Steve Mnuchin, the former Treasury secretary, was the rare figure to have escaped ignominy during the Trump administration, serving four uninterrupted years in his job without a scandal or an indictment to trail him during his time after Washington. Since then, he has spent his time doing the kinds of things wealthy bankers do, like raise money from Saudi Arabia and support his wife’s star turn as a murderous hedge-fund manager in a movie she also wrote, directed, and produced. (It was not well reviewed). Now, he’s decided to rescue one of the most troubled banks in the country, New York Community Bank, with a $1 billion investment. The announcement Wednesday yielded immediate results for the financier — who bought a bank before — stabilizing the free fall in the bank’s stock, and making it seem, for the moment, that the crisis at NYCB may be at the beginning of the end. This, in turn, makes Mnuchin the most important moneyman behind the one million rent-subsidized apartments in New York City financed by the bank, just as they are starting to crack under pressure from high interest rates and inflation. What could go wrong?
On Thursday, NYCB laid bare many of the problems it had been facing since January 31, when it disclosed that its real-estate loans were in far more trouble than it had let on. Billions of dollars in customer deposits had fled the bank in the past month, in an uneasy echo of the problems that plagued Silicon Valley Bank last year. The management said they would be selling off many of their loans in an attempt to stabilize the company. Thursday’s conference call came just days after the bank disclosed “material weakness” in its loan book and replaced its CEO — news that sent its stock price down 23 percent. “The guys at NYCB were kind of sleepy and parochial, and now we’ve found out they did not disclose the full scope of the problems they had on the loans,” said R. Christopher Whalen, an investor in NYCB who runs his own research and investment firm. “They lied to us.” With Mnuchin’s investment — which was done through his firm, Liberty Strategic Capital, and included a group of other investors — the bank took a big step back from facing the same kind of fate that befell SVB. Fitch, the credit-rating agency, boosted its outlook for the bank. The price of the shares has more than doubled.
The story of NYCB is a winding one (Bloomberg’s Max Abelson told it with remarkable clarity), but its central problem comes down to unprofitable loans to landlords — in particular, landlords of rent-subsidized apartments. As of the end of last year, the bank had lent more than $37 billion to multifamily homeowners — a sum that represents about half of its total loan portfolio. (While these are residential properties, the landlords are the ones borrowing money for renovations and buying the buildings, and thus they count as commercial real-estate loans.) For most of NYCB’s history, this was a good business to be in.
This changed in 2019, when New York State passed the Housing Stability and Tenant Protection Act, a law that blocked the main ways landlords could profit off these apartments. Most rent increases were capped at 2 percent, and other ways landlords were able to make money — application fees, passing along fuel charges — were nixed or curtailed. Landlords were also blocked from using renovations in vacated apartments as a way to bring their rents up to the market rate, a tactic that had led to the loss of an estimated 345,000 affordable units, mostly during the first two Bloomberg administrations.
“Unscrupulous landlords developed business practices contingent on these loopholes, all geared toward increasing the net operating income of their stabilized properties, which allowed them to overleverage their buildings with more and more debt. Conditions for tenants got so bad that the city and state were forced to sharpen their definitions of tenant harassment,” according to testimony from analysts at Community Service Society, a housing-advocacy group. At the same time, though, the cost of bringing a newly vacated apartment up to city code had increased, as had the cost of renovating a building in general. Landlords have revolted at the law and had hoped to bring a challenge before the Supreme Court, claiming that it violated their right to proper compensation, but that challenge died in October.
Right now, NYCB is trying to figure out how to lessen its exposure to these kinds of loans — options include selling them off or using complex financial instruments, called credit risk transfers, to essentially take the problems off its books. During the conference call Thursday, its management also said it would be pursuing other kinds of loans to bolster its balance sheet.
What does all this mean for renters? Right now, it’s not clear. Landlords are finding that their buildings are worth far less than they were valued at, particularly after a boom in sales in 2021 and 2022. At the moment, Wall Street is less worried about NYCB now that Mnuchin has effectively taken it over. “We need another Robert Moses to come and kick some ass,” said Whalen. “Mnuchin is the guy to do this.” Moses, of course, displaced some 250,000 people during four decades planning and reshaping New York City. Would Mnuchin even want a legacy like that? His investment is, after all, just a bet on a regional bank. Whether he, or anyone else, can fix the bigger housing problems remains to be seen.
