Q&A | By Christina P. O’Neill
New York Community Bank has been in the multifamily lending business for 40 years, 20 of them as a publicly traded company. Its parent company, New York Community Bancorp Inc., is currently the 20th largest bank holding company in the country, and a leading producer of multifamily loans in New York City, specializing in apartment buildings with below-market rents. However, it has yielded investors a 3,415 percent return on investment over its history as a public company, factoring in nine stock splits.
Joseph Ficalora, president and CEO and a director of holding company subsidiaries New York Community Bank and New York Commercial Bank, espouses a business approach that is the embodiment of patient capital, combined with the flexibility provided by loans with an average life of 3.3 years. He has been with the bank since 1965, working his way up through various positions to become president and CEO in 1993. He holds a degree in business and finance from Pace University and serves as a director of the American Bankers Association, the New York Bankers Association, and chair of its Metropolitan Area Division, as well as other directorships. He recently shared thoughts about the future of banking in general and the specific market niche with which the bank has marked consistent success. Here are edited highlights from that conversation.
BNY: Where do you see the future of banking over the next 10 years?
JF: Unfortunately, we are at a place today where there are many new forces that are impacting the very foundation and viability of community banking in the U.S.
Queens County Savings Bank, which evolved into New York Community Bank, was a local community bank in the borough of Queens with probably the largest customer deposit base in our market, which was there by choice, despite the fact that the largest banks in the world were within five blocks.
The reality is that 10 years down the road, as we are heading today, we will have fewer community bank choices. The bigger banks that will have a presence, will not necessarily be capable of taking the kinds of risk and taking the amount of time necessary to provide the funding for those smaller communities.
The single most aggressive, largest contributors to the evolution of an excess credit cycle, were Fannie and Freddie, and structured-debt lenders that aren’t regulated at all. It was the environment created by a government that was willing to actively encourage lending that was not prudent.
BNY: New York Community Bank has become a specialist in rent-controlled and rent-stabilized real estate, a market segment that some observers might regard as difficult. What’s it like?
JF: While we have been in our market niche for 40 years, it’s only since 2010 that we are doing one-to-four family properties, and we are selling those loans, not keeping them in our portfolio.
We are principally a multifamily lender on regulated housing that is very unique to the city of New York, so there are large numbers of apartment units that have rights under rent control or rent stabilization. Those rights supersede the rights of ownership. The owner of the building does not have the right to charge a market rent, but is literally restricted to what the rule of law represents in that particular case. So you can have one rent controlled apartment in ten, and five regulated otherwise [such as] rent stabilized apartments and maybe four at market apartments, in the same building.
BNY: So it’s a mixed income stream.
JF: That’s right, and the thing that we do better than others, is that we pay attention to the actual environment. We ensure that the buyer has the appropriate attentiveness to detail and to improving the building. Although there might be a few that lend less money in a similar way to us, they’re lending a lot less. Over the decades, we’ve lent tens of billions of dollars on low income housing, wherein for 40 plus years we have had significantly better outcomes out of average life of the loan between three and four years.
BNY: Rent-controlled and rent-stabilized real estate are both manifestations of government intervention. Has the bank mastered this market despite these restrictions or because of them?
JF: The bank has mastered this market because of the restrictions in multifamily. In the past 40 years, many credit cycles have occurred, and in some of those credit cycles, long-term, New York City-based banks like Bowery, American, Greater and Dollar all went out of business on multifamily real estate because they lent differently.
BNY: What mistake did they make?
JF: In most cases, the mistake they made was that they paid people to do the loan, and paid by the size of the loan. They lent more money than they should have lent. They didn’t pay attention to detail. The decision maker was not the board. In many cases, the decision maker was the lender who was being paid based on the dollar volume of the loans they made.
BNY: So that by the time there was trouble, that paid lender would have collected their fee and they’d be gone.
JF: Correct. And then the reality is, that is the way that business is done 98 percent of the time. People that lend like us are very few. Certainly even though we do large volume lending, and we do it consistently, the reality is that we’re competing with people who do not do what we do. So we lose lots of loans. Other people will lend more money on the very same property. We have requirements in regard to the appraisal process. Other banks appraise once, make a decision without ever inspecting the property, and book loans that are way too large for the cash flows in the property. And that’s just common practice.
We might appraise as many as three times. … We might actually inspect the property, with not only an executive lender, but also a member of the mortgage committee, a director. We may insist on meeting with the owner, at the property. We, in fact, in many cases have long-term relationships with the best owners in the market. All of that matters. And therefore, the results that we have are better when the market is stressed. We’ve had 52 consecutive quarters without any loss on any loan that we originated [from Q195 to Q407].
That’s an extraordinary reality, and we’ve actually been criticized for not taking enough risk. We believe that over time – we are a cycle player – we believe that the building of capital is not a function of how much money you make today, but how much money the obligation leaves you with when it’s over.
We do loans through disposition. We don’t do loans because it’s a lovely rate in today’s market. We do loans because we expect to be paid, fully, over time. So if we have loans that average three to four years, that means that we’re eligible for three points in year three. Other banks do 15 year lending fixed. That means that the loan they write today at the lowest rates in history, they in fact have to live with for 15 years. We, otherwise, would have the circumstances where every three to four years we get to re-set the interest rate, and we get paid 15 points in 15 years. So it’s not just the coupon rate today and the coupon rate that we get to set every three to four years, it’s also the points that we get every three to four years. So that business model is great for us.
But it’s also great for cycle players. [Owners] that are building the value of their property over time, need to know, because they’re cycle players, that when the cycle turns negative, they will have equity in their property. They’ll be able to refinance their existing property in that three to four year period with us, so as to buy the property next door at a deep discount. So they actually practice, buy low, sell high.
We’ve had property owners that had the ability to pay us five points because they consolidate 10 of their properties and sell them at ridiculous cash flows, receive $100 million, pay us five points on that hundred million dollars, and go out and reinvest that money so as to have $150 million worth of property. It works for them, and works for us. It’s a beautiful thing.
BNY: A 2012 article in Crain’s implies that New York Community Bank is the lender on a large amount of distressed properties. That doesn’t sound consistent with what you’ve just outlined.
JF: The reality is you cannot lend to low income housing and make money available to some of the more difficult properties in the marketplace without there being some ill-repaired, difficult properties. There’s no question that if we were to ignore all the properties they were talking about, those properties would become city liabilities. The worst landlord in the history of New York City, is the city.
At New York Community Bank, we have dedicated people to being informed of what’s going on in the marketplace. But I do not step back one inch in regard to our willingness to lend money on a building that has deteriorated. There is expectation that that building will be improved. And we have absolute certainty that we have improved materially, materially, housing in the New York market.
BNY: So you’re willing to take the risk of lending on a deteriorated building with the anticipation that the owner will make material improvements.
JF: We’re not doing it because we’re social engineers. We’re doing it because we have confidence that the right loan to the right owner will result in an improvement of the property. If that guy does his job well, he gets to refinance and get more money to keep doing his job well.
So when I tell you that for four-plus decades that we’ve been improving housing in New York City, doing that with loans that average three to four years, that means you can only do it if you’re successful in improving the property.
The difference between us and others is that we lend on the actual rent roll. Our rents don’t go down. In other words, rent control, rent-stabilized housing, never reverses. It only goes up, but it’s always below the market. It’s a one-way street. That’s a very good thing to have. ■