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SEC Asks New York Banks To Reveal Their Exposure To Rent-Stabilized Loans

At least three New York banks have come under scrutiny from financial regulators who want to know more about their commercial real estate loans. 

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The Securities and Exchange Commission headquarters in Washington, D.C.

The Securities and Exchange Commission has sent correspondence within the past year to Dime Community Bancshares, Delhi Bank Corp. and New York Community Bancorp, now known as Flagstar Financial, asking for further information about the financial institutions’ exposure to multifamily properties impacted by New York City’s 2019 rent stabilization laws, according to public records analyzed by Bisnow.

“Inflation [is] coming up, and net operating income is just dwindling and dwindling,” EisnerAmper Director Robert Martinek said. “My guess is that the SEC is aware of this and, with the bank failures, they're trying to get a hold on any bank with stuff on their balance sheet that's risky.”

The SEC requests could shed light on the risks that banks carry related to apartment buildings that have plummeted in value due to rising costs and an inability to increase rents as a result of the Housing Stability and Tenant Protection Act of 2019.

An SEC spokesperson declined to comment on the letters. Representatives from Dime, Delhi and Flagstar didn't respond to Bisnow’s requests for comment.

The correspondence follows the 2023 banking crisis, which included the failure of Silicon Valley Bank, Signature Bank and First Republic Bank. A total of five banks folded that year, with $548.7B in combined assets, according to the Federal Deposit Insurance Corp. 

Signature Bank held $11B in loans tied to rent-stabilized buildings when it failed in March 2023, a portfolio that was dubbed “toxic waste” when the FDIC was trying to offload it later that year. The loan book ultimately sold for 59 cents on the dollar.

The 2019 rent stabilization law severely limited how much landlords can increase rent, even after renovating a unit following a long-term tenant moving out. Nearly 1 million apartments in the five boroughs are rent-stabilized and subject to limits on rent increases. Meanwhile, maintenance and mortgage costs on the aging apartments are quickly outpacing what landlords can bring in.

The letters were sent out as more financial regulators raise concerns about commercial real estate loans that continue to sit on banks' balance sheets as property values have dropped. The Federal Reserve Bank of New York estimated in October that the banking sector has $400B in near-term CRE loan maturities, with the maturity wall representing 27% of bank capital as of the fourth quarter of 2023.

A March study by consulting firm Klaros Group found that 282 banks with $900B in combined assets have real estate loans that make up more than 300% of their capital, putting them at risk of failure. A large share of those loans are low-interest with unrealized losses, and the majority of banks with high CRE exposure are community banks.

Among those included in the study was NYCB, which nearly collapsed in March before securing $1B in rescue funding. The institution is also among the banks drawing SEC scrutiny. 

In a July 17 correspondence, the agency said that $18.3B of the bank’s multifamily loan portfolio was subject to rent regulation. SEC officials specifically requested a breakdown on those in New York.

“Please tell us and revise future filings to explain in greater detail how the New York Housing Stability and Tenant Protection Act of 2019 could impact or has impacted the value of the properties securing these loans and borrower’s ability to repay the loans,” officials from the SEC's Division of Corporation Finance wrote in the letter.

As of June 30, $20.4B, or 57%, of NYCB’s total multifamily loan portfolio was secured by properties in New York state, many of which are subject to rent regulation laws, the bank wrote back Aug. 12. 

In its next quarterly report, the bank said it lowered that exposure by 1 percentage point to $19.8B.

Although the SEC can mandate transparency through its comment letters, it can't force action, experts said.

“A bank is going to do what a bank's going to do,” said Christopher Mora, who leads Centri Business Consulting's SEC financial reporting and capital markets practice.

“But what [the SEC] can do for the investor community is make sure that those disclosures are transparent so an investor can make a decision or not make a decision to invest,” he added.

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A Dime Community Bank branch in New York City

NYCB came close to going under following its merger with Flagstar Bank and the acquisition of a portion of Signature’s assets, including $13B in loans, from the FDIC. It reported a $252M loss in Q4 2023 after it became subject to new regulation because of its rapid growth. It slashed its dividend, customers pulled $6B worth of deposits within a month, and the stock plunged. 

At the eleventh hour, it was saved by a group of investors, led by former Treasury Secretary Steven Mnuchin. It has spent the past year reviewing its loan book and undergoing a rebrand under its new executive team, led by former Comptroller of the Currency Joseph Otting.

However, the bank has consistently underperformed analysts' estimates, with its earnings per share coming in approximately 90%, 147% and 65% below expectations in March, June and September, respectively.

In its third-quarter report, the bank, which has changed its name to Flagstar Financial, pushed back its own profitability forecast as it continues to work through its exposure to problem loans. 

Flagstar is the sixth-most-exposed bank to commercial real estate, according to the Banking Initiative at Florida Atlantic University

In first place is Dime Community Bank, which received a similar letter from the SEC on Nov. 19. 

In its correspondence, the agency requested that Dime disaggregate the composition of its commercial real estate loan book to show geography, loan-to-value ratios, occupancy rates, and borrower or collateral type. It also asked the bank to provide a percentage of how much of its portfolio is subject to New York’s rent regulation.

The “repayment of multifamily residential loans is dependent, in significant part, on cash flow from the collateral property sufficient to satisfy operating expenses and debt service, existing New York City Rent Regulation and Rent Stabilization laws,” SEC officials wrote. “And with respect to CRE loans that repayment is often dependent upon successful operation or management of the collateral properties, as well as the success of the business and retail tenants occupying the properties.”

In a response sent on Nov. 26, Dime executives promised to enhance future disclosures. Its next quarterly report will be released Jan. 23.

“There is a lot of risk here on some of these particular assets, on the balance sheets of these companies, if these loans or the underlying collateral doesn't perform or produce the cash flow that's needed to either pay off the loan or refinance,” Mora said. 

The SEC’s examination also includes the upstate community bank Delaware National Bank of Delhi. It sent a letter to the third-oldest bank in New York on April 9. 

In its April 30 response, the bank — which is based in Delaware County, near Oneonta — said that while its loans may be tied to multifamily properties, none are impacted by rent stabilization.

Many other commercial real estate loans, especially those tied to office properties, continue to be a problem for financial institutions. 

As a result, Rebel Cole, a professor of finance at the FAU College of Business, warned that the risks go far beyond banks that lend to multifamily and rent-stabilized properties. 

Cole, who leads the school’s banking initiative, expects to see 500 to 1,000 banks disappear in the next 12 to 24 months, many due to mergers, but some from failures.

“This is a proverbial fly on the elephant's rear end,” Cole said. “Look at the elephant. Look at the fly.”