On the anniversary of New York Community Bank’s notorious first-quarter earnings flop, the lender, now Flagstar Financial, is still working to purge the bad debt that nearly sank the bank last year.
But rooting out delinquencies is proving a game of Whac-A-Mole: As Flagstar dumps problem loans, many of them to rent-regulated borrowers, new sets of payments .
Flagstar reported $749 million in multifamily loans marked 30-to-89 days past due in the fourth quarter. That is six times more than in the third quarter — a “pretty substantial quarterly increase,” a Citi analyst observed on a Thursday morning earnings call.
Executives said one borrower drove most of that uptick but paid off $541 million after the year ended.
The Citi analyst, Ben Gerlinger, asked how delinquencies might trend.
“I would like to think that we will not see [them] going forward,” said Lee Smith, the bank’s third chief financial officer in a year; Lee took the job in December.
“But, you know, you never know,” he added.
Since CEO Joseph Otting stepped in after Flagstar’s brush with death last March, the former comptroller of the currency and his shifting C-Suite have labored to offload the rent-regulated assets festering on Flagstar’s books.
But the 2019 rent law has proved a powerful and lasting headwind. The legislation all but bars rent-stabilized landlords from raising rents. So, as expenses and interest rates have surged, more owners have been forced to feed their buildings. Eventually, though, stores run dry.
Flagstar has whittled down its share of that debt. It shaved 9 percent off the $35.2 billion multifamily loan book it held at the end of 2023 through payoffs and loan sales. The bank reported $623 million in multifamily mortgages had been repaid in the fourth quarter of 2024, about half of which it had marked as substandard or risky debt.
At the end of last year, Flagstar was shopping $343 million in loans and recently sold $142 million in rent-regulated debt to Cantor Fitzgerald. The bank also took $308 million in net charge-offs — debt marked as uncollectible — tied to multifamily loans last year.
But the lender still holds $32 billion in multifamily mortgages, around half of which are tied to rent-regulated assets. Absent a change in the rent law, a growing crop of owners say there will come a point when they can no longer float their buildings and their only option will be to default.
For many, that moment will come when their loans’ interest rates reset to current rates.
But Flagstar said 90 percent of the multifamily loans with a rate that reset in 2024 were paid off or are current — “an indicator borrowers are standing behind their properties,” Smith said.
Still, there are $5 billion more multifamily mortgages resetting in both 2025 and 2026, and then $9 billion in 2027.
Resets are pushing rates of 3.5 percent as high as 7 percent at the moment, Otting said.
A Morgan Stanley analyst focused on the haziness around the Federal Reserve’s projected rate cuts and how the uncertainty affects the performance of both the loans and Flagstar’s loss provisions.
“If we’re in a higher-for-longer rate environment, maybe inflation is low, persistent, would that impact how you’re thinking about building reserves?” Morgan Stanley’s Ebrahim Reshamvala asked.
Otting acknowledged higher rates would pressure sponsors’ ability to cover debt service, but pointed to the progress that had been made so far.
“What we’re finding is ‘Hey, the payoffs at par and the resets are, you know, at such a high level, that it really has exceeded our expectations,’” Otting said.
The bank reported a fourth-quarter net loss of 41 cents per diluted share — an improvement over the 79-cents-per-share loss reported at the end of September.
Otting projected the bank would be making money again by the end of 2025.
“This will ultimately mark the company’s turning point and its return to consistent profitability,” he said.
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