Bank Slobbers Over Fannie, Freddie Pullback

NEW YORK ( TheStreet) -- The Federal Housing Finance Agency wants Fannie Mae ( FNMA) and Freddie Mac ( FMCC) to pull back from multifamily mortgage lending, which could boost New York Community Bancorp's ( NYCB) presence in its favored line of business.

Multifamily lending with a focus on apartment buildings with below market rents in the New York City area has been the preferred lending area for New York Community Bancorp for decades. The company had $44.2 billion in total assets as of June 30, with noncovered multifamily loans held for investment totaling $19.2 billion, or 43% of total assets.

Speaking at the Barclays Capital Global Financials Conference in New York on Tuesday, New York Community Bancorp CEO Joseph Ficalora said the pullback from multifamily loan purchases by Fannie and Freddie was "clearly" an opportunity for the bank.

"In 2008 when Fannie and Freddie were in somewhat disarray and pulled out of the market a bit, interest rates moved up dramatically." Fannie and Freddie's loan purchases have a "meaningful impact on the rates that everybody gets nationally, whether it's on one-to-four family or it's on multi-family," Ficalora added. "So, when they are less active, rates will automatically move up and the period ahead is most likely going to see a significant change in what Fannie and Freddie actually does in both multi-family and one-to-four family. And as a result of that, I would think that rates will, in fact, move up in both of those asset classes."

Fannie and Freddie were taken under government conservatorship in September 2008, and still purchase roughly 90% of one-to-four family mortgage loans originated in the United States. While the fate of the two companies -- known as the government-sponsored enterprises, or GSEs -- is still up in the air, their regulator has been working to shrink their operations, which has included the goal this year of "reducing their volume of new multifamily business by 10 percent relative to 2012."

The FHFA expects the GSEs to meet their 2013 goal for multifamily volume reduction, and on Aug. 9 said it was seeking comment on its push to continue the GSEs' gradual exit from multifamily loan purchases in 2014. Measures that might be taken to reduce the involvement of Fannie and Freddie in the multifamily mortgage market include restrictions on loan terms, which could include loan amounts, underwriting terms and interest rates, along with "other options." The public comment over the FHFA's plan ends on Oct. 8.

"Noncovered" loan balances exclude those acquired from failed institutions and covered by Federal Deposit Insurance Corp. loss-sharing agreements. New York Community purchased the branches, deposits and most of the assets of the failed AmTrust Bank of Cleveland in December 2009. New York Community Bancorp gained a significant one-to-four family residential lending business through the AmTrust deal, but it immediately sells most new loans of this type to Fannie Mae and Freddie Mac.

While Ficalora said that the pullback by Fannie and Freddie would push up rates for "both classes" of mortgage loans, the GSEs haven't yet pulled back from one-to-four mortgage lending, while their pullback from multifamily is in full swing.

"A pullback in GSE involvement in the multifamily market would be a definitive opportunity for NYCB as origination rates would be expected to move up," wrote KBW analyst Collyn Gilbert in a note to investors after Ficalora's presentation on Tuesday.

Gilbert rates New York Community Bancorp "outperform," with a $17 price target, representing potential upside of 15% from Tuesday's closing share price of $14.74.

"When polled, investors in the room 'overwhelmingly' highlighted 'Valuation' as the reason that they do not currently own NYCB shares," Gilbert wrote. At Tuesday's close, New York Community's shares traded for just over twice their reported June 30 tangible book value of $7.32, and for 14.3 times the consensus 2014 earnings estimate of $1.03 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $1.08.

In addition to a relatively high valuation, some analysts have for years questioned New York Community Bancorp's ability to maintain its quarterly dividend of 25 cents a share, since the company is paying out nearly all of its earnings. The shares had a very attractive dividend yield of 6.78% at Tuesday's close.

Gilbert in August raised her price target for New York Community's shares by two dollars and said the bank's dividend was " safe," in part because of the bank's very long track record for stellar asset quality and also because of a strong earnings track record with room for improvement.

Gilbert's August comments came after Citigroup analyst Josh Levin in July reiterated his "sell" rating on New York Community, writing "the dividend isn't sustainable given the earnings profile and changing regulatory environment, and the lingering risk of a dividend cut alone should cause the stock to underperform."

New York Community Bancorp has maintained the 25-cent dividend for 38 consecutive quarters.

Ficalora has repeatedly said the company is considering making a major acquisition that would take it significantly above the key $50 billion asset level, that would bring additional scrutiny from regulators. Since the company is already close to that magic number, Gilbert discounts the possibility of a rumored acquisition of the North American operations of Popular Inc. ( BPOP), of Puerto Rico, since the acquired assets would only total about $9 billion.

Ficalora on Tuesday said "We typically buy banks for the purpose of creating a retail franchise that operates more efficiently than our competitors and thereby provides us with funding that is more attractive than our competitors usually have."

"This is our business model," he said.

NYCB Chart NYCB data by YCharts

Interested in more on New York Community Bancorp? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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