This is What We Do: Research & Action - UNHP Multifamily Lenders Meeting
On July 28th we continued our This is What We Do series by highlighting our annual Multifamily Lenders Meeting as an example of how UNHP uses research and action to accomplish its mission to preserve affordable housing. The meeting focused on multifamily finance, specifically, the role that banks play in ensuring decent, habitable affordable housing for Bronxites. Research and Data Coordinator, Jacob Udell presented information about the state of the multifamily housing market in NYC and led a discussion about the role of multifamily lenders in housing with Chris Beck, Director of CRE Lending Administration from NYCB, and Rajiv Jaswa, Staff Attorney from TakeRoot Justice. Over 70 individuals attended, representing some 36 financial institutions. Below is a summary of the meeting. To view the full presentation materials, click here.
UNHP Presentation
Data shows that the multifamily housing market is in a troubling place - for years the average price per unit in the Bronx has been increasing quickly with buildings selling for $200,000 a unit; however, net income has not followed the same path. This divergence continually makes us question what sort of pressure exists on building operations to justify high valuations via rent increases, cutting corners on repairs and maintenance, or skirting financial obligations. One thing has become clear to us as we have monitored affordable, specifically rent-stabilized, housing in the Bronx: multifamily lenders play a key role in ensuring good outcomes for tenants in the buildings that they finance. Not only do banks often hold the largest financial stake in properties, as the principal of a mortgage is rarely paid down, they are also key in the fight for the Community Reinvestment Act (CRA) and against the continuing effects of redlining.
Banks become especially important in the world of rental housing in moments of market disruption when there are breaks in the ever increasing values of buildings, such as the decline caused seen in recent years. When market expectations of future values are not met, we have to wonder what the real life effects are for tenants in debt burdened buildings where leverage is often used to increase profit for landlords instead of improving tenants’ homes. It is very likely that tenants will face declining building conditions as landlords prioritize meeting their debt requirements. In this regard, banks have an ability to influence the experience of tenants in buildings they finance.
While building values have dipped throughout NYC since 2018, debt levels have remained fairly stable as shown in the graph above. This suggests that debt is being rolled over via refinancing - principals are not being paid down. It also suggests that current prevailing prices, which are significantly lower, are not being recognized in these refinancings. It is worrying that the shift in multifamily pricing has yet to be accounted for as all too often the tenants of these buildings bear a disproportionate amount of the fallout when landlords run into financial difficulties.
To try and gain a better understanding of what is happening within the Bronx rent-stabilized, multifamily market we looked at all of the 2020 sales. Below is a map showing the location of the sales from the past year - the size of the bubble represents the size of the building and the color of the bubble indicates the debt level.
There were only 67 likely rent-stabilized buildings sold in the Bronx in 2020 - a huge drop off in market activity. The average price per unit in the sales was $152,000. For context, before 2019 it was common to see similar buildings selling for between $180,000 and $200,000 per unit. Prices continue to drop in the borough; in recent weeks there have been sales around $130,000 per unit. Importantly, the average debt per unit in 2020 sales was $72,000 - a much lower debt level than similar buildings have had in previous years. This indicates that buildings that were not aggressively leveraged are the ones selling as owners are able to cover their lower levels of debt and make a profit even as values continue to decline.
However, from the perspective of banks, buildings with existing mortgages are potentially even more important in terms of exposure. We estimate that among the close to 4,000 likely rent-stabilized Bronx properties that have a new or refinanced loan from 2015 on, 38% have a debt per-unit level of over $114,000. At the prevailing price per unit, these buildings have a loan to value (LTV) of over 75%. In other words, more than a third of recent loans in the Bronx have what is often considered to be a risky level of debt - especially if property values continue to drop.
In the face of dropping values, owners with high debt levels may have a harder time refinancing. If refinancing is no longer an option, owners may begin cutting corners and expenses. We have been hearing from tenants and organizers that it has become increasingly difficult to get landlords to address issues within buildings. This is especially worrying when you factor in the likelihood of deferred maintenance due to the pandemic and the fact that many landlords have not prioritized building upkeep for years in order to maximize profit. Data on building operations is hardly ever available, but we had the chance to analyze the portfolio of a prominent lender in the NYC rent-stabilized market.
Across the three boroughs, cash flow hovers around 20% of rental income with the remaining 80% divided up between debt service and operating expenses. As the chart above shows, operating expenses do not exceed 40% of rental income across this lender’s portfolio. For context, in UNHP’s Bronx portfolio closer to 70% - 80% of rental income is dedicated to operating expenses: what is happening in housing when building acquisitions and financings are underwritten to expense levels at around half of that figure?
Potentially the most widely discussed piece of this puzzle are evictions. Below is a map of the almost 65,000 eviction filings by zip code since the courts closed in mid-March, 2020. Alarmingly, the Bronx only accounts for 16% of NYC’s population, but over one-third of eviction filings since mid-March 2020. Importantly, the median amount claimed in non-payment eviction filings has more than doubled compared to prior to the pandemic, reflecting the fact that New Yorkers have been struggling to make rent payments for months.
We are still waiting to see how effectively the ERAP program - which will help address back rent and prevent landlords from evicting tenants for one year - will be administered. But in the meantime, lenders can and should do all they can to help the tenants of the buildings they finance stay in their homes. Banks provided borrowers with added flexibility over the course of the pandemic, through forbearance or interest-only modifications. They should now explore how they can ensure that this added flexibility is felt by tenants who are struggling to keep up with rents that were already extremely burdensome prior to the wave of shutdowns and unemployment.
