April 16, 2020

Trends in Bronx Housing Finance through COVID-19


In our first blog, we focused on issues particular to non-profit affordable housing providers during the COVID-19 crisis. In this post, we will focus on financing trends among owners and investors in private, rent-stabilized housing in New York City. As mentioned in the previous blog, the operations of non-profit / subsidized affordable housing and private rent-stabilized housing can often be significantly different; this is particularly true in terms of how the two subsets of affordable housing approach asset valuation and financing. Below is an attempt to capture some of the changes in the housing finance landscape over the past number of months and particularly since the beginning of the current public health crisis. Without predicting the future, we hope to raise a number of questions as to where that market is headed and how tenants might be affected, with an emphasis on data and examples from the Bronx.


According to our tracking of Bronx multifamily sales price data, the second half of 2019 saw buildings in the borough sold for an average of ~ $22,000 less per unit than the first half of the year (an 11.6% decrease). This decrease was likely the beginning of the effect of the Housing Stability and Tenant Protection Act (HSTPA), passed in June 2019. The HSTPA significantly limited the ‘upside potential’ or ‘arbitrage opportunity’ that rent-stabilized housing, which is the majority of Bronx multifamily, represented for landlords and investors.

However, it would be incorrect to blame that price decrease solely on the HSTPA. In fact, market participants in multifamily had been predicting an end to the rent-stabilized real estate boom for some time. In the Bronx, prices per unit had risen by nearly 125% between 2013 and 2017, but have more or less stagnated since about 2018. Driven by cheap credit and supply of capital looking for returns in a low interest-rate environment following the 2008 Crisis and Recession, this boom was clearly unsustainable and bound to slow down.

Whatever the reason for the change in valuations over the last couple of years, it is clear that these trends are likely to be exacerbated by the COVID-19 crisis, as landlords deal with drops in rent collections and negotiate mortgage relief with their lenders. A recent sale between two long-time and prominent landlords in the Bronx closed at $138k per unit, which represents a 30% drop from just a year ago. Is this the new normal? Will sales prices for private, rent-stabilized housing drop even lower in the coming months and years?

The seeming boom and bust movement of multifamily prices in the Bronx and elsewhere in NYC portends potentially troubling consequences for the tenants of these buildings. Landlords who acquired buildings at the height of this bubble did so with loan to value (LTV) ratios that no longer make sense in the current market. If and when valuations are adjusted downward by lenders, many of these loans might be underwater from an LTV perspective.

Additionally, as mentioned in our previous blog post, landlords who took part in this speculative wave have generally maximized the debt service that they were able to carry given their net operating income. They could refinance to higher debt principals to capture rising asset values and pull equity out as long as their net income could support debt service. This has enriched private landlords of rent-stabilized housing in the past, and also makes such landlords disproportionate beneficiaries of any mortgage relief. It also means that they make their mortgage payments out of income at very thin margins. Recent data indicate that almost one third of tenants nationwide were unable to pay their April rent due to the crisis, and that figure is likely higher in NYC, the epicenter of COVID-19 and of job loss in general. How much relief are banks willing to provide before they ask landlords to bear part of their debt service? And will that prompt landlords to raise their NOI through deferred maintenance or late payments and charges?

If prices for multifamily in the Bronx and elsewhere continue to drop, there are also concerns that ‘distressed asset’ buyers might enter the market. A recent Wall Street Journal article entitled “Real-Estate Investors Eye Potential Bonanza in Distressed Sales” focused particularly on large institutional players in real estate with already committed capital looking for bargain prices to acquire buildings outright. There is also growing interest in purchasing debt at a discount from lenders who would rather sell their mortgage than deal with foreclosure.

