May 22, 2024 | Premium Service | The Mortgage Bankers Association Secondary Conference was revealing for a lot of reasons, but frankly working in and around the Times Square venue at the Marriott Marquis is becoming unbearable. Fortunately, we have not heard reports of any assaults on MBA members this year. NYC reminds us more and more of Gotham in the early 1980s, when we worked downtown at the FRBNY and the city was basically ungovernable.
It turns out that Q1 2024 was not bad for mortgage lenders, but many participants admit that even a full point of cuts in fed funds is not going to change things in the near term. Natural portfolio runoff will take many more years to rebalance the equation for lenders by getting the average loan coupon closer to a five handle than a three APR. The big talk at the MBA Secondary was how several industry leaders are buying up mortgage servicing rights at a brisk clip, with bids at least half a multiple above the market.
Source: FDIC/WGA LLC
Many thanks to readers for the comments on our suggestion that Citigroup (C) ought to acquire New York Community Bank (NYCB) and get back in the game in the world of government mortgage servicing. Several of our readers thought this was a profoundly bad idea. In our upcoming biography of Freedom Mortgage founder Stan Middleman, we talk about mortgage lending in the 1990s. That's when Citi CEO John Reed created the first no-doc mortgage loans in a program known as “Mortgage Power.” A print ad for Citibank mortgage power from the 1980s is below.
One well-informed reader opines that former NYCB CEO Thomas Cangemi seemingly “lacked the skillset to know not to buy Flagstar.” After all, NYCB had sold its mortgage business, including $500 million in assets, to Freedom Mortgage in 2017. Many observers in the mortgage industry were perplexed by the April 2021 announcement of the Flagstar transaction.
“Then he buys the Signature book and perhaps didn’t price it to get the capital boost,” continues the retired banker. “The Signature book and Flagstar should be outperforming his legacy book.” Agreed. The cash flows from the Flagstar servicing business are supporting the whole company. We came to this party with the team from Flagstar and they may yet save the bank. But we think it will take a lot more than $1 billion to fill the legacy NYCB hole. NYCB closed below 0.4x book value yesterday.
Meanwhile, as the tourists and mortgage bankers mill about the sweltering streets around Times Square, above them empty office buildings stand like grim totems looking out over the rotting carcass of old Gotham. A procession of office properties are headed for foreclosure and restructuring in the next year. Tourists don’t rent commercial office space.
If you are in NYC on a Friday or over the weekend, you’ll notice that Midtown is largely devoid of street traffic. As the crowds of mostly foreign tourists fill the streets around Times Square to overflowing, the slow-motion collapse of the commercial real estate market continues apace. RXR’s property at 340 Madison Avenue at 44th Street went into foreclosure this week, the latest default among the city’s most valuable midtown office properties.
“Massachusetts Mutual Life Insurance Company filed the complaint after RXR defaulted on the property’s $315 million mortgage,” The Real Deal reports, “which went unpaid when it matured this year.”
While NYC Mayor Eric Adams worries about zoning changes to allow small retail establishments to locate in residential neighborhoods, the commercial heart of the city is dying. NYC plans to modernize and update our city’s zoning regulations to support small businesses, create affordable housing, and promote sustainability – part of Mayor Eric Adams’ vision for a more inclusive, equitable “City of Yes.”
The progressives in New York continue to focus on consumers to the exclusion of all else, but don't want to admit that NYC is not "sustainable" without a business community. The exodus of businesses and capital from New York over the past decade is reflected in the valuations for commercial buildings. Discounts on commercial properties are running anywhere from 30-50% from previous valuations, forcing landlords into a desperate struggle to maintain tenancy and operating cash flows as creditors demand more cash.
We continue to believe that a federal financing vehicle for restructuring moribund urban real estate is inevitable ("Should We Resurrect the Reconstruction Finance Corporation?"). But don't expect Mayor Adams or any of the deliberately clueless inhabitants of New York's progressive community to talk about this issue. They are all too busy pandering to the perceived wants and needs of New York City's increasingly desperate residents, who are being crushed by rising living expenses and falling real incomes. When NYC is forced to recognize reality, it will already be too late to avoid another fiscal crisis.
Merchants Bancorp (MBIN)