Flagstar Financial is stemming the bleeding.
A top lender to the New York City rent-stabilized housing market, the bank is still facing profitability challenges. But on Friday, it posted its lowest net loss since 2023 at 19 cents per share. Flagstar has lowered its exposure to the multifamily housing market by 12 percent since last summer’s earnings release.
The earnings show measured progress as the bank aims to return to profitability in the fourth quarter. Early last year, the company was on the brink of collapse due to exposure to the multifamily market.
The bank still has a $9.9 billion portfolio of loans tied to rent-regulated buildings in New York City. That market has seen substantial distress in recent years, as inflation and tenant-friendly laws have eaten into landlord profits.
Of the New York rent-regulated buildings, about 97 percent are occupied, the bank says. The loans on those buildings are equal to about 69 percent of their appraised values.
But about 43 percent of the rent-regulated portfolio has some sort of financial red flag. That includes $1.9 billion in loans that are not accruing interest. The value of those assets has been re-evaluated at 90 percent of their previous appraisal, said Lee Smith, Flagstar’s chief financial officer.
“Given all the work that we’ve done, we feel that we are more than adequately reserved against the portfolio,” Smith said.
Still, the future is uncertain, especially since the likely next New York City mayor, Zohran Mamdani, has campaigned on freezing rent-regulated units. As for how a potential rent freeze would affect those loans, Flagstar’s president and chairman said it would depend on how fast expenses rise.
“It really comes down to just if rents are frozen, then what’s the arc of the operating expenses,” CEO Joseph Otting said on the call.
The bank also announced Thursday plans to merge its holding company and its bank. The unusual move will reduce costs and streamline operations, the company said in a release. But it’s still subject to regulator and shareholder approval.
In early 2024, the lender disclosed internal loan review issues, resulting in a sell-off. It took a $1 billion equity injection to avoid collapse.
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