PPP Update
While Congress debates legislative fixes to the PPP program, the SBA rolled out its rules and application for loan forgiveness. Attached is the forgiveness application. A few items of note:
- The 8-week covered period begins on the day of disbursement, or they may elect to start the clock upon the first day of the first pay period
- Eligible nonpayroll costs include: business mortgage interest payments, business rent or lease payments, and business utility payments. These obligations all had to pre-date February 15, 2020.
- The borrower has to rep to the use of the proceeds, the accuracy and completion of the required documentation (i.e. leases, etc.)
- If employment drops due to the employee rejecting a written offer to rehire said employee, or the employee was fired for cause or resigned voluntarily, loan forgiveness will not be reduced
- Additionally, there is a safe harbor from a loan forgiveness reduction if the borrower reduced its FTE employment levels between February 15 and April 26, 2020, and then restored them no later than June 30, 2020 at the levels of February 15.
A form was issued today that discussed how lenders will receive their processing fees, which includes some highly concerning clawback language of both their processing fees and eligibility for the guaranty.
If a Lender fails to satisfy the requirements applicable to Lenders that are set forth in section III.3.b of the initial PPP Interim Final Rule (as further explained in FAQ 1) or the document collection and retention requirements described in the lender application form (SBA Form 2484), SBA will seek repayment of the processing fee by the Lender who originated the loan, and may determine that the loan is not eligible for a guaranty. However, even in cases where processing fees are subject to clawback, SBA’s guaranty will not be affected if the Lender has complied with these obligations. Language.
This means that the SBA lender may be stuck with unguaranteed 1% interest rate loans with no processing fees or forgiveness. Additionally, the SBA has not set up a process for submitting forgiveness or required documentation. As time goes on, this program is becoming less attractive to the originators.
Meanwhile, the number of loans is declining as many businesses are running from the program and we are hearing that the quality of the round #2 applicants is declining. As of May 6, there were $526 billion authorized and the number now stands at $512 billion. Businesses are generally optimistic about the loan forgiveness they will receive, so many will be disappointed at the drive-thru.
More than half of business owners expect all expenses to be forgiven, and 27% say they expect three-quarters of the loan to be forgiven under current guidelines, as understood. Few want this to turn into a low-interest loan.
We have been sayings this for a while – lenders need to be prepared for some unhappy customers, and unhappy bank CFOs, who over-modeled the forgiveness and will be stuck with 1% loans through next year. Congress is attempting now to relax the forgiveness rules, especially the 75% payroll requirement.
Sen. Marco Rubio (R-Fla.), who chairs the Senate Small Business and Entrepreneurship Committee, wants to extend the eight-week time frame for loan money to be spent under the PPP program and is pushing for the Senate to pass a legislative fix as soon as this week.
Democrats included some changes to the program as part of its roughly $3 trillion package, expanding eligibility to the program and adding flexibility for how the money is spent.
The House bill, for example, expands eligibility for nonprofits, allows the loans to cover an 24-week period instead of an eight-week period and eliminates a 75-25 rule that required that 75 percent of the loan went toward payroll.
We suspect that there will be some relaxation of the 75-25 rule and some more time to obtain the forgiveness. Meanwhile, bankers and lenders are finally moving on to other activities as the vast majority of these loans have now been closed. According the NFIB, 90% of small business owners surveyed who applied for a PPP loan received their funding. Unless the door is opened to nonprofits or other ineligible businesses (i.e. owners with a felony conviction, etc.), this program is grinding to a halt.
Suburban Flight
As we have predicted weeks earlier, we suspect that the COVID-19 pandemic may change people’s attitudes towards urban living. Of course, this may be temporary, as 9/11, for example, had little impact on population trends. But, we now have concrete data that Americans are looking for less density.
Nearly a third of Americans are considering moving to less densely populated areas in the wake of the pandemic, according to new data from Harris Poll. That may foreshadow a shift that would have a major impact on residential real estate sales and home prices.
Urbanites (43%) were twice as likely than suburban (26%) and rural (21%) dwellers to have recently browsed a real estate website for homes and apartments to rent or buy, the survey showed, which was conducted among 2,050 U.S adults from April 25-27.
“People will be much more cautious about living in high-density areas with so many people nearby,” predicts Lawrence Yun, chief economist at the National Association of Realtors.
Robin Kencel, a licensed associate broker at Compass Real Estate in Greenwich, Connecticut, has been fielding calls from clients in New York City over the past seven weeks looking to rent or buy properties in the area. Grass, outdoor space and convenience to essentials like groceries is critical to them, she says, as well as fast internet connectivity because many of them are traders who work in the financial services industry.
“The draw of the city is the social life, the dating scene, bars, restaurants, the ability to do fun things on the weekend,” said Deniz Kahramaner, the founder of data-driven real estate brokerage Atlasa. Without those attractions, “it makes a lot of sense to just abandon ship and go back to your parents.”
The exodus has left apartments empty, remaining roommates scrambling to make rent and landlords wondering whether demand for apartments will return when life gets back to normal.
