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Flagstar Purges $4.7B In CRE Loans As Losses Narrow

Flagstar Financial is offloading problem loans tied to multifamily and office buildings as quickly as new delinquencies are rolling in.

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A Flagstar branch in Manhattan

The bank, which rebranded from New York Community Bancorp last year, is in the midst of a major financial overhaul to avoid the fate of its failed regional bank counterparts. The Long Island-based institution nearly imploded in March, then replaced its leadership with a new team that is attempting to stabilize its balance sheet. 

That was reflected in Flagstar’s fourth-quarter and year-end earnings report Thursday. Flagstar reduced its multifamily exposure last year by 9%, or $3.2B, and dropped its office exposure by 27%, or $900M.

“We managed down our exposures through run-off of non-relationship CRE loans, par payoffs, and strategic loan sales,” Flagstar CEO Joseph Otting said in a statement.

And despite the bank continuing its streak of losses — with a $160M net loss in Q4, following a $280M loss in Q3 — its executives exuded confidence over its future.

“We think the company is very uniquely positioned now as a strong regional bank,” Otting told investors during a conference call. “America needs a strong regional bank.” 

Flagstar's reported losses of 34 cents per share were better than analyst expectations. JPMorgan Chase forecast earnings per share to be negative 51 cents, while Wall Street held a consensus estimate of negative 56 cents, according to a report provided to Bisnow.

Following Flagstar’s report, its stock rose approximately 17%.  

Since stepping into his role in March, Otting has swiftly sold branches of the bank's operations, paid down debt and laid off thousands of staffers to reduce CRE exposure and shore up reserves. In 2024, $4.7B in CRE balances were cut from the bank’s books.

During the latest quarter, the bank’s provision for credit losses declined 55%, or $124M, to $108M. That’s also an 80%, or $444M, drop from Q4 2023.

However, distress in sectors the institution has historically lent to continue to be troublesome. Nonaccrual loans totaled $2.6B, an increase of $101M from the end of September and approximately $2.2B from the end of 2023, with multifamily accounting for $1.7B of those loans. 

The company also said 56% of its nonaccrual loans are current, meaning the borrower has started making payments again. Of the commercial nonaccrual loans, 60% are tied to multifamily, and 45% related to other CRE assets are performing. 

In addition, net charge-offs totaled $222M, down $18M from the prior quarter but up $37M, or 20%, compared to the same time in 2023.

During the quarter, the company started to look at selling $266M of nonaccrual CRE loans, including $215M of primarily office loans and $51M of multifamily loans. That follows a sale of about $5B in mortgage warehouse loans to JPMorgan last year.

Of its $68.3B loans held for investment, 47% are multifamily and 17% are CRE. More than 3.8% of those loans are categorized as nonaccrual, up from 0.5% a year ago.

And delinquencies are still flooding in. 

Flagstar reported a 270% jump in loans 30 to 89 days past due this quarter, rising from $261M in Q3 to $965M. However, Flagstar attributed that increase to one unnamed borrower, saying that otherwise there would have been a $164M increase to $425M in delinquent loans. 

In December, special servicing of CMBS loans reached nearly 10%, according to a Trepp report. That rate hadn't surpassed 10% since November 2020. 

The multifamily sector had a special servicing rate of more than 8.7%, while office's rate surpassed 14% last month. The last time the office rate was above 14% was for three months in 2012, and it hasn't breached 15% since at least 2000, according to Trepp.

Flagstar has a total liquidity of $31.8B, with a coverage ratio of 240%. 

“There’s a lot of protection that we've built,” Chief Financial Officer Lee Smith told investors. “The other thing that I would just mention is we're getting more and more appraisals coming back, and those appraisals are not coming back as punitive as we may have thought.”

Although the bank remains in the red, its $160M net loss was a dramatic decrease from a net loss of $2.7B during the same quarter in 2023. That earnings report, in which the bank also announced it would slash its dividend, kick-started a selloff in its stock and precipitated the need for rescue financing less than two months later.

The increased losses came in part as a result of NYCB’s merger with Flagstar Bank and the acquisition of a portion of Signature Bank’s assets, including $13B in loans, from the Federal Deposit Insurance Corp., which ballooned the bank's size and forced it to set aside more capital because of increased regulatory scrutiny. 

It was feared that the bank would collapse, nearly a year to the day after Signature failed. But it was rescued by a $1B equity infusion from a group of investment firms led by former Treasury Secretary Steven Mnuchin. It now has completed a review of its office and multifamily loan books and expects to become profitable in 2026.

Federal regulators still have their eye on Flagstar, alongside other banks with exposure to New York City’s rent-regulated multifamily stock. 

Local legislation imposed in 2019 has prevented landlords from raising rents and improving their assets. As a result, property values have plummeted and borrowers have struggled to repay their debt. 

Last year, NYCB was one of at least three banks to receive correspondence from the Securities and Exchange Commission requesting the institutions to reveal more information about their exposure to rent-stabilized assets, Bisnow found.

The bank told the SEC that as of June 30, $20.4B, or 57% of its total multifamily loan portfolio, was secured by properties in New York state, many of which are subject to rent regulation laws to varying degrees.