Beginning in the first quarter (Q1) of 2020, office and retail buildings sat empty and construction cranes fell silent. But the global impacts of the novel coronavirus (COVID-19) were just beginning to be felt in the real estate industry.

For mortgage professionals, the effects have been mixed.

Home sales volume has plummeted, descending nearly 30% in Q2 2020 from the prior year. Still, residential lenders have seen a silver lining in the high levels of refinance mortgages being originated due to historically low interest rates. However, the outlook for the commercial mortgage market is less promising.

The Mortgage Bankers Association (MBA) forecasts a 59% decline in commercial loan origination amounts in 2020 for a nationwide total of $248 billion. This forecast is down from 2019’s $601 billion loan volume.

The majority of the lending volume the MBA foresees for 2020 comes from the multi-family sector, forecasted to fall to $213 billion from 2019’s record-high of $364 billion. The remainder of commercial loans originated in 2020 will go to other income-producing properties, including industrial and to an almost non-existent extent, office and retail properties.

The MBA anticipates 2021 will see a slight rebound to $390 billion total commercial loan volume, of which $308 billion will be attributed to multi-family originations.

But this forecast relies on the continued support from state and federal governments to keep renters and homeowners housed during the recession. As key CARES Act provisions wind to an end, residents unable to pay rent may soon find themselves evicted, resulting in higher vacancies and diminished prospects for landlords and other owners of multi-family properties.

Stimulus need

Many single family mortgages will be spared from foreclosure in the coming months, as Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (HUD) recently announced an extension to the foreclosure moratorium through the end of 2020. But this does not shield commercial landlords, including owners of multi-family properties, from their own mortgage obligations.

For example, one-in-four landlords responding to a U.C. Berkeley survey have needed to borrow money to cover unpaid rents this year. Worse, 39% of respondents were unable to say with confidence that they will be able to cover operating expenses in the next three months, as of July 2020. 83% said they are interested in a government loan program to help landlords.

Homeowners and commercial property owners who have been unable to pay their mortgage payments have thus far received some amount of loan accommodations. These have included loan modifications and forbearance plans where the mortgage holder temporarily foregoes their right to pursue foreclosure while the property owner takes steps to bring their mortgage payments current.

As a result, 7.2% of mortgage loans were in forbearance at the end of August 2020, according to the MBA. While this share has declined since peaking at over 8.5% in June 2020, the pace of decline has slowed markedly. If this trend continues at today’s protracted pace, it will take over 13 years to return to the pre-recession forbearance level of 0.25%.

As the pandemic and the recession continue to have a protracted impact on property owners, the need for additional loan accommodations and more creative loan programs is dire. Otherwise, a foreclosure crisis will be inevitable, and the commercial and multi-family markets will sink further.

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