refinancing debt

In early March, Brown Harris Stevens broker Mindy Diane Feldman had reservations about a First Republic Bank loan.

A buyer had offered to purchase a New York City co-op from Feldman’s client and had pre-approval from First Republic for a below-market-rate mortgage — the bank’s specialty. Feldman wanted to ensure that if interest rates rose, it wouldn’t affect the closing or the buyer’s ability to meet the co-op board’s financial requirements.

“If they were the lowest rates that the bank was offering, then we had volatility risk,” she said.

Two days after the broker asked for details about the mortgage, Silicon Valley Bank collapsed. Fearing that First Republic could get caught in the maelstrom, Feldman urged her client to take another bidder’s all-cash offer.

First Republic’s rock-bottom rates did more than make agents nervous — they led to the bank’s downfall.

Its seizure Monday by the Federal Deposit Insurance Corporation and sale to JPMorgan Chase ended weeks of turmoil for the bank, which saw its stock plummet 89 percent in March as customers pulled out over $100 billion in deposits.

But the drama now shifts to First Republic’s residential and multifamily borrowers — its largest lending pools — and to lending in those markets.

Game over

Early Monday morning, the FDIC took control of First Republic and sold the “substantial majority” of its loans and assets to JPMorgan Chase, the country’s largest bank with more than $3.7 trillion in assets.

JPMorgan acquired $203 billion in loans and other securities, but passed on assuming First Republic’s corporate debt or preferred stock.

Some insiders believe the sale includes $103 billion in residential mortgages, about $23 billion in multifamily loans and nearly $11 billion in other commercial real estate debt.

That contrasts with New York Community Bank’s purchase of Signature Bank’s assets in March, which excluded Signature’s commercial real estate loan book — inviting speculation that the debt was toxic.

Experts say the First Republic sale gives little insight into the health of its assets. But the FDIC committed to covering 80 percent of losses incurred on that debt over the next five to seven years, implying a degree of distress and a “downside risk of significant losses in the portfolio,” said Sam Chandan, director of NYU’s Institute of Global Real Estate Finance.

The FDIC pegged its own loss on the deal at about $13 billion.

First Republic reported $549 million in loans with “high volatility commercial real estate exposure” in the first quarter, more than twice the $252 million it reported a year earlier, according to the FDIC. The first-quarter figure represents a fraction of its $139 billion real estate loan book.

But the bank did not report any non-performing commercial or multifamily loans on its books as of March 31.

Rather, the problem was rising interest rates, which meant First Republic had to pay more on its customers’ deposits while the vast majority of its long-term residential mortgages were issued in a low-rate environment.

For now, brokers don’t expect First Republic’s residential borrowers to experience much disruption. JPMorgan plans to keep all of its branches open, allowing existing loan customers to “bank as usual,” it said Monday in an investor presentation.

Brad Lagomarsino, a Colliers multifamily broker in San Francisco, said he touched base with his personal banker at First Republic on Monday morning, hours after the sale, and said nothing had changed.

“Every loan I have is with them,” Lagomarsino said.

Still, residential brokers including Feldman say they have spent the past month advising clients considering a First Republic loan to line up alternatives.

“Just so there’s a plan A, a plan B and maybe even a plan C,” Feldman said.

David Cohen, a broker at City Real Estate in San Francisco, said some clients have opted to “double-dip” with pre-approval letters, one with a low rate from First Republic and a second from another lender to avoid delaying a closing if First Republic fell.

“We joked that a pre-approval letter from First Republic was the Rolls Royce of pre-approval letters,” Cohen said.

“A gaping hole”

Though it was known for catering to the rich and famous — providing mortgages to Ben Affleck, Mark Zuckerberg and, as recently as last month, actress and socialite Julia Fox — First Republic was also a prominent lender to landlords.

The bank was San Francisco’s top multifamily lender in the first quarter, financing eight out of the quarter’s 20 deals, according to Colliers.

If rival banks were offering a senior loan with an interest rate of 5.5 percent, First Republic was offering one in the lower 5 percent range, Lagomarsino said. Account holders especially often scored preferential terms.

“If you had a ton of money there, you were able to get very good debt,” he said.

No longer.

“They are going to leave a gaping hole in this market in the short-term,” Lagomarsino added, noting that multifamily buyers are already stepping away from regional banks. “You’re seeing people gravitate towards the Chases of the world.”

