The Last Clean Book Just Got Dirty

The Last Clean Book Just Got Dirty

No, this isn’t a post about romance novels. Rather, the agency lenders—Fannie Mae and Freddie Mac—have seen rising loan delinquencies. These lenders are supposed to be conservative: lower leverage, longer terms, larger capital reserves (taxes, insurance, and replacements), and tighter underwriting. A borrower doesn’t seek out an agency lender for maximum leverage and flexibility. Stability works best for the agencies. And Fannie Mae’s multifamily delinquency rate is now within two basis points of the Great Financial Crisis (GFC) peak.

Approaching GFC Highs

The Great Financial Crisis was a bad time for most property types, including multifamily, and we’re getting close to it again today.

The serious delinquency rate (SDR)—60+ days past due or in foreclosure—is near GFC highs for both Fannie and Freddie. As of Q1 2026, Fannie’s SDR was 0.78%, up from 0.62% a year earlier and only two basis points away from the GFC-high of 0.80%. Freddie’s Q1 results are similar. Its SDR was 0.43%, above its GFC-peak of 0.40% but below recent highs. Freddie’s delinquency rate has been essentially flat over the past six months.

Loan loss provisions are also rising in step with delinquency rates. In Fannie’s Q1 filings, it reported that its loan loss provision increased from $5 million in Q4 to $174 million in Q1. The agencies underwrite billions of dollars in loans every year, and $174 million remains small. I’m more concerned about the trend. The data from the CMBS market isn’t any better. In fact, Trepp reported a multifamily delinquency rate for CMBS loans of 7.15% as of March 2026. That’s an increase of 171 basis points year-over-year.

An interesting finding in the Trepp report concerned the new delinquencies. Stephen Buschbom, head of applied research and analytics at Trepp, said “…nearly 80% of the new distress [is] concentrated in just two markets.” Those markets are New York and New Jersey, with 48% of delinquent loan balances, and Houston with 30%. Buschbom also notes that these new defaults are term, not maturity, defaults. That means borrowers are defaulting because of cash flow problems. This is very different from defaulting because they can’t refinance a maturing loan at today’s interest rates.

Term Defaults

Maturity defaults had been the primary driver of distress among multifamily loans. Let’s go back to the heydays of 2020 through 2022. To pay the highest price for an apartment property, you had to take on as much leverage (debt) as possible. Debt funds provided maximum leverage, at a competitive interest rate, and over a 3-1-1 term—loans initially set for three years, with two one-year extensions. Those loans started coming due in 2023 and have been distressed every year since as extension options run out. These borrowers ran out of time. Even if they were the best operators and cash flow was inline with the pro forma, they had to raise additional cash to refinance. For many syndicators, this wasn’t possible, and the easier route was to give the property back to the lender.

The issue today with term defaults, it seems, is cash flow. A term default happens during the term of the loan, not at maturity. Borrowers with sufficient time left have seen cash flow deteriorate to the point where they can’t make debt service payments. This says more about the operating environment than about leverage. Sure, if you have no debt, or got a 50% LTV loan at acquisition, cash flow can drop significantly without threatening the asset. The issue is that prudent borrowers, those with modestly leveraged agency loans, are feeling the pinch.

Insurance costs have doubled for many owners (they have for us). Property taxes have been reset higher, often at levels that don’t reflect current values. Payroll costs have risen with inflation and the need to staff properties with people who actually want to be there. On top of rising operating costs, revenue has suffered. Concessions are everywhere thanks to record numbers of new apartment units across the Southeast and West. And occupancy is down because apartment demand isn’t strong enough to support all of the new units at once.

It Depends On Vintage

How structural are these issues? It depends on when you bought the property. Was it before, during, or after rents accelerated in 2021 and early 2022? Agency lenders size loans based on past and current cash flow. So if a property was acquired before the run-up, the loan is probably appropriately sized. If it was based on rents 30% higher, the loan is likely in trouble. I’m not sure “extend and pretend” can help those borrowers unless rents start to accelerate again.

Rents aren’t growing in many markets. The San Francisco Bay Area, Midwest, and Northeast seem to be best positioned right now. They didn’t experience the onslaught of new supply, and in the case of the Bay Area, AI investment is driving a demand surge. It feels better to operate in these markets than in many parts of the rest of the country.

Time will help those with agency debt who bought before or at the onset of rents going vertical. As operations stabilize and rents return to inflationary growth, there are plausible exits and refinances for them. For the others, the increase in term defaults may be a leading indicator of more distress to come.