Signature Bank Failure Update: What's Next? The Federal Deposit Insurance Corporation (FDIC) has announced its plans to sell the commercial real estate holdings left over from Signature Bank. FDIC has announced a framework for selling off approximately $60 billion in the loan portfolio of Signature Bank following its failure. The failed New York firm's loans include rent-stabilized multifamily housing loans and commercial real estate loans, which will be sold as-is and without warranties to qualified buyers.
The portfolio is primarily made up of commercial real estate and commercial loans, with a smaller pool of single-family residential loans. The FDIC is reviewing the CRE loans secured by multifamily residences in New York City that are rent stabilized or rent controlled, as they serve as an important source of affordable housing.
To ensure the preservation of affordable housing, the FDIC plans to collaborate with state and local government agencies and community-based organizations. The marketing process is expected to begin later this summer, with Newmark & Company Real Estate, Inc. acting as an advisor on the sale.
Why Did Signature Bank Fail?
Signature Bank was seized by the FDIC under some suspicious circumstances, but it never actually failed. In mid-March, there was a deal to offload some of Signature's resources into New York Community Bank, but a large chunk of their assets, mostly commercial real estate, was left out of the deal. FDIC has now announced its plans to unload that material. The portfolios compromised primarily commercial real estate loans, including a concentration of multi-family properties primarily located in New York City.
Signature Bank, one of the largest US banks, was shut down on March 12, 2023, by regulators. Its collapse was a result of depositors withdrawing large sums of money after the failure of Silicon Valley Bank (SVB), which raised concerns about contagion in the banking sector. Signature Bank was the second-biggest bank failure since Washington Mutual closed in 2008, and its closure has raised policy questions around FDIC insurance and bank and cryptocurrency oversight. In this article, we delve into Signature’s history, the events that led up to its demise, and how it impacts buyers, sellers, and the broader economy.
Signature Bank was an FDIC-insured, New York state-chartered commercial bank, primarily serving privately owned businesses. It was listed as the 19th largest bank in the United States by S&P Global, with assets worth $110.36 billion and $88.59 billion in deposits in December 2022. It was also the third-largest commercial real estate bank in New York City.
The bank had clients in middle-market companies but was especially known for catering to law offices, real estate buyers, and cryptocurrency companies. Notably, it was the first FDIC-insured bank to create a blockchain-based digital payments platform approved by the New York State Department of Financial Services (DFS). Its platform, Signet, required a minimum account balance of $250,000; FDIC insurance caps out at $250,000.
Signature Bank began in 2001 with $50 million in assets and a network of private client banking teams. By 2023, it had grown to become the 29th largest U.S.-based commercial bank. The bank continued to expand and by 2018 had ventured into digital banking, eventually launching its blockchain payments platform in 2019.
By the end of 2021, total digital-related deposits reached $28.7 billion—almost 30% of the bank’s deposit portfolio. Signature Bank was added to the S&P 500 Index in 2021, and its shareholder return ranked top among all financial institutions in the index. The bank affirmed a commitment to creating a positive social impact, including diversity awareness events and time donated to charitable causes.
However, the failure of Silicon Valley Bank led to a Signature bank run on March 10, 2023. Depositors panicked after SVB failed because Signature had high amounts of uninsured deposits and was exposed to the crypto sector. New York state and U.S. federal regulators were also concerned, and the run was continuing over the weekend. On March 12, 2023, the New York State DFS took possession of the bank “to protect depositors and the public interest.
Challenges the FDIC is Facing
The FDIC is already running into problems with the sale of Signature Bank's commercial real estate holdings. The majority of the properties in Signature's book are rent-controlled multi-family housing, which is subject to strict rent control laws in New York. In 2019, a law was passed that made it impossible for landlords to raise rents above a certain threshold, even if the apartments become vacant. This has led to a decrease in the value of these properties, making it difficult for the FDIC to sell them at a price that recovers the maximum amount of the bank's assets.