“It’s a really hard time for the renter, but it’s a really hard time for the housing provider, too,” said Charley Goss, government and community affairs manager at the San Francisco Apartment Association, which works on behalf of property owners.
A survey Goss conducted of 352 San Francisco landlords found that 17% -- an unusually large amount -- have had tenants break leases or give 30-day notice to vacate over the past month. Of those surveyed, a fifth said they’d received requests for temporary or permanent rent reductions.
Whether people will ultimately follow through with their desire for a less suburban life is a big question. But, there has been a remarkable uptick in homebuying, which suggests some people are following through.
Mortgage applications to purchase a home rose 6% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Purchase volume was just 1.5% lower than a year ago, a rather stunning recovery from just six weeks ago, when purchase volume was down 35% annually.
This is a remarkable recovery, especially since a home is the single biggest consumer purchase. Time will tell if there is a repeat of the 70s, in which Americans fled major cities for the suburbs, often leaving decimated downtowns in their wake. In the past decade or so, so many large companies have relocated their headquarters to downtowns, and people may think differently when traffic returns to their commutes.
Mortgage Delinquencies Spike
Delinquencies among borrowers for past-due mortgages are soaring, a sign that Americans are struggling to pay their bills due to a wave of layoffs or lost income from the coronavirus pandemic.
Mortgage delinquencies surged by 1.6 million in April, the largest single-month jump in history, according to a report from Black Knight, a mortgage technology and data provider. The data includes both homeowners past due on mortgage payments who aren’t in forbearance, along with those in forbearance plans and who didn’t make a mortgage payment in April.
At 6.45%, the national delinquency rate nearly doubled from 3.06% in March, the largest single-month increase ever recorded, and nearly three times the prior record for a single month during the height of the financial crisis in late 2008, Black Knight said.
In the top 100 largest metropolitan areas, Miami (7.2%), Las Vegas (6.2%) and New York City (5.4%) topped the list for cities with the largest delinquency increases. Nevada was among the states with the biggest delinquency rates, climbing 5.2% to nearly 8%. New Jersey and New York followed, rising 5.1% and 4.9%, respectively.
Some more detail is available from Black Knight. Without distressed sales as evictions and foreclosures have been largely suspended, the housing market supply is being artificially reduced, as borrowers are not yet under any pressure to sell their homes. It will be interesting to see what percentage of modified loans recover.
CRE Safe Havens Struggle
In April and May, 354 apartment and office properties started missing payments on $7.1 billion in mortgages, according to data from Trepp LLC, which only includes loans packaged into mortgage bonds. That is up from around $4.2 billion in February and March.
“The buyers want to buy at 50 cents on the dollar, and the sellers are still remembering the prices from nine weeks ago,” said Mark Edelstein, chair of law firm Morrison & Foerster’s global real-estate group. The lack of deals has made it hard to determine how far property prices have already fallen.
In the office sector, most tenants are still paying their rent. But as more leases expire in the years to come and the impact of the economic crisis becomes clearer, some firms are bound to shrink their footprint. The rising popularity of remote work increases the danger to landlords. In a late-April survey among corporate real-estate users by trade group CoreNet Global, 69% of respondents said they would use less real estate as a result of remote work, up from 51% in March.
Some rental-apartment owners were already struggling before the pandemic in cities like New York, where lawmakers tightened rent restrictions.
The current crisis is acting as an “accelerant,” Mr. Edelstein said. The trade group National Multifamily Housing Council said last week that 87.7% of households had paid their May rent as of May 13. But landlords and attorneys say the figure is likely lower for some low- and middle-income housing, where many renters have lost their jobs.
These trophy assets were bid up the most by investors, and received the highest possible leverages, so recovery rates on defaults could be painful for lenders. But, it does seem that someone will always pay top dollar for these assets.
Special Assets Webcast
We were most interested in the poll questions, which show some disconnect between the participants view of the economy and their own portfolios. This falls into the “I love my Congresswoman but hate Congress” dichotomy.
In response to the following question, “What Shape do you Expect the Recovery Curve to Be,” only 3% of respondents answered a “V” shape recovery, while a “W” shape was the highest at 37%. So the attendees were generally pessimistic on the state of the economy.
The vast majority see only a modest impact on the residential real estate prices. We asked whether residential real estate prices will:
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Increase (5-10%)
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7.14%
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Stay the Same
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17.14%
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Decrease (5-10%)
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55.71%
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Plummet (>10%)
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19.52%
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Only 20% of the respondents expect more than a 10% drop in prices, and everyone else sees a change under 10%. We then asked the respondents what percentage of COVID-19 modifications will become TDRs.
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< 10%
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34.29%
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11-20%
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42.38%
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21-30%
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16.19%
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> 30%
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7.14%
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Again, this is a modest projection. The short answer though is no one really knows, as no one knows what a borrower looks like after the economy re-opens. Some will see a permanent loss of customers, others will bounce back as if nothing happened.
All of the panelists did a great job and we received great feedback from the attendants. Many said this was the best webinar they’ve attended on the topic of distressed real estate, which is likely to become a bigger topic in the months ahead.
