to its 2019 cybersecurity breach.

Shares of Capital One were up 0.8% in late trading Wednesday, to $63.38.

Though he expressed concern about the multifamily sector, Fairbank said that consumer loans have held up reasonably well during the crisis, partly due to government stimulus efforts but also because households have kept their spending in check and increased their savings.

“We are seeing this great paradox of extraordinary credit performance in the middle of the worst economy metrics in our lifetimes,” he said. “That’s a hard one to prognosticate where it goes from here, but I’d give really high marks to the strength of the consumer.”

Like many banks, Capital One has also been helping customers by waiving fees and allowing them to skip payments. Fairbank said that 14% of Capital One’s car loan customers had enrolled in a customer assistance program that lets them skip a payment, but that only 2% of its credit card users have taken advantage of a similar program.

“One fundamental reason is that auto payments are typically much higher than card minimum payments and so they’re just more likely to be beyond the reach of the given customer whose income is disrupted,” Fairbank said. Secondly, he said, “in auto, the stakes are higher for the customer, and they’re very motivated to make sure that they can keep the car.”

Still, echoing recent comments of top executives at other large banks, he said that the state of the economy remains precarious and that much will depend on whether Congress comes through with another round of stimulus to help households ride out the pandemic.

“The elephant in the room,” Fairbank said, is uncertainty surrounding further government relief efforts.

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Multifamily Consumer lending Auto lending Capital One Coronavirus