FDIC makes surprising decision in sale of “toxic” Signature loans

After a six-month wait, the marketing for failed Signature Bank’s commercial real estate loans kicked off Tuesday with a surprise.

The Federal Deposit Insurance Corporation said it would sell the $33 billion of debt in two buckets — rent-stabilized and not — and would keep a majority stake in the loans on rent-stabilized buildings.

The FDIC said it would place the $15 billion rent-stabilized loan book, which some dubbed “toxic” after New York Community Bank declined to buy it, in one or more joint ventures.

The government agency will keep control of the JVs, even as it sells a minority stake in them to one or more firms that will act as managing partners, in charge of servicing and ultimately selling the loans.

A spokesperson for the FDIC said the strategy would allow the agency to retain the largest amount of equity that would still draw bidders from the private sector.

“This is a normal practice often used during (and after) the Great Recession,” the spokesperson wrote in an email.

But a lawyer with knowledge of the sale characterized the marketing as “a way to make sure the properties don’t go into decline during the interim period and the loans don’t go to low bidders who won’t work with borrowers or invest in the buildings if the owners default.”

It’s possible the FDIC, which cited its “statutory obligation … to maximize the preservation of the availability and affordability” of homes for low- and moderate-income people, is trying to stave off private interests’ foreclosure of the rent-stabilized buildings backing the mortgages.

A spokesperson for the firm said the FDIC’s majority stake wouldn’t prevent a JV partner from “using any disposition strategy appropriate for the asset, including foreclosure.” However, it noted the partner must also abide by the terms of the JV operating agreement, which has yet to be disclosed.

The assumed toxicity of the loans stems from the impact of the 2019 rent law, which severely limited rents and undercut valuations of rent-stabilized buildings. As mortgages come due, owners have struggled to refinance. Insiders expect delinquencies and defaults, which have begun to pop up, could mount.

When Signature Bank collapsed in March, industry observers speculated that an investor might seek to buy the loans on the cheap, foreclose, then sell the distressed assets. The FDIC took over Signature’s loans when it bailed out the bank’s depositors, then went about recovering as much money as possible from the loan book.

As the agency in charge, the FDIC gets a greater say in how any troubled assets might be worked out, according to Trepp.

That doesn’t mean foreclosures won’t happen eventually. The FDIC’s release said minority partners in the JVs will be responsible for the “ultimate disposition” of the loans, meaning their subsequent sale. It does not appear that the agency intends to keep the loans forever.

It’s possible whoever buys the minority interest in the loans will eventually move to foreclose — assuming the FDIC agrees — but in the meantime will reap fees for servicing the debt.

The FDIC also did not offer details on the marketing strategy for the remainder of Signature’s commercial real estate loans, which are primarily backed by market-rate rentals, according to an analysis by Maverick Real Estate Partners.

But the two-bucket approach will likely allow the agency to attract a higher-paying bidder for the debt, which is less likely to be troubled given the performance of free-market rentals in New York City.

This article has been updated to include comments from the FDIC.

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