Investors have punished the stock of commercial real estate lender New York Community Bancorp (NYCB) so far this month. To know why, it helps to understand the changing economics of a New York City staple: the rent-stabilized apartment building.

The regional bank’s biggest loan exposure is to apartments. Roughly half of that portfolio is tied to scores of multifamily complexes in the Big Apple where annual rent increases are regulated by the government.

And this is what has investors worried. These properties could end up being worth a lot less than they used to be because of high interest rates and new limits on rent increases, leading Wall Street to question whether this $116 billion lender will be able to withstand the losses that are expected over time.

The Hicksville, N.Y.-based bank is trying to convince investors that it has the situation under control.

NYCB’s new executive chairman Alessandro DiNello told analysts Wednesday that the company would work to reduce its commercial real estate exposure. The bank also has $3 billion of loans tied to office properties, another potential area of future weakness as work patterns shift in big cities.

On Friday DiNello and other board members purchased roughly $873,000 of NYCB shares, and that vote of confidence helped push the stock up 17%.

It is still down by 53% since Jan. 31, when it surprised analysts by slashing its dividend and reporting a net quarterly loss of $252 million. The bank announced that day it had set aside $552 million for future loan losses, well above estimates, to account for weaknesses tied to office properties and multifamily apartments.

NYCB has its roots in New York City. It was founded in 1859 as the Queens County Savings Bank, the first savings bank chartered by the state of New York in Queens. The company went public in 1993, and in the subsequent decades became one of the city’s biggest lenders to the owners of rent-stabilized buildings.

Almost half of all apartments in New York City are rent stabilized. It was a system designed to keep some units affordable, especially in older buildings put up before 1974.

What made the multifamily complexes valuable for so long were local laws that gave landlords greater freedom to hike rents to match market prices, making these properties low but stable streams of income.

A 2019 change by the state of New York limited the rent increases, squeezing profits for building owners and giving them less incentive to fix the properties up. Then rises in inflation and interest rates made the maintenance and debt tied to these buildings more expensive.

The fear now is that losses or defaults could begin to pile up as loans come due or there is a forced sale of these properties at a deep discount.

That’s what happened at the end of last year when the Federal Deposit Insurance Corporation sold roughly $15 billion in loans backed by rent-regulated buildings that were once held by Signature Bank, one of three sizable lenders seized by regulators in 2023. FDIC’s discount on the sale was 39%.

'None of this can happen fast enough'

And this is the challenge for NYCB as it tries to work itself out of its current predicament. It says that it wants to reduce its commercial real estate concentration, but doing so without taking losses is going to be difficult.

"I think [NYCB] investors are right to be concerned," said Joshua Siegel, former banker and current CEO of New York City-based StoneCastle, an asset manager and advisory firm that provides equity and deposit funding to smaller US banks.

"This is going to end poorly for the city, because we're all on borrowed time and someone has to pay," Siegel said, speaking more broadly to the dynamic of the New York City multifamily property market.

Chris Marinac, an analyst with Janney, told Yahoo Finance that "what you want to see them do is diversify their book."

But "none of this can happen fast enough for investors who are worried about their stock."

Ratings agency Moody’s highlighted the bank’s exposure to rent-regulated apartment properties this week 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 may be different."

New York Community Bank last week said its rent-regulated portfolio had a loan-to-value ratio of 58% and the percentage of nonperforming loans was a minimal 0.52%. However, "criticized" loans accounted for 14%, or $2.4 billion of the portfolio.

Across the bank’s entire multifamily book, criticized loans accounted for 8.3%.

'Nothing like what we saw in 2008'

The debate analysts are having is whether NYCB’s problems are unique or whether they are just the start of a bigger drag on a number of regional banks across the US.

Banks own half of all outstanding commercial real estate loans, according to the Mortgage Bankers Association, with smaller banks holding the majority.

And interest past-due for 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 isn’t a crisis across the country, according to Siegel. "It is a crisis by market and I would say first and foremost, metropolitan commercial real estate that never modeled vacancy rates this high." he added.

Treasury Secretary Janet Yellen told Senate lawmakers Thursday that "I hope and believe" commercial real estate weaknesses "will not end up being a systemic risk to the banking system."

But "there may be smaller banks that are stressed 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 have not reserved enough to absorb potential commercial real estate losses.

But "it’s nothing like what we saw in 2008," she added, referring to a real estate meltdown that eventually took down some of the country’s largest financial institutions and hundreds of other banks across the US.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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