New York Community Bancorp Faces Downgrade Amid Uncertainty in the Rent-Regulated Multifamily Lending Market



In a recent announcement, Wedbush Securities downgraded New York Community Bancorp’s rating from neutral to underperform – the second rating cut this month for the lender. This decision comes as the bank grapples with significant exposure to the rent-regulated multifamily lending market in New York City.

Analyst’s Insights

Wedbush analyst John Chiaverini, who spearheaded the downgrade, has also lowered his price target for New York Community Bancorp shares from $12 to $8. According to Chiaverini, the bank faces considerable risk due to its “sizable exposure” in the rent-regulated multifamily lending market. While occupancy levels are expected to remain robust even amid a potential recession, Chiaverini believes that rent growth may not be sufficient to navigate the challenges posed by higher interest rates.

Risks in the Rent-Regulated Market

Chiaverini warns that rent-regulated properties are particularly susceptible to stress, which could result in a surge in nonperforming loans, loan modifications at below-market rates, and the need for elevated reserves to mitigate losses. The downgrade follows a previous rating reduction on November 3rd when New York Community Bancorp’s exposure to commercial real estate in a prolonged high-interest-rate environment raised concerns.

Magnitude of Exposure

As of Q3, NY Community Bancorp bore a substantial burden of $37.7 billion in multifamily loans on its balance sheet. Of these loans, approximately half are associated with New York City rent-regulated properties. This particular segment represents a significant exposure of approximately $18.8 billion, constituting roughly 22% of the bank’s total loan portfolio.

Contrasting Market Dynamics

While market-rate rentals have the flexibility to adjust rent prices based on supply and demand dynamics, rent-regulated apartments operate under the constraints of rent guideline boards, with strictly imposed caps on rental increases.

In conclusion, New York Community Bancorp finds itself confronted with increasing uncertainty in the rent-regulated multifamily lending market. The recent downgrade by Wedbush Securities reflects the bank’s vulnerability to potential challenges arising from higher interest rates and the associated risks present in the rent-regulated sector.

Impact of Inflation on Building Owners’ Cash Flows

According to industry expert Chiaverini, the impact of inflation is expected to continue causing cost pressures in 2023. This, in turn, may negatively affect the cash flows of building owners. The situation is further exacerbated by higher interest expenses, resulting in potential declines in debt service coverage ratios.

Changing Loan Yields

NYC Bancorp has observed a significant increase in incremental multifamily loan yields. Previously ranging from 3.5% to 4%, these yields now fall between 7.5% to 8%. Such a substantial change within just a few years highlights the growing challenges faced by building owners.

Potential Risks to NY Community Bancorp

In a recent estimation by Wedbush, NY Community Bancorp may experience losses of up to 10% on its rent-regulated multi-family portfolio. As a consequence, there could be a 20% reduction in tangible book value for the company. Wedbush has even revised its price target for the lender to $8 a share, reflecting the potential negative impact.

New York Community Bancorp’s Recent Acquisitions

This year, New York Community Bancorp gained attention for its acquisition of Signature Bank. Unfortunately, Signature Bank ceased operations earlier this year, following Silicon Valley Bank. The dynamics surrounding these acquisitions may pose additional challenges for NY Community Bancorp.

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