February 21, 2024 (MLN): Banks’ asset quality metrics are expected to deteriorate for certain US multifamily loans, as borrowers will face elevated risks from higher refinancing rates and valuation pressures as loans mature over the next few years, says Fitch Ratings.
However, the level of multifamily loans past due or on non-accruing status is still below long-term averages, and well below peak levels during the Global Financial Crisis for US banks.
Multifamily loans facing pressure include those that are rent stabilized, reliant on overly optimistic rental income increase projections, or in submarkets with elevated rental vacancy rates and/or excess supply, many of which are in Sunbelt states, particularly Texas, Florida, Tennessee and the Carolinas.
Multifamily lending by US banks has grown 32% since the start of the pandemic to $613 billion outstanding as of 4Q24, driven by low interest rates, high levels of housing demand and attractive rents.
The 10 largest multifamily lenders in US dollar terms comprise nearly 40% of total multifamily loans for the US banking industry.
There were 49 banks as of YE 2023 with multifamily nonperforming loans (NPLs) greater than 5% of total multifamily loans.
These banks are relatively small, averaging $1.3 billion in total assets.
While NPLs are elevated for this subset of community banks, the balance of multifamily loans at these banks is only a modest fraction of the overall industry, thereby limiting the contagion to the broader financial system if one or more of these banks were to fail.
Fitch expects any deterioration to play out for the banking sector over an extended period. During the Global Financial Crisis, losses did not peak until almost two years after a peak in delinquencies, and problem loans have yet to peak for the sector.