Investors buying distressed housing at the trough of real estate cycles has been a concern for tenants and advocates for some time, as evidenced by the work on Predatory Equity prior to and following the 2008 Financial Crash and Recession. How can the City & State act in advance of distressed asset buyers looking to capitalize on when the market for rent-stabilized housing turns around again? One approach might be to actually participate in that market, by acquiring distressed private housing (or their mortgages) and transferring that housing to existing non-profits or other social housing models. In NYC, there are mechanisms in place to do that such as the NYC Acquisition Loan Fund and the Neighborhood Pillars Program, though given concerns about municipal budgets during and after this Crisis, those programs might no longer be viable. However, with long term low-interest rates and the Federal Reserve mulling significant support to state and municipal bond markets, New York agencies at the city and state levels could consider an acquisition program for distressed affordable housing financed with bond issuances.

Private Label and Government Commercial Mortgage-Backed Securities

Commercial mortgage-backed securities (CMBS) are financial instruments made up of multiple mortgages purchased from banks or other mortgage originators. These mortgages are grouped together and then sold at different rates of return to investors, supported by the debt service payments across all of the mortgage borrowers in the security. NYC multifamily real estate saw a boom in the CMBS market prior to the Great Recession, and then a significant slowdown followed up by another increase over the last few years.

As of this week, the Federal Reserve has committed to supporting the CMBS of both Government Sponsored Enterprises (GSE), like Freddie Mac and Fannie Mae, as well as highly rated private CMBS. While much of the press on CMBS during the crisis has focused on office, retail, and hotel properties, it is worth noting that multifamily rental housing is also an important part of these investment vehicles.

Over the past few months there has been an uptick in multifamily mortgages in NYC packaged into CMBS by both private institutions and GSEs. Using Building Indicator Project (BIP) data, we estimate that 17.3% of NYC multifamily loans originated or assigned in 2020 are eventually packed into CMBS, of which 9.3% are originated to be included in Fannie Mae and Freddie Mac CMBS. Compare this to BIP data citywide over the last 10 years, where only 8% of existing mortgages on BIP buildings are CMBS, 6.7% of which come from Fannie or Freddie.

What’s more, in the Bronx, we have seen prominent rent-stabilized landlords receive CMBS financing at extremely cheap terms, including over 50 CMBS loans provided by one institution that are 10-year interest-only mortgages in the 3.5% to 4% interest rate range. And since the beginning of the COVID-19 crisis, there has been an even greater rush to mortgages that will eventually be packaged into GSE CMBS. According to a recent newsletter from Ariel Property Advisors, an NYC mortgage broker,

In the last month, [Fannie Mae, Freddie Mac, and FHA] have experienced a record number of loan applications which has caused their underwriting parameters to tighten slightly but new originations are still being funded through a seemingly unlimited amount of government buying power in the secondary market for agency mortgage backed securities.

In some cases, it seems that the growth of CMBS might indicate an unwillingness of more traditional lenders to refinance at existing debt levels. It might also indicate borrowers chasing cheap credit. Many of the CMBS we have been tracking often have, at the very least, multiple year interest-only periods. CMBS are also less sensitive to value changes in individual properties, though the recent decision to prop up these instruments through Federal Reserve tools speaks to their current instability as well.

Whatever the case, the prominence of CMBS lending is a trend to follow during the current crisis. Last cycle, a similar rise in CMBS origination preceded a financial meltdown; now, as landlords flock to government-backed CMBS that are being supported by central bank action, what responsibility do the mortgage holders and the federal government have to the tenants of multifamily buildings whose mortgages have been packaged into these instruments?

Below, we will take an extended look at one type of CMBS issued by government-sponsored enterprises, and how it might be handled in the current crisis. While GSEs are currently offering mortgage relief to multifamily landlords who commit to an eviction moratorium, more needs to be done to address past issues and ensure tenants of low-income housing are protected.

Government-Sponsored Enterprise Commercial Mortgage-Backed Securities

GSE CMBS have been an important part of the landscape for the financing of multifamily housing in NYC for the past number of years. After 2008, the federal government placed Freddie Mac and Fannie Mae under conservatorship. Among other things, this led to the creation of total lending caps, which significantly limited the number of mortgages Freddie Mac and Fannie Mae could purchase. However, “workforce rental housing” was exempted from these caps, which meant that purchasing mortgages for low-income multifamily rental housing became a growing part of the business of GSEs.

