The NYCB Article That Vanished, Bank Examiner Weighs In & the CRE-CLO Torment

The NYCB Article That Vanished

In January 2016, New York Community Bank’s chief lending officer, James Carpenter, and his 2 top lieutenants got the ⭐️ treatment from the Commercial Observer: a splashy cover spread (“Big Things Come From Small Loan Packages”) and a sit-down interview in which the dealmakers got candid about lots of things: their big bet on lending on NYC rent-stabilized properties (Carpenter: “it’s helped shield us from all of the down cycles in the market”), its appetite for acquisitions and crossing of the $50B threshold which meant more regulatory oversight (Carpenter: “It’s our intention that if we’re going to go over $50B, we’re going to go over $50B for a meaningful reason”) and its close relationship with debt brokerages, including Meridian Capital Group.

The article, according to 2 sources involved in the process, was well-received by its protagonists at NYCB, who felt like it put a well-deserved spotlight on an as-of-then unheralded powerhouse. But soon after publication, it vanished from Commercial Observer’s website. 

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NYCB Vanished Article (cont.)

The web version of the article, which is the version indexed and searchable on Google (i.e. comes up in search hits for the bank), was removed after NYCB top leadership put in a call ☎️ to Jared Kushner, the real estate scion who was owner and publisher of the paper at the time, 3 sources familiar with the matter told The Promote. Kushner, in turn, instructed Commercial Observer editor-in-chief Max Gross to take it down. And so it was done.

The bank’s longtime CEO was Joseph Ficalora and the CFO was Thomas Cangemi; 1 source said that it was Cangemi who pushed his boss to make the call, over concerns that the story would draw too much attention onto the bank at a time it was trying to make more acquisitions.

“This [story] was all approved – they knew this was happening,” a source involved in the process said of bank leadership. “They freaked out post-publication and Joe [Ficalora] pulled whatever strings he could.”

The article, glowing in its tone, contains color from Carpenter and his 2 top lenders, John Adams and Charles Baker. They share details on just how entrenched the bank was in NYC’s rent-stabilized business (eventually its poisoned chalice), and the article also quotes Meridian boss Ralph Herzka as saying “No lender has greater experience—or has had greater success—in an asset class than NYCB has had with multifamily lending in the New York metropolitan area.” Even Kushner is quoted in the piece, describing the team as “real estate guys rather than lenders.” (All innocuous comments then, of course, but valuable context for where the bank finds itself today.)

Gross, when reached for comment, only pointed to a digital magazine version of the article that can still be accessed online. He did not respond to multiple inquiries about the web article and why it was pulled. A spokesperson for NYCB said it was “unaware of and can’t speak to conversations that may have been had by our then CEO related to the article in 2016,” noting that the bank was now operating “under the Flagstar brand with a different leadership team in place.” (Ficalora retired in Dec. 2020 and was succeeded as CEO by Cangemi, who led the bank through its Flagstar merger. Cangemi was pushed out last month; his successor was pushed out barely a week later by a Mnuchin-led investor group.)

PS: This wasn’t the first time that Kushner’s ownership had played a role in the newsroom. In the early 2010s, upset over a deal involving 666 Fifth, Kushner had reportedly pushed CO to pursue a damaging piece on Richard Mack - an attempt (ultimately futile) that came to be known as the “Big Dick Mack story” 🍆 

A Bank Regulator Speaks

We at The Promote have been tracking a series of conversations between an active CRE credit investor, @CleanTo2ndLien (vetted, legit) and a federal banking examiner who’s been sharing his unvarnished thoughts on the CRE lending environment – a regulator’s perspective that’s hard to come by. We published an earlier installment, on the vital CAMELS 🐫 rating, here, and I’m thrilled to bring you the latest installment. - HS

By CleanTo2ndLien 

“I wish I had something to sell you. Our portfolio is performing well.”

I get the above on almost a weekly basis. But if everything’s “fine,” why are regulators paying so much attention? 🤷 

When I caught up with Mr. Bank Examiner this weekend, he noted that his peers are getting more calls from policy analysts trying to understand what regulators are looking for. The regulators in turn are trying to understand what liberties banks took - it’s very much a discovery phase of “what is going on and how bad did things get?”

(Quick note: Federal examiners tend to prioritize the safety & soundness of banks, whereas the FDIC adds the touch of depositor protection oversight. Catch up on previous chats I had with him here and here.)  

