Office Space Fallout Raises More Questions About Regional Banks

Key Takeaways:

– Regional banks are facing pressure from commercial real estate loans, raising concerns about their ability to issue new loans such as jumbo mortgages.
– The balance sheets of regional banks are showing cracks due to the ongoing distress in the commercial real estate sector.
– Moody’s cut New York Community Bancorp’s credit rating to junk status after the bank announced a surprise net loss tied to commercial real estate loans.
– Smaller lenders have filled the gaps left by larger banks cutting back on commercial real estate loans.
– The stress on regional banks in 2023 has led to warnings that jumbo loans could become harder to obtain.
– Rates for jumbo mortgages have been trending upwards, potentially reducing the availability of credit across various sectors.
– There is skepticism about whether jumbo loans will be affected by the fallout, but the difficulty in predicting such situations is acknowledged.

inman:

Regional banks are in the spotlight again as cracks begin to show in their balance sheets due to the ongoing distress in the commercial real estate sector.

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The pressure on regional banks from commercial real estate loans is raising questions about their ability to issue new loans, such as jumbo mortgages, moving forward. 

Nearly a year after the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank regional banks are in the spotlight again as cracks begin to show in their balance sheets due to the ongoing distress in the commercial real estate sector caused by the entrenchment of remote and hybrid work. 

Those cracks were laid bare on Wednesday when Moody’s cut New York Community Bancorp’s credit rating to junk status after the regional lender announced a surprise net loss of $252 million during the fourth quarter of 2023, and its stock price sunk 60 percent over the past week. Its losses were tied mostly to commercial real estate loans.

As larger banks cut back on commercial real estate loans in recent years, smaller lenders filled the gaps, with 67 percent of commercial real estate loans held by regional lenders, according to the Federal Reserve

“A common question is: Who is holding commercial real estate on their books? It’s predominantly going to be regional community banks,” Chad Littell, national director of U.S. capital markets analytics at CoStar Group told Inman. “We’ve seen large banks actually pull back from lending over the past number of years, not just recently.” 

The stress on regional banks during 2023 — which was largely a result of deposit flight caused by losses incurred due to high interest rates — caused Fannie Mae economists to warn that jumbo loans could become harder to come by. 

“Unlike conforming loans, which are largely financed through mortgage-backed securities (MBS) via capital markets, the jumbo mortgage space is almost entirely funded via the banking sector, and some regional banks are more concentrated in jumbo mortgage lending than others,” Fannie Mae forecasters warned in March 2023. “Ongoing liquidity stress could limit home financing and therefore sales in the related market segments and geographies with high jumbo concentration.”

Rates for a jumbo mortgage sat at 7 percent for a 30-year fixed rate jumbo loan on Wednesday, according to OptimalBlue, down from October when they hit 7.78 percent but trending upwards from a year earlier, when they sat at 6.1 percent. 

“These are multi-year challenges where in general, banks have to reserve more liquidity for future loan losses and uncertainty that’s going to have them pull back on the amount of new commercial real estate loans they’re originating, and you’re also seeing this across the board if you look at all bank lending across all banks, that has actually turned negative year over year as well,” Littell said. “It sounds like what this is going to do is just continue to reduce the availability of credit, not only across commercial real estate but across other lines that banks lend on as they become constrained due to commercial real estate exposure.”

Others in the mortgage industry are skeptical however that jumbo loans will be affected by the fallout. 

“Anytime a regional bank — where a lot of jumbo lending gets done — gets into trouble you worry about what’s going to happen to mortgage rates: Will they get more expensive? Will the guidelines change? Will they just not be available?” said Melissa Cohn, regional vice president of William Raveis Mortgage. “I don’t believe that it will come to fruition again this year.” 

Cohn however acknowledged the difficulty in predicting such situations. 

“Obviously, SVB said they were going to be okay and they weren’t,” she said. “So let’s hope that New York Community Bank is on the money this time.” 

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Property Chomp's Take:

Regional banks are facing increasing pressure as the commercial real estate sector continues to struggle. The cracks in their balance sheets are becoming more evident, raising questions about their ability to issue new loans, including jumbo mortgages.

The distress in the commercial real estate sector, caused by the rise of remote and hybrid work, has put regional banks in the spotlight once again. Just a year after the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank, cracks are beginning to show in the balance sheets of regional banks due to their exposure to commercial real estate loans.

Moody's recently downgraded New York Community Bancorp's credit rating to junk status after the bank reported a surprise net loss of $252 million in the fourth quarter of 2023, with most of the losses attributed to commercial real estate loans. This downgrade and the decline in the bank's stock price highlight the vulnerability of regional banks in the current economic climate.

Regional banks have been filling the gap left by larger banks, which have been cutting back on commercial real estate loans in recent years. According to the Federal Reserve, 67 percent of commercial real estate loans are held by regional lenders. However, this increased exposure to commercial real estate loans puts regional banks at risk when the sector experiences distress.

The stress on regional banks in 2023, largely caused by deposit flight resulting from high interest rates, led Fannie Mae economists to warn that jumbo loans could become harder to obtain. Unlike conforming loans, which are primarily financed through mortgage-backed securities, jumbo mortgages are mostly funded by the banking sector. Some regional banks have a higher concentration of jumbo mortgage lending than others, making them more vulnerable to liquidity stress.

The current average rate for a 30-year fixed rate jumbo loan is 7 percent, down from October but higher than the previous year. The challenges faced by regional banks are expected to result in a reduction in the availability of credit, not only in the commercial real estate sector but also across other lines of lending.

However, some industry experts remain skeptical about the impact on jumbo loans. Melissa Cohn, regional vice president of William Raveis Mortgage, believes that jumbo loans will not be significantly affected by the fallout from regional banks. Nevertheless, predicting the outcome of such situations is challenging, as evidenced by the previous collapse of Silicon Valley Bank.

In conclusion, the cracks in the balance sheets of regional banks due to their exposure to commercial real estate loans are raising concerns about their ability to issue new loans, particularly jumbo mortgages. The ongoing distress in the commercial real estate sector and the reduction in credit availability could have significant implications for the real estate market and the broader economy.

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