Last Friday in “Fast & Furious COVID 19 Week-In-Review”, it was noted that this would be the week that determined whether the U.S. slid just into a recession – or fell into another Great Depression. For clarification between the two, a recession is generally regarded as two consecutive quarters of contracting GDP. A depression, on the other hand is much, much worse – and you have to go way back to find the definition for a depression. A depression is generally characterized as three dimensional:
1. Negative GDP of at least 10%
2. Unemployment rises to or above a 10% level for a sustained period of time (years not months)
3. A depression is a recession that lasts in the range of 3 years (such as the depression between 1919-1921 and the Great Depression of 1929 – 1933)
Congress’ inaction over the weekend to pass a stimulus and recovery bill risks directing the U.S. down a path of a depression. Congress has yet to realize this public health crisis is not a game of horseshoes where close counts. Fortunately, the Federal Reserve gets this point and is literally throwing everything it has to prevent a depression. And so too are many other government agencies, housing authorities, industry associations, corporations, and small businesses.
On Friday, March 20, 2020, the Fed intervened for the fifth time in a week with three unprecedented moves in one day:
i) announced an increase in their Repo-Market purchases to a record $1.0 trillion per day indefinitely through March;
ii) moved to support muni-bonds; and
iii) began what was previously unthinkable with stock purchases
One would think that was plenty of intervention; however, when Congress failed to agree – let alone pass – a stimulus bill over the weekend and the futures market was pointing to another 700+ point decline in the DOW, the Fed acted again in a big way on Monday. To the Fed’s credit, they acted again and essentially decided to engage in the “do whatever it takes” QE plan by announcing it was going to buy more than bonds. It was going to also support corporate and household debt via the “Term Asset-Backed Securities Loan Facility.” This facility will essentially do what Congress is not doing to stabilize and support the market for student loans, auto loans, credit card loans and loans backed by the Small Business Administration. This level of intervention is unprecedented.
Other government and housing agencies are getting it as well and have joined the Fed. The actions by these agencies will ultimately rewrite history and finance textbooks on how to battle a depression. For example, the FDIC issued a Financial Institutions Letter Sunday (FDIC FIL-22-2020) titled “Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus”. This letter gives banks needed direction on how to work with customers.
The six key points to note in this letter are:
1. Encourages financial institutions to work constructively with borrowers affected by COVID-19;
2. Does not criticize institutions for prudent loan modifications and will not direct supervised institutions to automatically categorize COVID-19-related loan modifications as troubled debt restructurings (TDRs);
3. Confirmed with the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This is a critically important item for all CRE property owners with bank debt. Keep your CRE loan current (make your March payment) until you can get a loan modification with your bank lender!
4. Views modification efforts described in the interagency statement for borrowers of one-to-four family residential mortgages where loans are prudently underwritten and not past due or carried in nonaccrual status do not result in loans being considered restructured or modified for the purpose of respective risk-based capital rules; (this means banks won’t be hit with requirement to hold more capital just for modifying a loan as long as it was not past due or a TDR-type loan restructure.
5. Views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk.
6. Provides supervisory views on regulatory reporting of past due and nonaccrual status for loan modification programs whereby past due status should be based on the due date stipulated in the legal loan documents as modified within such modification program. Additionally, the interagency statement reminds institutions that loans that have been restructured as described under the statement will continue to be eligible as collateral at the FRB’s discount window based on the usual criteria. This latter point is critical to enable banks to offload modified loans to the Fed and enhance their ability to remain liquid and free to extend new credit.
The Federal Housing Finance Authority (FHFA) has also stepped up to the plate. The FHFA is the entity in control of Fannie Mae and Freddie Mac since they were put into conservatorship during the Financial Crisis. On Monday, the FHFA announced that Fannie Mae and Freddie Mac (the Enterprises) will offer multifamily property owners mortgage forbearance with the condition that they suspend all evictions for renters unable to pay rent due to the impact of coronavirus. The eviction suspensions are in place for the entire duration of time that a property owner remains in forbearance. The forbearance is available to all multifamily properties with an Enterprise-backed performing multifamily mortgage negatively affected by the coronavirus national emergency.
What does the aforementioned FHFA announcement mean?
i. Know who holds the debt on your MF community. If it is Fannie Mae or Freddie Mac, you will likely see a suspension of an eviction if you can’t pay rent IF the property owner accepts “mortgage forbearance” (the lender will not foreclose on your property owner if the MF property owner cannot pay the mortgage because you cannot pay rent).
ii. Keep in mind this is a leniency or deferral and not to be confused with a forgiveness of the debt or your rent obligation. Pay what you can on rent just as the property owner should as well because there may be a day of settlement unless the FHFA later decides to forgive the past due obligation. None of these intervention programs are designed to forgive obligations, they are essentially kicking the day of reckoning down the road.
