Looming interest hikes prompt multifamily lending spree

With deferrals down, earnings up and multifamily buildings eagerly borrowing, New York Community Bank, one of the city’s largest lenders to rent-stabilized apartments, reported an impressive end to 2021.

The looming buzzkill, however, is the series of interest rate hikes expected to hit as early as March.

During a fourth-quarter earnings call Wednesday, New York Community Bank CEO Thomas Cangemi celebrated the spree of lending that buoyed the bank’s annual earnings to levels last seen in 2005.

For the quarter, the bank reported diluted earnings per share of 31 cents, a 15 percent jump from the fourth quarter of 2020. Loans grew by 2.1 billion to $45.7 billion, or 19 percent on an annualized basis compared to the third quarter — the biggest gain since 2016.

A surge in multifamily lending did most of that legwork. The segment, which accounts for three-quarters of NYCB’S loan portfolio, rose by $1.8 billion in the fourth quarter from the third, a 21 percent jump on an annualized basis.

Cangemi said that increased activity was “prompted by the outlook for higher interest rates.” The Fed is expected to act to raise rates in March to combat rising inflation. It will probably be the first of multiple quarter-point rate increases targeted this year, Reuters reported.

The threat of hikes could drive borrowers to lock in financing while rates are still low. The bank said its pipeline leading into 2022 is “robust,” which “bodes well for first-quarter originations.”

But after rates rise, banks such as NYCB could tighten lending standards to insulate themselves against the threat of declining property values. They could ask for more equity from borrowers, for example, which — coupled with higher interest rates on multifamily loans — could scare off investors.

When the Fed approves a higher rate target, mortgage rates will rise. Pricier borrowing can drive would-be homebuyers to seek out rentals, to the benefit of multifamily property values.

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However, the bank’s upcoming merger with Flagstar Bancorp, one of the largest residential mortgage servicers in the U.S., means New York Community Bank will be exposed to any struggles in residential lending.

The acquisition, expected to be completed this year, will cut the bank’s multifamily loan concentration to around 56 percent and give it a portfolio of residential mortgages, which currently are absent from its portfolio.

Lee Smith, president of Mortgage at Flagstar Bancorp, said additional interest rate increases this year “could start to impact affordability.” Already, the bank said there was “some disappointment with the mortgage results” for the quarter.

Still, NYCB is in a much better position than it was just a few quarters ago. The bank touted the flurry of recent property transactions that buoyed lending.

Also, deferrals are down. Loans between one and three months past due dropped to just $67 million from $380 million in the third quarter of 2021. Midway through last year, deferrals exceeded $1 billion.

Principal-only deferrals were cut in half last quarter, compared to the third. They now total $479 million.

Cangemi said the majority of owners behind on payments are based in Manhattan; the outer boroughs have seen a swifter recovery. The CEO projected that nearly all the bank’s borrowers would be current by mid-way through the year.

“We went through a very interesting journey during Covid,” said Cangemi. “But where we stand today, come July we should have close to zero [deferrals].”