NYCB raises capital for residential mortgage portfolio amid market turmoil

Portfolio in focus as company moves away from commercial real estate loans

NYCB raises capital for residential mortgage portfolio amid market turmoil

New York Community Bancorp (NYCB) is in talks with investors to secure capital for financing a residential mortgage portfolio as mounting pressures squeeze the regional lender, sources familiar with the matter revealed.

The company is exploring avenues for third-party capital for a portfolio of residential mortgages housed under its Flagstar Bank unit. One potential option under consideration is a synthetic risk transfer, backed by a portfolio of approximately $5 billion worth of home loans originated at lower interest rates, disclosed the sources, who preferred anonymity when discussing non-public information.

In synthetic securitizations, banks transfer the risk of assets to the buyer, effectively offloading their exposure to loans.

Additionally, NYCB is reportedly considering the sale of a nearly $1 billion portfolio comprising recreational vehicle and marine loans, according to Bloomberg’s sources. However, discussions are in the preliminary stages, and details are subject to change.

These discussions began before NYCB’s recent report of an unexpected loss, which was linked to deteriorating credit quality, and its announcement of a dividend reduction — developments that triggered a sharp decline in the bank’s shares.

The bank’s loan-loss provision surged to $552 million in the fourth quarter, surpassing analysts’ estimates by more than tenfold.

Following the plunge that saw NYCB shares hit a 27-year low on Tuesday, the stock slumped by as much as 14% Wednesday morning. However, executives tried to reassure investors about the bank’s financial position, leading to a partial recovery by early afternoon.

Read more: Pandemic-era loans stir turbulence in commercial property market

The bank stated in a late Tuesday release that deposits had increased since the end of the previous year, and liquidity remained “ample.”

NYCB’s newly appointed executive chairman, Alessandro DiNello, asserted during a conference call with analysts on Wednesday that the company would take the necessary steps to bolster capital, including asset sales such as loans. DiNello also pledged to reduce the bank’s exposure to commercial real estate as quickly as possible.

The stock remained relatively unchanged at 1:35 p.m. in New York after fluctuating between losses and gains following the statement and a credit-rating downgrade by Moody’s Investors Service.

The appointment of DiNello, previously non-executive chairman, may contribute to investor uncertainty, noted Piper Sandler Cos. analyst Mark Fitzgibbon.

Fitzgibbon, who holds an overweight rating on the stock, told Bloomberg, “It just causes uncertainty, and the market hates uncertainty.”

Banks have generally refrained from selling bundles of mortgages to private lenders or hedge funds amid concerns over underwater long-term loans since interest rates surged. Nevertheless, synthetic securitizations have begun to emerge in the US market as banks seek ways to manage their capital constraints.

NYCB shares, which were among the victors amid last year’s regional-banking upheaval, plummeted by a record amount last week and have now declined by more than 60%, with investors fretting over the bank’s exposure to commercial real estate. The lender’s assets surpassed $100 billion following recent acquisitions, triggering additional regulatory scrutiny and capital requirements.

Moody’s downgraded NYCB’s credit rating to junk late Tuesday, citing “multifaceted” financial risks and governance challenges. The ratings firm lowered the company’s long-term issuer rating two notches below investment grade to Ba2, indicating the potential for further downgrades if conditions deteriorate.

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