Murray, Michael
NEW YORK--Balloon risk maturations will keep multifamily servicers preoccupied for not only the next few years but possibly the rest of this decade.

"It's out there; it's the elephant in the room," said Robert Shean, COO at M&T Realty Capital Corp., Baltimore, Md., here at the Mortgage Bankers Association's Commercial/Multifamily Servicing and Technology Conference. "2010 has a relatively modest number of maturities--we have 14 total loans, and that is largely because we burned a lot of them off. We refinanced them in really good years when there were those opportunities to do that."

However, going forward, balloon risk maturities increase to four times the current level in Shean's shop, then six times the current level in 2012 and then "the roof really falls in for us" in 2013 because balloon risk maturities are at 10 times as many loans as this year, he said.

Multifamily servicers will also require further resources as delinquencies and defaults trend higher. "It is mind-boggling for me when I think about how much effort is going into dealing with the very few that we deal with now in today's environment," Shean said.

In the next three or four years, most of the emphasis will be on Fannie Mae's Delegated Underwriting and Servicing maturities—not only at M&T but for a larger multifamily servicer in Wells Fargo Bank, NA, San Francisco.

Maureen Fitzgerald, senior vice president at Wells Fargo Bank's, McLean, Va., office, said there are higher number of defaults with a higher hit on loss severities, particularly in Fannie Mae DUS loans.

"Our books mirror [M&T Bank and Wells Fargo] in terms of the years that it is coming and the waves that are hitting us," said Caroline Blakely, vice president at Fannie Mae.

With 100 percent balloon-risk maturations, the watchlists are growing, including a 60 percent increase in M&T Bank's watchlist assets and 70 percent increases in dollar volume.

"We have very few Freddie [Mac loans]. Probably a handful between now and 2013," Shean said.

However, maturities pick up in 2014 and, in 2017, nearly $1.1 billion in balloon-risk maturities hit a "crescendo" for Shean and his shop. "For a shop our size, that is pretty big," he said. "That is why I say it feels like a tsunami coming this way when I look at it."

Fitzgerald said Wells Fargo has a "relatively easy 2010" with a handful of foreclosures and, in other instances, equity entices borrowers to the table for extensions, but maturities "ramp up a bit" in 2011 and 2012.

"Over the next five years or so, we see one-third of our portfolio mature and the biggest hit is approximately 17 percent in the next 24 to 36 month stand," Fitzgerald said.

M&T Bank has nearly 9 percent of its multifamily portfolio on a watchlist and Wells Fargo, with a larger shop, is closer to 25 percent to 30 percent on the watchlist—all balloon risk loan maturities.

"In 2007, our average loss severity was about 7 percent. In 2008, it jumped to 11 percent and, last year, we recorded to 30 percent," Fitzgerald said. "It's costly."

Despite defaults from peak 2006 to 2007, Fitzgerald's silver lining—defaults are known issues from watchlists and servicers are not blindsided by them. She said Wells Fargo also hired a "mature" staff for this phase and trained them for future downturns. She added there is more communication with the front end of the business, but borrowers are putting off an inevitable confrontation.

"We are hitting borrowers earlier, but I agree completely that there is denial and [borrowers say they] will deal with it next year when it gets closer to the time that they run into an issue," Fitzgerald said.