NYCB in Talks to Offload Mortgage Risk, Exploring Loan Sales

(Bloomberg) — New York Community Bancorp has been reaching out to investors for capital to finance a large portfolio of residential mortgages as pressures on the regional lender mount, according to people with knowledge of the matter.

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The company is seeking third-party capital for a portfolio of residential mortgages held under its Flagstar Bank unit. Among the options is a synthetic risk transfer backed by a portfolio of about $5 billion of home loans originated when interest rates were lower, said the people, who asked not to be identified discussing information that isn’t public. In a synthetic securitization, banks offload their exposure to loans by effectively transferring the risk of the assets to the buyer.

NYCB also is exploring the sale of a roughly $1 billion portfolio of recreational-vehicle and marine loans, according to separate people familiar with the matter. Conversations are preliminary and details could change, the people said.

The talks were underway before NYCB reported a surprise loss a week ago that was tied to deteriorating credit quality, and announced a cut to its dividend — moves that sent the bank’s shares sinking. NYCB’s loan-loss provision surged to $552 million in the fourth quarter, more than 10 times analysts’ estimates.

Representatives for the Hicksville, New York-based lender didn’t respond to requests for comment.

NYCB shares, which touched a 27-year low on Tuesday, slumped as much as 14% Wednesday morning after executives tried to reassure investors that its financial position is strong, before recovering by early afternoon. Deposits have increased since the end of last year and liquidity remains “ample,” the bank said in a statement late Tuesday.

NYCB’s newly appointed executive chairman, Alessandro DiNello, said on a conference call with analysts Wednesday that his company will do what’s necessary to build capital, including selling assets such as loans, and will reduce its commercial real estate concentration as quickly as it can.

The stock was little changed at 1:35 p.m. in New York, after swinging between losses and gains overnight following the statement and a credit-rating downgrade by Moody’s Investors Service.

The appointment of DiNello, who was previously non-executive chairman, may also add to investor uncertainty, said Piper Sandler Cos. analyst Mark Fitzgibbon. He has an overweight rating on the stock.

“It just causes uncertainty, and the market hates uncertainty,” Fitzgibbon said in an interview. “The executive chairman who went on the call today, he sketched out sort of a nice vision for the company, but didn’t really give a lot of hard numbers. So that just makes it harder for people to triangulate where they’re headed.”

Read More: NYCB Fails to Reassure Investors After Shares Hit 27-Year Low

In general, banks have held back from selling bundles of mortgages to private lenders or hedge funds with many of the long-term loans underwater since rates surged. Instead, they have pursued sales of shorter-dated debt such as auto loans. Still, synthetic securitizations have started to make their way into the US market as banks search for ways to manage their capital constraints.

The shares of NYCB — one of the winners amid last year’s regional-banking turmoil — plunged by a record amount last week and are now down more than 60% with investors worried over the bank’s exposure to commercial real estate. The lender last year bought parts of failed Signature Bank through Flagstar, and is now contending with heightened risks tied to commercial real estate loans as well as stiffer regulation due to its increased size.

Late Tuesday, NYCB’s credit rating was cut to junk by Moody’s. The bank is facing “multifaceted” financial risks and governance challenges, Moody’s wrote in a report, lowering the company’s long-term issuer rating two notches below investment grade to Ba2. The ratings firm said it could go further if conditions deteriorate.

Read More: NYCB Cut to Junk by Moody’s as Stock Hits Lowest Since 1997

Recent acquisitions catapulted NYCB’s assets beyond $100 billion, a level that triggers additional regulatory scrutiny and capital requirements. The bank took steps to shore up capital after mounting behind-the-scenes pressure from the Office of the Comptroller of the Currency, Bloomberg reported late Monday. Two executives overseeing risk and auditing left their posts in recent months.

–With assistance from Bre Bradham.

(Updates with NYCB shares starting in sixth paragraph.)

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