Another point to consider are the governors and appraisal requirements. In Georgia, the governor waived permits and inspections on new home construction to mitigate a chokepoint from cities, counties and other local government authorities being closed or incapable of timely processing building permits and required inspections. Be careful with these governor-issued pronouncements as we don’t yet know the full impact on market value or financing from these kinds of permits and inspections waivers. It is likely that local jurisdictions will look to collect the lost revenue from these permits – and additional inspections may later be required by Fannie, Freddie or a bank to lend on newly constructed homes without in-process inspections for plumbing, electrical, etc.
Fannie Mae has also weighed in on appraisals. It recognized issues with appraisers inspecting the inside of homes and apartments during the virus outbreak and turned to an alternative to aid appraisers. The new “Lender Letter” from Fannie Mae states as follows:
“Effective immediately, we are allowing temporary flexibilities to our appraisal inspection and reporting requirements. As described below, we will accept an alternative to the traditional appraisal required under Selling Guide Chapter B4-1, Appraisal Requirements, when an interior inspection is not feasible because of COVID-19 concerns. We will allow either a desktop appraisal or an exterior-only inspection appraisal in lieu of the interior and exterior inspection appraisal (i.e., traditional appraisal). If a traditional appraisal is not obtained and there is insufficient information about the property for an appraiser to be able to complete an appraisal assignment with a desktop or exterior-only inspection appraisal, the loan will not be eligible for delivery to us.” (Note this latter highlighted portion of the announcement and then the chart provided below as to when a “desktop/no interior inspection” appraisal will be required.)
While at first glance, this intervention seems welcome news, the alternative of a “desktop” appraisal (appraisal without an interior inspection) is being narrowly applied to just “purchase transactions,” and second homes with at least 15% equity down payment. It excludes home equity refinancing and second homes greater than 85% LTV.
As we are early in this discovery process of where the logistics and chokepoints are, the desktop option could get expanded. Below are the key points and chart as to where a desktop appraisal option can be applied. The devil is always in the details and the details are fluid during this virus.
A key takeaway so far is that unimaginable intervention is now not only imaginable, it is occurring. The devil is in the details, and the end-result may not match up with the news headline. The Fed is once again doing both monetary intervention and fiscal stimulus. The market is clearly communicating that Congress has to engage and pass a bipartisan stimulus and recovery bill ASAP, or the Dow is headed to 15,000 or lower. While the initial federal response at the onset of this coronavirus crisis was deferring just to the traditional rate cut tool, today the Fed is encouraging other agencies, state authorities and governors to join them in a coordinated response to unclog the chokepoints.
As the week progresses, here are other things to pay attention to as they unfold:
- Social Distancing/Home Isolation: How long and what more impacted? One of the biggest challenges is a consistent definition of who and what industries are considered “essential services or service providers.” On an Appraisal Institute conference call today discussing this item, while states like Illinois, Indiana, Ohio and Delaware include appraisers, inspectors and property managers as essential – other states like California defer to the definition in the Patriot Act that are less clear. It is not just the duration of social distancing orders that are impacting CRE, it is also which professionals in our industry can operate and under what restrictions and waivers. Our CRE industry needs to be united and cross-pollinating on these topics. NAIOP is leading just such an effort this week and hosting a joint webinar with the IREM CEO, the Appraisal Institute CEO, and the CCIM Chief Economist/ACRE Director of Research and Corporate Engagement to accomplish such a coordinated effort between property managers and appraisers. One such initiative is how appraisers can use virtual tours and interior photos by Certified Property Managers within IREM to provide interior photos to satisfy inspection requirements without a choke-point or adding future risk to a property owner, lender or investor that a key component of due diligence (inspection) was waived.
- Managing the next wave of “after-shocks”. These include: i) auto manufacturers idling plants; ii) keeping America’s supply chain functioning from ports and rail to air cargo and trucking. America’s supply chain is materially impacted with a California state-wide home isolation order idling the two largest container ports in the U.S. (Los Angeles and Long Beach that handle more than 25% of our 55 million annual containers and more than half the inbound flow from China); and truckers experiencing limited services at truck stops and interstate rest areas.
- Final decisions by primary and secondary schools as to whether to hold commencement ceremonies and host summer programs on university campuses. If schools cancel all commencement and summer programs, the small business carnage in university towns will be severe. Recall that “Christmas” for most small businesses in university towns is commencement season.
- Small businesses stepping up such as NJ Pizza Owner of Federico’s Pizza & Restaurant that took out a $50,000 personal line of credit to retain his long-time restaurant staff and keep them paid during this time of social distancing. Like this pizza owner, many in the real estate industry are small businesses and even sole proprietors. The CEO of Etsy reports that 56 million taxpaying Americans are sole proprietors, according to 2018 IRS data. Those stats – and the story behind the NJ Pizza restaurant owner – are why the focus on this economic intervention has to be a “bottom-up.”
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