Between 2008 and 2018 Freddie Mac more than tripled the amount of low-income rental mortgages that it packaged into investment products (from $24 billion to $78 billion). In 2017, almost half of all new multifamily mortgages in the country were purchased by Freddie Mac and Fannie Mae. In other words, due to strict lending caps on certain types of housing investment, Freddie Mac and Fannie Mae shifted the emphasis of its new business from owner-occupied homes to multifamily rental buildings.

These charts are taken directly from a Freddie Mac investor presentation.The first chart shows how significantly Freddie Mac increased its multifamily lending, especially post-2014. And while the caption in the above chart claims that Freddie Mac “volumes have grown proportionate to overall market growth”, the distribution of multifamily originations in 2015 and beyond in the second chart seems to contradict that.
Source: https://mf.freddiemac.com/docs/mf_securitization_investor-presentation.pdf

For its current portfolio, the Federal Housing Finance Agency, which oversees GSE lending, has offered mortgage forbearance to their existing landlord borrowers who commit to not evicting any tenants during the payment deferral period. While this is an important first step, in many cases it does not go far enough to protect tenants and maintain safe conditions in the low-income buildings that these Government Sponsored Enterprises often finance.

One lending program that we at UNHP have examined closely is Freddie Mac’s Small Balance Loan (SBL) Program. The SBL Program provides loans to rental properties are ‘naturally-occurring affordable’ – a euphemism for what one Freddie Mac executive called “C, B-minus product that just happens to be affordable.” The SBL program is focused on refinancing up to $7.5 million, and is justified by Freddie Mac as helping to fill a critical capital need in underserved markets; in fact, the program has received positive press in the past for providing needed capital to mom-and-pop landlords to continue to operate. However, a significant issue with the program is that it contains no guarantee that affordability will be maintained or that new capital from the refinance will be used to maintain conditions.

This can lead to situations in which SBL financing benefits landlords without necessarily benefitting tenants. And at least in New York City, there are indications that Freddie Mac has used the SBL Program to over-finance rent-stabilized rental housing. By this, we mean the financing of buildings at values or at mortgage payment amounts that can: (a) incentivize landlords to raise rents or minimize expenses in order to cover their debt service, and (b) allow landlords to profit significantly without any requirement that they maintain affordability or reinvest in the buildings they own. And Freddie Mac’s SBL program features heavily here in NYC; using BIP data, we estimate that Freddie Mac has amassed almost $2.5 billion in SBL debt across approximately 1,300 buildings across all five boroughs since its inception in 2015.

Below are a few different examples of SBL loans to landlords in the Bronx:

  • Emerald Equity Group, run by Isaac Kassirer, was provided SBL financing across 34 buildings in the Bronx. Previous reporting about Emerald Equity Groups behavior as a landlord in East Harlem details unbearable living conditions for low-income tenants, including rat infestations, lack of gas and hot water due to illegal renovations on vacant apartments, aggressive buyout offers accompanied by threats to report undocumented households, and more. The 34 Bronx buildings were purchased in March 2016 for $127 million by Emerald Equity with a $95 million acquisition loan. The buildings were then refinanced 14 months later for $129 million at a total valuation of $218 million, This translates into a 71% increase in the value of the portfolio in over a little more than a year, and the refinance provided Emerald Equity with an additional $34.6 million in debt.

    Even though prices for rental real estate have risen rapidly in New York City, this change represents an enormous difference between the actual purchase price and the appraised value in a relatively short amount of time, and suggests that these buildings might have been appraised inflated values. Importantly, the almost $35 million in extra funding could be used exclusively to ‘pull equity out’. In other words, as long as Emerald Equity was able to pay the debt service, they could use the money as their equity to purchase additional buildings or provide returns to their investors.

