NYCB reportedly in talks to transfer mortgage risks amid market pressure

Less than a year after coming to the rescue of Signature Bank during the market turmoil of March 2023, New York Community Bancorp (NYCB) faces a confidence crisis due to its exposure to commercial real estate loans. 

The stress is leading to the bank to seek the sale of some of its assets to improve its capital position, executives said during a conference call on Wednesday morning. According to a Bloomberg report, the bank has already started to offer its mortgage assets to investors in order to transfer the portfolio risks.

“While we are already in a strong liquidity position, (…) we are committed to building liquidity further,” NYCB executive chairman Alessandro DiNello told analysts during the call. 

Bloomberg, citing anonymous sources, reported that NYCB has contacted investors to finance a large portfolio of residential mortgages held by Flagstar Bank. The offering includes a synthetic risk transfer-backed portfolio of about $5 billion in home loans originated when mortgage rates were lower. 

According to Inside Mortgage Finance (IMF) estimates, Flagstar originated $15.7 billion in mortgages in 2023. It also had $84.3 billion in owned servicing rights at year’s end. When including the portfolio of other companies, Flagstar serviced $379 billion in mortgages, IMF data shows. 

Questions regarding NYCB financials began at the end of January when it reported earnings for fourth-quarter 2023. The data included a $193 million net loss available to common stockholders during the three-month period, compared to a net income of $266 million in the previous quarter. 

The performance was impacted “by reserve building repricing risk in multifamily loans and deterioration in office in our ACL [allowance for credit losses] coverage,” the bank said. NYCB’s provisions for loan losses surged to $552 million in Q4 2023, up from $62 million in the previous quarter. 

After the earnings report, NYCB stock shrunk 60%, from $10.38 on Jan. 30 to $4.20 on Feb. 6. 

Credit rating agency Moody’s put even more pressure on Tuesday when it announced the downgrade to “junk” status of all long-term rates and assessments, as well as some short-term ones, for NYCB and its lead bank, Flagstar. 

Moody’s actions reflected, among other things, an unanticipated loss on the bank’s New York office and multifamily property portfolio that “could create potential confidence sensitivity.” It also mentioned the bank’s concentration in rent-regulated multifamily properties amid an inflationary environment, as well as NYCB’s low fixed-rate multifamily loans, which could face refinancing risk.  

According to Moody’s, there are also governance risks, including the leadership transition “of second and third lines of defense, the risk and audit functions of the bank, at a pivotal time.”

In response to Moody’s, NYCB president and CEO Thomas R. Cangemi said in a statement that the bank’s deposit ratings remain “investment grade” at other credit rating agencies. 

Cangemi also said the bank has an orderly process of bringing in a chief risk officer and a chief audit executive with large bank experience and has “qualified personnel filling those positions on an interim basis.”

NYBC had $83 billion in total deposits as of Tuesday, with 72% of the total insured and collateralized. Total liquidity was $37.3 billion, with a coverage ratio of 163%.

The bank’s capitalization, as measured by its common equity tier 1 (CET1) ratio, fell to 9.1% as of Dec. 31, 2023, down from 9.59% in the third quarter. Targeting a 10% CET1 ratio, the bank announced that it cut its quarterly dividend from $0.17 to $0.05 to assist with capital generation.  

“We will build a financial plan to gradually build capital, no ifs, ands or buts,” DiNello told investors. “We have already reduced the dividend to preserve capital, so that’s a step in the right direction. If we must shrink, then we will shrink. If we must sell non-strategic assets, then we’ll do that. We’ll do whatever it takes.”

DiNello said the bank will sell assets, including loans, and will reduce its commercial real estate concentration as soon as it can.