While all of this information is helpful when trying to understand what is happening currently in the multifamily market and what may be coming down the road, it does not present a clear path for how banks can intervene in order to prevent the situation from worsening.
Historically, the CRA has been the main framework for banks when considering the impact of their multifamily lending - multifamily mortgages are such large loans that they are often a significant portion of the community development credit in CRA exams. However, currently, CRA credit is assumed for almost all loans given in an LMI district or to buildings containing de facto affordable housing unless there is some sort of red flag (BIP list, Worst Landlords List, etc). While this is a good starting point, it does not ensure that the true goals of CRA are being met - banks may be receiving credit for properties that are not truly providing safe, affordable housing but are instead furthering owners’ business plans and profits.
The Equitable Reinvestment Coalition’s multifamily best practices go a step further in helping provide a roadmap for banks to be more involved in ensuring that they are financing quality properties. The practices laid out by the Coalition include commitments about stable underwriting, monitoring of available data on buildings for problems, and working towards the resolution of building issues as they show up.
While the multifamily best practices improve upon CRA requirements, banks could and should still go farther in terms of proactively managing the loans they give - in other words, ensuring that the quality of the building is not only considered when originating or refinancing a mortgage. For example, banks could establish policies regarding code enforcement in buildings they lend to requiring landlords to rectify issues in a timely fashion. This would not only benefit the tenants living in the building, but it would also help ensure that the value of the building remains intact. Banks could also work to open more regular lines of communication across building stakeholders, especially as we continue to move through these tumultuous times, to help catch emerging issues early on.
Discussion
To get more perspective on how different stakeholders interact we heard from Chris Beck, Director of CRE Lending at New York Community Bank, and Rajiv Jaswa, Staff Attorney at TakeRoot Justice. Both have lots of experience in thinking through how tenant concerns are addressed by financial institutions and incorporated into a given bank’s due diligence. Below is a summary of what each discussant conveyed.
Rajiv gave a summary of what it takes for tenants to reach out to banks, describing the challenges tenants face when dealing with substandard housing conditions. When code enforcement fails, tenants have to turn to housing court which is a long and confusing process that in no way guarantees results. Especially now as we face oncoming evictions, Rajiv argued that it is important for tenants to have dependable recourse when they need building conditions to be rectified.
Rajiv also noted that tenants are typically quite frustrated by the time they make contact with the bank that finances the property they live in. Lenders are often the last resort for tenants who are dealing with substandard living conditions and landlords who are not fixing the issues present in the building and/or apartment. In light of this, Rajiv argued that site visits are a hugely important piece of a bank’s monitoring of multifamily housing that they finance. In his experience, it has been shocking to see some of the conditions going unresolved that tenants must put up with. The reality of the situation is often impossible to understand from publicly available data sources such as violation descriptions.
Rajiv also spoke at length about the ERAP program, arguing that it is incredibly important and deserves everyone’s attention. He noted that ERAP will help keep tenants in place which is especially important in the midst of a public health crisis - evictions, along with other social determinants, have been found to be associated with the spread of the COVID-19 virus. Rent relief would also provide landlords with back rent in turn making it easier for them to meet their financial obligations to their lenders.
Chris started off his part of the discussion by detailing the concerted effort NYCB has made to be more involved with their CRA lending. They have increased their use of building data in an effort to ensure that the buildings they lend on are well maintained. Chris stated that increasing contact with tenants who live in buildings within their portfolio has also helped bring building conditions to light. In particular, Chris said that conversations with tenant leaders and advocates have resulted in a shift in how the bank interacts with the landlords it finances. The bank has decided not to move forward with providing financing for certain landlords based on these discussions and insight from building data.
Chris also spoke about the importance of site visits, not only when originating a loan, but also when a tenant complaint comes up. When equipped with information from a tenant, site visits are more powerful, because the bank gets more than just the landlord’s tour, but can actually go see specific units or look for specific conditions. For Chris, issues with communication are a good place for the bank to step in, and site visits are key to help facilitate that.
Chris mentioned the importance of reputational risk in thinking through how information from tenants should affect lending. While it can be challenging to make a decision with imperfect or at times limited information, do you want to take the risk of making another loan to a known bad actor? Chris shared that for NYCB, as a large multifamily lender, it has been a long journey. The key for Chris has been being able to get the bank to understand that tenant concerns are important and useful for the bank, instead of just being concerned with working with the borrower. Banks may hear things they don’t want to hear in the course of these conversations, but they need to engage with it and not hide from it.
UNHP would like to extend a special thank you to Chris and Rajiv for sharing their experiences and thank all who attended and especially Jacob Udell and Caroline Kirk for their research work. We believe the data and the discussion emphasizes the need for all players in multifamily and affordable housing, public, private, and nonprofit, to work together to stabilize rental housing amid the challenges of the pandemic and the ongoing affordable housing crisis. Sharing Bronx and multifamily-focused research is part of What We Do. So is our work to bring parties together to address the issues raised by the data to preserve and create decent, affordable multifamily housing. Please consider supporting What We Do: Research and Action as a sponsor or donor. Online donations are accepted, our sponsor form can be found here and you can read more about UNHP’s What We Do events here. The deadline for Sponsors to get on our custom pint glass is August 18th.
