Failing loans surge in New York’s regional banks

Over the last two years, the dollar volume of distressed commercial real estate loans at a sampling of New York-based community banks has risen eightfold. That’s only the beginning of a wave of delinquencies expected to hit portfolio lenders, analysts said.

Experts predict more red ink in the mid-year earnings reports released this month from lenders such as New York Community Bank, Flushing Savings Bank and Astoria Federal Savings. These institutions are considered stable lenders, but have still seen a steady increase in failing loans.

In a broader sample of portfolio lenders — financial institutions that carry loans they make on their own books — the percent of delinquent nonresidential commercial loans in the New York metro area is expected to reach 5.8 percent by the end of the year, up from an estimated 4.3 percent in the second quarter of 2009 and 0.9 percent in the first quarter of 2007, figures from California-based real estate research firm Foresight Analytics showed.

“We believe sharply higher delinquency rates are ahead for commercial mortgages,” said Matthew Anderson, a partner at Foresight Analytics.

The distressed assets held by portfolio lenders are closely watched by brokers and investors because they may help jumpstart a weak investment sales market in the city when they go up for sale.

The total estimate of defaulted commercial and multifamily loans held by all portfolio lenders in the New York metro area was forecast to rise 27 percent from $1.65 billion in the first quarter to $2.1 billion in the second, the research firm said.

Total nonperforming loans (generally loans that are 90 days past due) on the six sampled regional banks, which also included Bank of Smithtown, Intervest National Bank, and Dime Savings Bank, grew to $308 million in the first quarter of 2009 from $37 million in the first quarter of 2007, data from Foresight Analytics showed.

Although the banks make loans beyond New York City, they each have significant investments in the five boroughs. For example, New York Community Bank, the largest, reported that about 97 percent of its multifamily and commercial loans are in the New York metro area.

The lenders with the most distressed multifamily and commercial real estate loans among the six were New York Community Bank, which had a total of $102 million, Intervest with $93 million and Astoria Federal with $80 million, as of the end of the first quarter.

The six banks in the survey showed varying exposure to the distressed loans. The highest was Intervest, which had a delinquency rate of 7.3 percent, while New York Community Bank was at 1.4 percent and Smithtown was the strongest at 0.4 percent, the Foresight Analytics data showed.

Banking analyst Matthew Kelley at Sterne, Agee & Leach said these regional New York banks will sell more assets over the coming year, ultimately putting downward pressure on prices.

“In our view, over the next 12 to 24 months, each of these institutions will be sellers of repossessed assets in the multifamily and commercial [sectors] in the boroughs,” Kelley said.

“So the supply of troubled assets will increase pretty significantly. That will add pressure to the banks which have been slow to get their assets off the balance sheets because prices have held up, but we believe that will change because of the coming tidal wave of maturity defaults [in securitized commercial loans] coming in 2010,” he said.

Intervest’s first-quarter report showed that it had $45.7 million in nonperforming loans in New York City, including an $11 million loan on a development site at 45-56 Pearson Street in Long Island City and a $13 million mortgage on a retail property at 150-24 Northern Boulevard in Flushing.

Intervest also reported in a preview of its second-quarter figures that it had increased its debt restructurings by more than 150 percent in just three months, from $30 million to $76 million in the second quarter.

Other nonperforming loans that have entered the foreclosure process are a $9 million mortgage made by New York Community Bank at 2211 Third Avenue at 121st Street, and two mortgages totaling $4 million lent by Astoria Federal Savings at 107 East 60th Street.

To some observers, the commercial loan restructuring may be a positive sign that the lender is being proactive with the loan in distress, said Richard Fries, a partner at law firm Bingham McCutchen and head of its real estate workouts practice group.

“In some ways I view restructurings optimistically,” he said, noting that they may be evidence of the bank trying to keep a maturing loan or a delinquent loan from failing altogether. Astoria Federal, which said 70 percent of its non-performing commercial and multifamily loans were in the New York area, conducted an analysis of the losses it took after selling such assets last year. The bank found the average loss per loan to be approximately 35 percent, it said in its first-quarter report.

Robert Knakal, chairman of Massey Knakal Realty Services, said he expected the number of distressed sales to rise but remain a small percentage of the banks’ portfolios.

“We talk to all these banks to try and help them sell the paper that is in distress or REO [real estate owned by the bank] properties,” he said.
Nonperforming Loans