Regional banks are in the spotlight again as cracks begin to show in their balance sheets due to the ongoing distress in the commercial real estate sector.

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The pressure on regional banks from commercial real estate loans is raising questions about their ability to issue new loans, such as jumbo mortgages, moving forward. 

Nearly a year after the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank regional banks are in the spotlight again as cracks begin to show in their balance sheets due to the ongoing distress in the commercial real estate sector caused by the entrenchment of remote and hybrid work. 

Those cracks were laid bare on Wednesday when Moody’s cut New York Community Bancorp’s credit rating to junk status after the regional lender announced a surprise net loss of $252 million during the fourth quarter of 2023, and its stock price sunk 60 percent over the past week. Its losses were tied mostly to commercial real estate loans.

As larger banks cut back on commercial real estate loans in recent years, smaller lenders filled the gaps, with 67 percent of commercial real estate loans held by regional lenders, according to the Federal Reserve

“A common question is: Who is holding commercial real estate on their books? It’s predominantly going to be regional community banks,” Chad Littell, national director of U.S. capital markets analytics at CoStar Group told Inman. “We’ve seen large banks actually pull back from lending over the past number of years, not just recently.” 

The stress on regional banks during 2023 — which was largely a result of deposit flight caused by losses incurred due to high interest rates — caused Fannie Mae economists to warn that jumbo loans could become harder to come by. 

“Unlike conforming loans, which are largely financed through mortgage-backed securities (MBS) via capital markets, the jumbo mortgage space is almost entirely funded via the banking sector, and some regional banks are more concentrated in jumbo mortgage lending than others,” Fannie Mae forecasters warned in March 2023. “Ongoing liquidity stress could limit home financing and therefore sales in the related market segments and geographies with high jumbo concentration.”

Rates for a jumbo mortgage sat at 7 percent for a 30-year fixed rate jumbo loan on Wednesday, according to OptimalBlue, down from October when they hit 7.78 percent but trending upwards from a year earlier, when they sat at 6.1 percent. 

“These are multi-year challenges where in general, banks have to reserve more liquidity for future loan losses and uncertainty that’s going to have them pull back on the amount of new commercial real estate loans they’re originating, and you’re also seeing this across the board if you look at all bank lending across all banks, that has actually turned negative year over year as well,” Littell said. “It sounds like what this is going to do is just continue to reduce the availability of credit, not only across commercial real estate but across other lines that banks lend on as they become constrained due to commercial real estate exposure.”

Others in the mortgage industry are skeptical however that jumbo loans will be affected by the fallout. 

“Anytime a regional bank — where a lot of jumbo lending gets done — gets into trouble you worry about what’s going to happen to mortgage rates: Will they get more expensive? Will the guidelines change? Will they just not be available?” said Melissa Cohn, regional vice president of William Raveis Mortgage. “I don’t believe that it will come to fruition again this year.” 

Cohn however acknowledged the difficulty in predicting such situations. 

“Obviously, SVB said they were going to be okay and they weren’t,” she said. “So let’s hope that New York Community Bank is on the money this time.” 

Email Ben Verde

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