3/25/2020 | By Calvin Schnure
Growing concerns about the impact of the coronavirus on the economy have caused severe liquidity issues in some asset classes. One of the asset classes that has exhibited significant illiquidity has been agency Commercial Mortgage Backed Securities or agency CMBS. Notably, this has not been an issue related to credit quality as the implicated securities are all guaranteed by the Agencies. This market has been the focus of timely Federal Reserve and GSE interventions that appear to be beginning to stabilize pricing and liquidity in these critical markets.
Agency CMBS are securities backed by mortgages on multifamily properties and are guaranteed by Fannie Mae and Freddie Mac. This market is much smaller than the single-family agency MBS market, with $744 billion outstanding, or 46.7% of the $1.6 trillion market for multifamily mortgages, compared to $7.0 trillion of single-family agency MBS. Agency CMBS – which during the last financial crisis were not a significant part of the overall CMBS market - were not included in the Fed’s initial rounds of asset purchases in either 2008 or 2020.
Starting late last week, illiquidity concerns about agency CMBS created funding pressures for holders of agency CMBS including some of the mREITs that hold significant quantities of these securities.
On Monday, the Federal Reserve, Treasury and the Federal Housing Finance Agency of FHFA—which regulates Fannie and Freddie—announce a set of dramatic steps to addressing the financial market ramifications of the dramatic reduction in real activity we are experiencing.
For agency CMBS, there were two key announcements:
- The Federal Reserve has now extended its support of financial markets to include agency CMBS. The Fed has retained BlackRock Financial Markets Advisory to help select securities for purchase, and intends to begin during the week of March 23 (that is, nearly immediately).
- The FHFA has used its own regulatory powers to help bolster CMBS. The FHFA has authorized Fannie Mae and Freddie Mac provide agency CMBS investors with short-term financing of their positions, providing liquidity to these investors.
Early indications suggest that these timely interventions are beginning to stabilize pricing and liquidity in these critical markets.