  • Abdul Khan, #4 on the NYC Public Advocate’s Worst Landlords List in 2019, has SBL refinancing on two of his fifteen Bronx properties. Khan is known to purchase extremely distressed buildings on the cheap, and profits on the buildings by keeping expenses down and increasing debt principal as much as possible. He has illegal units in multiple buildings, many of his tenants have experienced protracted gas shutoffs, rat infestations and more stemming from deferred maintenance. He has also had at least two buildings in foreclosure proceedings of late, and there are recent reports that he has closed his management office in the wake of the public health crisis.

    It does not seem like the SBL program has led to improvement of conditions in these properties. Both of his buildings are currently on Freddie Mac’s internal watchlist, and exhibit indicators of distress like overdue charges (including from the Emergency Repair Program), participation in HPD’s Alternative Enforcement Program, and more. According to Freddie Mac’s own data, one of the buildings is unable to cover its debt service out of net income, and the other is operating on margins more or less equal to its overdue charges and fees.

  • 378 & 380 East 139th Street are two identical 10-unit buildings in the South Bronx. 380 East 139th has a tenant association with the South Bronx Tenants Movement; tenants there have fought a lack of cooking gas and have been subject to rat infestations, mold, leaks, and broken ceilings. As of the end of 2019, the two buildings together had 53 hazardous B violations and 58 extremely hazardous C violations, or 5.5 B & C per unit. The buildings were purchased in 2004 by the current landlord for $1.25 million, with a $900,000 mortgage from Washington Mutual. In 2017, they refinanced Freddie Mac for $2.85 million with a valuation of $4.09 million, almost 4x the original purchase price. Residents from 380 East 139th Street recently participated in a rally to have their rents suspended.

    When the landlord provided their operating figures a year after the loan was underwritten, it was clear that they had overestimated their rental income. They had only collected $250,000 in rents over 2018 which, given their reported expenses, meant that they could not cover their debt service out of net operating income, a clear indication of a property being over-leveraged. In the middle of 2019, however, the landlords projected an increase in rent collections to $310,000. They also reported that their utility bill had gone down from $43,000 to $20,000, which would have freed up additional net operating income to cover their Freddie Mac debt. However, publicly available data reveals that this dip in utility expenses resulted simply from the landlords not paying their annual water bills ($10,992 on each of the two buildings). What is clear, then, is that the mortgage amount provided by Freddie Mac translates into an annual debt service that can only be covered out of net operating income if expenses are kept to a level that ensures the building remains in poor condition or necessary payments are deferred.

How common are loans to these sorts of landlords, either through the SBL program or other GSE sponsored lending that end up in CMBS? At the very least, as a semi-public institution whose goal it is to make housing more accessible and affordable, Freddie Mac has the opportunity now to address past over-financing in their SBL portfolio and ensure that tenants in those buildings can weather the current crisis. Should Freddie Mac, and other GSEs, require that mortgage relief during this crisis be predicated upon some combination of the borrowers agreeing to rent forgiveness and/or improving conditions in buildings?

As with all commercial mortgages on rental property, debt service is paid out of operating income on a monthly basis, meaning that even a mortgage deferral gives landlords leeway during those months to deal with losses in rental income or extra capital to continue maintaining buildings. Should GSEs be requiring that of landlords in programs like SBL as opposed to leaving it up to individual decisions?

Rent forgiveness could keep low-income tenants in their homes after the eviction moratorium ends, as few households would have enough to cover the arrears for months of unpaid rent. Improving conditions is also urgent, given that tenants are being told that the best thing that they can do for public health is to stay in their homes. In NYC, rates of infection of COVID-19 are significantly higher in low-income communities of color, and tenants in low-income housing often experience exposure to mold, vermin, leaks, and lead, each with their own set of health effects that potentially make them more vulnerable to COVID-19. How can tenants be asked shelter-in-place when their apartments pose their own set of health dangers?


Whatever the solutions, it is clear that affordable housing advocates need to continue to track the movements of multifamily finance as they shape and determine outcomes for rent-stabilized housing during the COVID-19 crisis.

Special thanks to CITI for supporting our research and action work