The examiner mentioned that banks are making the same arguments they were in the GFC (“Look at our loss history, there are no losses” etc.) CRE credit issues are being swept under the rug, and a good chunk of his time will be spent with bank management to understand how deals, specifically covenants, loan mods and the like, are being tracked internally. 

We then dove into some specific qs/themes the community has been wondering about:

• Rescue capital 🛟: This has been top of mind since the Mnuchin-NYCB takeover. The examiner (speaking generally) said his peers would like to see bad management removed, then have new managers that are willing and able to pump in new capital come in, with a laid-out plan (triggers) as to when that money will come.

• Bank mergers: Are approvals likely to remain randomly/politically delayed, or can we expect a 6-month timeline for definitive decisions? He said that the M&A environment is tough at the moment, with deals having the potential to get killed because of poor consumer compliance ratings. That could change though, depending on whether it’s the Dems 🫏 or GOP 🐘 in charge. 

• SVB: The Fed Board’s post-mortem on SVB revealed that regulators handled the bank with 'kid gloves' over its severely mismatched balance sheet. Is that endemic and does it bleed into asset quality? The examiner feels 2 two different items are at play here: “hot deposits” and credit quality. The deposit run led to the immediate failure of the bank. However, when it comes to asset quality, the credit cycle takes longer to play out. Given that longer timeline, regulators have more of a window to call out substandard loans.

• CECL: How is that the newish CECL requirement  (how credit losses are represented in financial statements)  is not causing significantly larger writedowns and hence pressure to sell/exit loans? He noted that the CECL calculation doesn’t immediately hit writedowns – it hits the P&L. It’s more of a mechanical calculation that is dependent on the bank's view of the economy – “expected credit losses.”

CRE-CLOs Hurting  

CRE CLOs (debt securities backed by shorter-term, floating-rate loans, key vehicle for the multi buying spree) are on the ropes.

Two CRED iQ crunches got a lot of attention: the first found that the distress rate for such instruments leaped more than 4x in 12 mos; and the second ranked the players in the space by their total delinquency rate and current O/S deal balance. Bloomberg dives into how it’s all shaking out, from issuers buying out delinquent loans w their cash reserves – $1.3B such purchases last year per JPM – to issuers under the cosh, such as Ready Capital – 15% of its loans have already been transferred to special servicers. (The piece explains the history of these instruments and how they work in their latest avatar - definitely check it out.)

CRE CLO issuances jumped to $45B in ‘21 from $19B in ‘19, per Bloomberg. Over two-thirds of CRE CLO collateral is backed by multifamily, per Trepp.

Quickies

• Walton Street, Greenlaw default on $64M TPG loan, do a deed-in-lieu (To understand how a deed-in-lieu – i.e. owner transferring title 🤘 w/o lender needing to file for foreclosure – works, start here)

• DJT’s lawyers say he can’t post $464M bond in civil fraud case - raises the specter of asset seizure 🟠 🎺 

• Short seller once again dives into Brookfield’s “matryoshka corporate structure” 🎎, this time looking at BAM subsidiary Brookfield Property Partners: “An Orgy of Related-Party Dealings” 

• Jeff Sutton’s Fifth Ave deal seems impeccably timed: Gucci 👜 owner Kering’s shares are ⬇️ 14% after it telegraphed lower-than-expected profits

• NY’s highest court keeps the NYC property tax regime fight in play

Special Servicers Feel the Heat

Special servicers are printing money at the moment, and one of the biggest players in the space is Jeff Krasnoff’s Rialto Capital. Rialto is also the biggest buyer of CMBS B-pieces over the past decade, per Trepp, with $93B+ in deals. B-piece holders get to choose the special servicer on a loan, so it’s a lucrative self-lovefest. But when you’re playing in the muddiest trenches of the CRE business, expect to get kicked a bit.

A Staten Island mall owner is suing Rialto, the FDIC and the venture (incl Rialto, Blackstone & CPP) that holds $17B in Signature CRE debt, claiming that they failed to acknowledge an extension of a $14M loan. The landlord claims that after exercising its right to extend the loan, it received no “substantive response,” and was then hit with nearly $1M in add’l charges, much of it from late fees. It alleges, per TRD, more dancing around by Rialto and claims that there was a ploy to “artificially manufacture financial obligations to benefit the servicers, investors and attorneys.”

“This matter is rife with such wanton dishonesty as to imply criminal indifference to their obligations,” the owner alleges of Rialto and the FDIC.

The suit itself is not that big (seeking $5M or more in damages), but it’s fascinating because it hits on something that’s going to be a major sticking point in the months to come: Fee juicing 🧃 

Unquotable Quotes