Signature Bank and New York Housing

A story about how much the state monitors private real estate in NY and how that could be a good thing

Despite my earlier pleas not to overly worry, concerns have been growing over the CRE loan portfolio from the former Signature Bank. After Signature went under and the FDIC stepped in, loans were sold to a New York Community Bank (NYCB) subsidiary. That bank chose specifically not to acquire the CRE loan portfolio. Since that decision, fear around the tenability of Signature’s CRE loan portfolio has been bubbling up.

The reasons for why NYCB maybe didn’t buy the loans run the full gamut. Maybe…

• NYCB wanted to diversify its business that was already overweight on NY CRE.

• The loans are distressed. Owners are using pre-existing cashflow to cover debt costs. Investors want to stay away.

• The loans are not yet distressed, but thanks to rent stabilization rules from 2019, they are much more likely to default in the future. Investors want to stay away.

No matter the reason NYCB passed over the CRE portfolio, a buyer does need to step up and who that buyer is will be very important. The FDIC is conscious of the weighty responsibility on its shoulders. It has allegedly issued guidance to Newmark, who it has entrusted to sell the loans, that it doesn’t want more than four buyers for the notes and that it doesn’t want to go above a 10% discount to par value of the loans. This will be tough because many of the Signature mortgages issued are yielding ~3.5% in interest. If those loan maturities aren’t for another five years, then that’s five years of below market (150-200 bps) returns for the buyer of the note. On top of that, the commercial properties that secure these mortgages have lost paper value. Covid-19 effects, interest rates creeping up, or tighter rent controls- there’s several possible reasons. There’s a compelling argument for taking a discount on the real estate loans.

But why should connected investment firms reap the benefit of the discounted loans as opposed to say, the building owners and borrowers themselves? Ira Zlotowitz, CEO of commercial brokerage Gparency, raised the question in a video call recently. Signature Bank prided itself on its relationship with working class owners, so the idea is certainly aligned with the core values of Signature. Still, the CRE portfolio weighs in at around $35Bn so it’s not expedient to slice up all the individual loans and sell them back to the original borrowers. Also, borrowers may not have the funds to buy back the mortgages– they did borrow money after all. Finally, there’s the question of moral hazard: if the loans are sold back to borrowers at a discount, why did borrowers ever bother to pay their debt down in the first place? It’s an interesting idea to give the discount to those who “earned it.” If you believe in the idea, you can click the link here to try and work with Gparency to buy back your loans.

Whoever buys the basket of loans will have to contend with more than just borrowers and building owners. US Representative Ritchie Torres cautioned the residents of New York about the possible adverse effects on their housing due to the recent failure of Signature Bank. He pointed out that a total of 479 properties in Bronx, comprising 19,750 units, could be impacted. If the portfolio of multifamily loans, estimated at around $15.5Bn by Maverick Real Estate, is sold to a buyer interested in collecting default interest on the loans, that could spell disaster for many of the tenants in those properties as the lenders limit flexibility with owners and in doing so, reduce maintenance and repair budgets. On the other hand, if the buyer is willing to engage in restructuring talks with the owners of the multifamily properties, this could stabilize the bruised rent stabilized market. Buying rent stabilized debt at a discount and re-pricing the underlying asset could be a positive path forward for rent stabilized buildings that have warped debt/equity ratios because of the 2019 rent laws.

Congressman Torres ended up writing a letter directly to FDIC Chair Marty Gruenberg, who happened to grow up in a multifamily building in the Bronx, about his concerns. That same day, the FDIC agreed to allow NY’s housing agency HPD to review the loan book prior to its sale. May this serve as a reminder that in New York, the story of real estate and government are intrinsically linked. Real estate investment here will never be free from the public sector’s rules and regulations. The idea is to have elected officials who understand multifamily buildings and the profit motives that drive their development and upkeep.

Governor Kathy Hochul has missed the deadline to get a budget deal done in NY by close to two weeks at the time of this publishing. That’s not good, but it’s also reflective of the strain she is taking on to advance an agenda that is desperately needed. Hochul is intent on getting her Housing Compact housing plan passed.

Using government to promote housing supply growth instead of restricting it, is something echoed by NMHC President Sharon Wilson Géno. In a Bisnow interview, she highlighted that real estate interests have been historically successful at delivering housing because the work of development / restoring has largely been a collaboration of private investment seeking returns, like most other industries. The result of that collaboration is usually more housing. But, Géno cautioned, new rent control proposals and rules that restrict new developments that are burgeoning in the U.S add uncertainty to the investment landscape. Those efforts cause private investment to slow and that produces less housing units.

That slowing of investment into housing is exactly what Governor Hochul is seeking to quell with her plan and it looks like now is her best opportunity to do so. As a reminder, during 2010-2020, 1.2 million new jobs were created in New York State. Housing lagged. For every 3 jobs of the 1.2 million, only 1 unit of housing was built. What’s more, NYC between 2011-2020 only created 27 new homes for every 1,000 residents. Enter Hochul’s plan – use a variety of tools namely mandatory % increases in the housing stock county by county in NY. The governor has some of the most leverage over legislative bodies during the budget making process. This is because she can tie infrastructure and housing planning assistance funding to the bills being pushed into the budget. For these reasons, DHCR Commissioner RuthAnne Visnauskas and other allies insist Hochul dig her heels in now.

Important: Visnauskas is against altering the Housing Compact such that housing targets become goals that get rewarded as opposed to hard requirements that will be met with punishment if absent. This, she said, had been tried in other states and has failed. Wealthy towns will not reach for the incentives as they already have enough economic resources, and housing just won’t be built at an acceptable rate.

Source: Gotham Gazette, Bisnow, The Real Deal