First Republic was generally conservative in its underwriting, offering lower loan-to-value ratios — generally between 50 and 60 percent — but low rates.

For CRE, First Republic Bank was always a low leverage lender.

50-60% LTV, in my experience.

Perhaps their CRE book is actually ok –

I guess the larger issue would probably be overall market conditions reducing the value of these loans/assets.

But from a conservative lending…

— Jeff Feldman (@JeffFeldman_) April 30, 2023

As high interest rates eat into banks’ profits, regional lenders figure to offer less competitive loan terms, leaving a void in the market.

“It’ll be interesting to see if JPMorgan wants to fill that gap,” said Mark Weinstein, the founder of Santa Monica-based multifamily firm MJW Investments.

What is certain is that JPMorgan’s purchase of First Republic consolidates the residential and multifamily lending markets, narrowing options for borrowers.

First Republic was New York’s ninth-largest provider of home mortgages in 2021 with nearly $5 billion in loan volume, according to Home Mortgage Disclosure Act data. It was eighth in California and 23rd nationally.

JPMorgan, by comparison, took the top spot in New York, with $21 billion in volume, and ranked fourth in California and nationally.

First Republic’s sale eliminates one national home-loan heavyweight while inflating another, JPMorgan.

That could be bad news for residential borrowers, Feldman said. With less competition, lenders can set higher rates and stricter requirements while offering fewer loan products.

Other banks “don’t have to compete” with First Republic’s low rates anymore, said Michael Nourmand, head of the Los Angeles residential brokerage Nourmand & Associates.

Rivals including Wells Fargo, PNC Bank, City National Bank and Citibank have spent the past two months snapping up First Republic’s market share after the bank began offering less generous mortgage rates.

Some First Republic borrowers are also concerned about JPMorgan’s size.

“[It] is like Bank of America — too big for personalized service,” Artem Tepler, who runs multifamily developer Schon Tepler Partners in L.A. and held personal loans with First Republic, wrote in a text.

First Republic often sweetened deals by offering potential borrowers interest-only loans. It’s unclear whether JPMorgan will continue that, but insiders say it’s unlikely.

“I don’t think JPMorgan is going to continue the kind of business that First Republic was doing that they weren’t doing themselves,” said Morris Pearl, a former managing director at BlackRock who now chairs the lobbying group Patriotic Millionaires.

JPMorgan plans to spend $2 billion restructuring the bank, according to its investor presentation. It plans to convert certain branches into new wealth centers and said the loans will be placed into its banking divisions.

Beyond that, details are vague. Restructurings typically involve layoffs, selling loans, closing offices and refinancing debt.

Run risk

JPMorgan CEO Jamie Dimon touted the First Republic acquisition as a salve for lingering fears of a banking crisis.

The executive told CNN Monday that the deal “helps stabilize the system” and the threat of bank failures is “getting near the end.”

“Down the road — rates are going way up, real estate recession, that’s a whole different issue,” he said on a call with analysts Monday. “But for now we should just take a deep breath.”

Investors are not convinced. The KBW Regional Banking Index slid 2 percent on Monday, then 6 percent Tuesday morning to hit $81.59 per share, the lowest in more than two years.

Trading of Pacific Western Bank, a regional L.A.-based lender, was halted for volatility multiple times Tuesday after the stock plummeted more than 39 percent, CNBC reported. Valley Bank has dropped 25 percent since the markets closed on Friday.

Chandan, speaking as regional bank shares tumbled Monday, said First Republic’s seizure could reignite fears about withdrawals at smaller institutions.

As the FDIC can only insure up to $250,000 in a customer’s deposits at any one bank, Chandan said a risk remains that smaller lenders could see clients rush to the perceived safety of larger banks. First Republic suffered nearly $102 billion in outflows in the first quarter as clients, anxious about market turmoil, yanked funds.

“This leaves the door open for further runs on deposits from institutions that are perceived to be a significant risk,” the professor said.

David Hunt, CEO of global asset manager PGIM, alluded to that in remarks at the Milken Institute Global Conference in L.A. on Monday.

“There’s a tendency to breathe a sigh of relief on mornings like this,” he said. “Actually, we are just getting started.”

Source: therealdeal.com