A New York Rent-Control Bank Panic

Investors fret about NYCB’s multi-family housing portfolio

WSJ editorial.

"Regional bank share prices have tumbled since New York Community Bancorp (NYCB) reported surprisingly large losses on real-estate loans. Don’t blame this mini-bank panic only on underwater office buildings. Primary culprits are Albany’s destructive rent-control laws.

NYCB last month reported $552 million in credit losses, including a $185 million charge-off mostly from two office and condo building loans during the fourth quarter. These losses were bigger than investors expected. But what worries investors more is the bank’s $37 billion multi-family housing portfolio, about half of which is comprised of New York rent-regulated units.

The bank flagged that 14% of its $18 billion rent-regulated loan book is at risk of default. Its eventual losses could be bigger as rent-regulated buildings have recently been selling at a 30% to 60% discount from their purchase price. The values of rent-regulated buildings have fallen by some $75 billion, according to one estimate.

NYCB acquired the failed Signature Bank’s deposits and some of its loans last spring. But the Federal Deposit Insurance Corp. struggled to find a buyer for Signature’s $15 billion in loans that were backed primarily by New York rent-regulated buildings. Last autumn the agency finally unloaded the loans at a roughly 40% discount. Why have these loans become toxic?

Blame Democrats in Albany, who in 2019 restricted landlords’ ability to raise rents to pay for renovations and “de-regulate” rent-stabilized units. These apartments account for nearly half of the city’s rental housing. Landlords used to be able to charge the market rate once the rent exceeded $2,800 a month and a tenant moved out. No longer.

One result is that landlords have removed rent-regulated apartments from the market and are leaving them vacant rather than spend on maintenance and improvements that they can’t recoup. Tighter supply has pushed up rents in the non-regulated market—one reason Manhattan’s average market-rate monthly rent has surged 30% over the last two years.

Lower anticipated future rents have also slashed property values. Loans for buildings that were issued at low-interest rates—the average coupon for NYCB’s rent-regulated portfolio is 3.85%—will also have to be refinanced in the coming years. Some underwater owners may walk away. NYCB’s rent-regulated portfolio could be a ticking time bomb.

Meantime, the bank needs to raise more capital to meet tougher regulatory requirements after catapulting into the league of big regional banks. Its Signature acquisition means it must comply with stricter prudential rules for banks with more than $100 billion in assets. The Federal Reserve has also proposed toughening standards for the regional banks.

Bloomberg News last week reported that NYCB is looking to transfer the risk of its home mortgages and sell assets to raise capital.

Moody’s

also downgraded the bank’s credit rating to junk, and its stock has fallen more than 50% since it reported its fourth-quarter earnings. NYCB’s travails have dragged down shares in other regional banks.

Few investors until recently appreciated the financial impact of New York’s rent-control regulations. NYCB’s troubles are a reminder that bad government policy is a source of financial instability. What other risks could be hiding in plain sight?"