How Exposed Are NY Banks to Rent-Stabilized Loans?

In a move highlighting growing concerns over CRE risks, the SEC has sent letters to at least three New York-based banks requesting more info on their exposure to rent-stabilized loans, per Bisnow.

This scrutiny follows growing financial instability in the banking sector and the impact of New York City’s 2019 rent stabilization laws, which have limited the income potential for multifamily properties.

In The Crosshairs

The SEC’s inquiry targets Dime Community Bancshares (DCOM), Delhi Bank Corp. (DWNX), and Flagstar Financial (formerly New York Community Bancorp), all of which have significant CRE loan portfolios. Dime was asked to disclose details about its portfolio’s loan-to-value ratios, geographic breakdown, and the percentage of loans tied to rent-stabilized properties. 

In response to the SEC’s request, Dime pledged to enhance future disclosures, particularly regarding the potential risks of rent-regulated loans. Flagstar Financial, which was impacted by its merger with Signature Bank’s assets, also faces heightened scrutiny as it works through problem loans.

Zooming Out

The SEC seems mostly concerned about the banks’ exposure to multifamily properties impacted by the Big Apple’s Housing Stability and Tenant Protection Act of 2019. The law limited rent hikes, even after long-term tenants moved out, suppressing revenue growth for landlords and threatening loan repayments.

The SEC’s request follows the 2023 banking crisis, when several major banks—including Silicon Valley Bank and Signature Bank—collapsed, largely due to underperforming CRE assets. Notably, Signature Bank held $11B in loans tied to rent-stabilized buildings when it failed.

Impact of Rent Regulations

Rent stabilization laws are a key focus of the SEC’s inquiry because they affect multifamily investments.

According to experts, rising inflation and maintenance costs put pressure on apartment buildings, where rent hikes are capped, leading to falling net operating income. This could jeopardize loan repayments and may create financial instability for banks holding these loans.

“Inflation is coming up, and net operating income is just dwindling,” said Robert Martinek, Director at EisnerAmper, which reflects the concerns voiced by the SEC.

The Bigger Picture

The SEC’s request is part of a wider trend of financial regulators looking at risks across the entire CRE sector. The Federal Reserve Bank of New York has estimated that $400B in CRE loans are due for maturity in the near term, contributing to the “maturity wall” that poses challenges for banking.

Rebel Cole, a professor at Florida Atlantic University’s College of Business, has warned that banks with high exposure to real estate loans—especially multifamily and office buildings—face higher risks. Cole predicts many banks, particularly smaller institutions, could fail or merge in the next 12–24 months as they struggle to manage their CRE portfolios.

What’s Next

As the SEC continues its scrutiny, the question remains whether banks will take action to reduce their exposure to rent-stabilized multifamily loans or continue to carry the risks associated with these properties. 

While the SEC cannot force banks to take specific actions, it can ensure investors have transparent and accurate disclosures regarding potential risks.

For investors and financial institutions alike, the outcome of this scrutiny could have broader implications for the commercial real estate market in New York and beyond.