Investors have punished the actions of commercial real estate lender New York Community Bancorp (NYCB) so far this month. To know why, it is useful to understand the economic evolution of an essential element of New York City: the rent-stabilized building.
The regional bank's largest lending exposure is to apartments. About half of that portfolio is tied to dozens of multifamily complexes in the Big Apple where annual rent increases are regulated by the government.
And that's what worries investors. These properties could end up being worth much less than before due to high interest rates and new limits on rent increases, leading Wall Street to wonder whether the $116 billion lender will be able to withstand the expected losses over time.
The Hicksville, N.Y.-based bank is trying to convince investors it has the situation under control.
NYCB's new executive chairman, Alessandro DiNello, told analysts Wednesday that the company will work to reduce its exposure to commercial real estate. The bank also has $3 billion in loans tied to office buildings, another potential area of future weakness as work patterns change in big cities.
On Friday, DiNello and other board members purchased about $873,000 worth of NYCB stock, and that vote of confidence helped send the stock up 17%.
It is still down 53% since January 31, when it surprised analysts by cutting its dividend and announcing a net quarterly loss of $252 million. The bank announced that day that it had set aside $552 million for future loan losses, well above estimates, to account for weaknesses related to office buildings and multifamily apartments.
NYCB has its roots in New York. It was founded in 1859 as Queens County Savings Bank, the first New York State chartered savings bank in Queens. The company went public in 1993 and over the next decades became one of the city's largest lenders to owners of rent-stabilized properties.
Nearly half of all apartments in New York are rent stabilized. This was a system designed to keep certain housing affordable, particularly in older buildings built before 1974.
What made multifamily complexes so valuable for so long were local laws that gave landlords greater freedom to raise rents to bring them in line with market prices, making these properties income streams weak but stable.
A 2019 change by New York state limited rent increases, reducing profits for building owners and giving them less incentive to renovate their properties. Then, rising inflation and interest rates made the maintenance and debt associated with these buildings more expensive.
The fear now is that losses or defaults will start to pile up as loans mature or there will be a forced sale of these properties at a deep discount.
That's what happened late last year when the Federal Deposit Insurance Corporation sold about $15 billion in loans backed by rent-regulated buildings that were formerly owned by Signature Bank, one of the three major lenders seized by regulators in 2023. the sale was 39%.
“None of this can happen fast enough”
And that is the challenge for NYCB as it attempts to extricate itself from its current predicament. It says it wants to reduce its concentration in commercial real estate, but doing so without incurring losses will be difficult.
“I think [NYCB] investors are right to be concerned,” said Joshua Siegel, a former banker and current CEO of New York-based StoneCastle, an asset management and advisory firm that provides equity and deposits to smaller U.S. banks .
“This is going to end badly for the city, because we're all on borrowed time and someone has to pay,” Siegel said, speaking more broadly about the dynamics of New York's multifamily real estate market.
Janney analyst Chris Marinac told Yahoo Finance that “what you want to see them do is diversify their portfolio.”
But “none of this can happen fast enough for investors worried about their stocks.”
Ratings agency Moody's this week highlighted the bank's exposure to rent-regulated apartments while announcing it had downgraded NYCB's credit rating to “junk.” Such buildings have “historically performed well for them,” Moody’s said, but “this cycle could be different.”
New York Community Bank said last week that its rent-regulated portfolio had a loan-to-value ratio of 58% and the percentage of nonperforming loans was a low of 0.52%. However, “criticized” loans represented 14%, or $2.4 billion, of the portfolio.
Of the bank's entire multifamily portfolio, criticized loans represented 8.3%.
“Nothing like what we saw in 2008”
The debate among analysts is whether NYCB's problems are unique or just the start of a larger drag for a number of regional banks across the United States.
Banks hold half of all commercial real estate loans outstanding, according to the Mortgage Bankers Association, with smaller banks holding the majority.
And delinquent interest on non-owner-occupied commercial real estate loans rose in the fourth quarter to its highest level since 2013, according to Apollo chief economist Torsten Slok (Apollo is the parent company of Yahoo Finance).
This is not a countrywide crisis, according to Siegel. “It’s a crisis by market and I would say first and foremost metropolitan commercial real estate which has never seen such high vacancy rates.” he added.
Treasury Secretary Janet Yellen told Senate lawmakers Thursday that “I hope and believe that 'the weaknesses in commercial real estate' will not end up posing a systemic risk to the banking system.”
But “it is possible that certain small banks will be put to the test by these developments”.
Former FDIC Chair Sheila Bair told Yahoo Finance the same day that there could be “a few more bank failures” if lenders haven't set aside enough to absorb potential commercial real estate losses.
But “this is nothing like what we saw in 2008,” she added, referring to the housing crisis that ultimately bankrupted some of the country's largest financial institutions and hundreds other banks in the United States.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other areas of finance.
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