U.S. banks face downside risk from exposure to multifamily real estate loans, Fitch says – 03/27/2024 at 7:21 p.m.

((Automated translation by Reuters, please see disclaimer https://bit.ly/rtrsauto)) by Matt Tracy

U.S. banks that make large loans to some multifamily properties, and particularly rent-controlled housing, are likely to post losses this year due to rising costs faced by landlords, according to analysts at Fitch Ratings.

In a conference call Wednesday, Fitch Ratings analysts highlighted the risks facing banks that underwrite loans behind apartment complexes and other multifamily properties.

Bank lending to multifamily borrowers has increased 32% since 2020 to reach $613 billion at the end of 2023, according to a March 19 report from Fitch.

But supply has begun to outstrip demand, creating downward pressure on the rents landlords can charge, Fitch noted on Wednesday's call. These homeowners also face rising interest rates and insurance premiums, as well as falling apartment values.

These factors have weighed on several regional banks with heavy exposure to the asset class, and particularly those most exposed to rent-controlled multifamily loans, where landlords must cap rent increases to offset rising costs.

“Particularly in the strictest rent-controlled areas, the ability to make up that difference is limited,” Brian Thies, a senior director at Fitch, said on Wednesday's call.

“So I would say that may be a concern for loan performance at this point

We saw this in late February, when regional bank New York Community Bancorp NYCB.N posted $2.7 billion in losses and a provision for credit losses of $552 million in the fourth quarter, including on a multifamily loan rent-controlled company based in New York.

Fitch highlighted 10 banks with the largest exposure to multifamily loans at the end of 2023. Flagstar Bank FBCANK.UL, which merged with New York Community Bancorp in 2022, tops the list with 43.6 % of its loan portfolio in the multifamily sector.

Other banks with a high proportion of multifamily loans include First Foundation Bank, Dime Community Bank DIMCDB.UL , Pacific Premier Bank PPBI.O and Apple Bank for Savings PPBI.O , according to Fitch.

These banks and others have exposure to the rent-controlled multifamily loan markets in states with strict rent control laws, including California, New York, New Jersey and Oregon.

There were 49 banks at the end of 2023 with at least 5% of multifamily loans delinquent, the rating agency noted. Most of them are regional and community banks.

The most capital-constrained banks will likely seek to sell more of these loans – and at a loss, Fitch analysts note.

“We view most U.S. banks as currently well booked for multifamily lending,” Mr. Thies said.

“But it usually depends on the value of the collateral and how easily the bank can part with it

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