Another challenge the FDIC is facing is the current market conditions. The COVID-19 pandemic has disrupted the real estate market, with many tenants struggling to pay rent and many landlords struggling to maintain their properties. This has led to a decrease in demand for commercial real estate, including multi-family housing. As a result, the FDIC may have to lower the price of these properties to attract buyers, which could result in a lower recovery rate for Signature Bank's assets.
The $60 Billion Portfolio
The portfolio is primarily comprised of commercial real estate (CRE) loans, commercial loans, and a smaller pool of single-family residential loans. The CRE loans include a concentration of multifamily properties, primarily located in New York City. Industry experts have noted that commercial real estate loans have been viewed with increasing skepticism by banks and regulators amid concerns that sluggish return-to-work practices could lead to delinquencies on loans for office space and retail. This explains in part why the agency and Flagstar left out the now up-for-sale $60 billion loan portfolio and other such assets that presented heightened liability or loss risks to an acquiring institution during the initial sale.
Affordable Housing in New York City
The FDIC has a statutory obligation, among other factors, to maximize the preservation of the availability and affordability of residential real property for low- and moderate-income individuals. Therefore, the agency is paying particular attention to commercial real estate loans secured by rent-stabilized or rent-controlled multifamily residences as they are an important source of affordable housing in New York City. The FDIC plans to reach out to state and local government entities, as well as community-based organizations, to inform them of their efforts and to seek local input as the agency establishes a marketing and disposition strategy.
Selling Process and Qualified Buyers
The FDIC says it plans to begin its sale process this summer and has tapped Newmark & Company Real Estate, Inc. to advise on the sale. The loans will be sold exclusively to qualified buyers, and information concerning the loans will be furnished only to persons who demonstrate that they have a level of financial sophistication and resources sufficient to evaluate and bear the risks of an investment in the loans. This means that only buyers who are deemed to have the necessary expertise and financial resources to handle the loans' risks will be eligible to purchase them.
Potential Impact on the Market
The sale of Signature Bank's commercial real estate holdings could have a significant impact on the market, particularly in New York City where a large portion of the properties is located. If the FDIC is unable to sell the properties at a price that recovers the maximum amount of assets, it could lead to a decrease in the value of similar properties in the area.
On the other hand, if the properties are sold at a reasonable price, it could attract more buyers and potentially increase the value of similar properties. It's worth noting that the FDIC has successfully sold commercial real estate holdings in the past, such as the assets of Colonial Bank in 2009. However, the current market conditions and the unique circumstances surrounding Signature Bank's assets present a significant challenge.
For potential buyers, this presents an opportunity to acquire a large portfolio of loans, including commercial real estate and multifamily housing loans. However, they will have to demonstrate their financial and operational capabilities to handle the risk involved. On the other hand, for sellers, it presents a chance to dispose of a significant amount of assets while ensuring that they end up in capable hands. The FDIC's emphasis on affordable housing and reaching out to community-based organizations also indicates a commitment to maximizing the benefit to the broader public.
In conclusion, the FDIC's plan to sell Signature Bank's commercial real estate holdings is a complex situation with potential implications for the real estate market. While it remains to be seen how the sale will play out, it's clear that the FDIC will have to navigate several challenges to recover the maximum amount of assets for Signature Bank's creditors and ultimately resolve this situation.
FDIC's framework for selling off Signature's remaining loans provides insight into the agency's disposition strategy and priorities. The loans will be sold exclusively to qualified buyers, and the FDIC will pay particular attention to the commercial real estate loans secured by rent-stabilized or rent-controlled multifamily residences.
The agency plans to begin the sale process this summer and has tapped Newmark & Company Real Estate, Inc. to advise on the sale. For potential buyers, this presents an opportunity to acquire a significant amount of loans, but they will have to demonstrate their financial and operational capabilities to handle the risk involved. The FDIC's commitment to affordable housing and reaching out to community-based organizations also indicate a desire to maximize the benefit to the broader public.