Lenders who bundled multifamily mortgages into collateralized loan obligations are buying bad loans back at a breakneck pace.

Multifamily lenders purchased $520M of delinquent CLO credit in the first quarter, a 210% increase year-over-year, according to estimates from JPMorgan Chase. Lenders are acquiring these loans to ensure the share of bad loans in their CLOs doesn't get too high, Bloomberg reports.

If the number of delinquent loans in a CLO hits a certain threshold, lenders don't receive the fees they usually collect on the product, the outlet reports. Some lenders have been borrowing money from banks and other third parties to buy the loans.

“The reason these managers are engaged in buyouts is to limit delinquencies,” JPMorgan Strategist Chong Sin told Bloomberg. “The wild card here is, how long will financing costs remain low enough for them to do that?”

The loan buybacks are an indicator of distress in the $79B commercial real estate CLO market, which spiked over the past few years as syndicators scooped up apartment complexes to renovate them and increase rents, according to Bloomberg. Some borrowers included in the securitizations who took out floating-rate loans began to fall behind on their payments when interest rates spiked.

The distress rate for loans bundled into CRE CLOs eclipsed 10% at the end of March, compared with 1.7% in July, according to CRED iQ data reported by Bloomberg.

CRE CLO issuance spiked to $45B in 2021 as multifamily borrowers assumed three-year loans to take advantage of a wave of Sun Belt migration. Now, those loans are maturing in a difficult capital environment.

“The multifamily CRE CLO market was not prepared for rate volatility,” Fraser Perring, the founder of Viceroy Research, told Bloomberg. “The result is significant distress.”