Flagstar’s New York Apartment Loans Face Fresh Pressure as Credit Costs Rise

Share this article!

New York apartment loans remain a costly problem for Flagstar Bank. The lender’s third-quarter earnings showed another reduction in its multifamily portfolio, but higher interest rates and rent-regulated buildings continued to drive credit expenses upward.

Flagstar’s October 23 earnings release filed with the Securities and Exchange Commission reported $12 million in net income for the three months ended September 30, down from $34 million in the second quarter. The bank earned $3 million attributable to common shareholders, equivalent to one cent a diluted share. A year earlier, it had reported a $36 million quarterly net loss.

The provision for credit losses increased $58 million from the preceding quarter. Management attributed much of the increase to higher rates, including their effect on New York City rent-regulated multifamily properties. The bank has been working to shrink that exposure while expanding commercial and industrial lending.

A smaller apartment book, with stubborn risk

Flagstar’s New York City multifamily loan balance fell $531 million, or 4%, during the quarter. Across multifamily and commercial real estate combined, the portfolio declined $1.1 billion, or 3%. The bank reported $1.2 billion in commercial real estate loan payoffs at par, 35% of which had been classified as substandard.

Payoffs at par matter because they remove loans without the bank having to accept a discount to the amount owed. They do not, however, settle questions about the remaining portfolio. Flagstar’s allowance coverage for multifamily loans with at least 50% rent-regulated units was 2.97%, compared with 1.63% for its total multifamily book. That difference indicates the bank continues to reserve more heavily against the rent-regulated segment.

The lender reported $248 million more substandard loans and a $670 million increase in the broader criticized and classified loan category. Those classifications are measures of credit concern, not statements that every borrower has defaulted. Nonaccrual loans were described as relatively stable.

Flagstar’s situation reflects the difficulties facing some owners of regulated New York apartment buildings. Higher refinancing costs have coincided with restrictions on rent increases and, in some properties, substantial repair and operating expenses. Loan outcomes still depend on individual buildings, borrowers and financing structures. The bank did not provide a property-by-property breakdown in the headline earnings release.

Commercial lending offsets part of the decline

Flagstar added $2 billion in commercial and industrial loans, an 11% quarterly increase that brought the category to $20.6 billion. Total loans grew $958 million to $61.9 billion, despite the apartment and CRE runoff. Net interest income rose $20 million, or 5%, to $460 million, and the net interest margin increased four basis points to 2.17%.

Chief Executive Joseph Otting said the bank was still making progress toward a different loan mix but pushed back the full realization of its long-term strategic objectives from 2027 to 2028. That is a change in management’s timetable, not an announced abandonment of the restructuring.

Capital remained a buffer. The bank reported a common equity Tier 1 ratio of 12.38% and said it completed a $250 million share repurchase in early October. The quarter’s net charge-off rate was 0.49% of average loans, compared with 0.66% in the prior period.

The central question for lenders and investors is whether the pace of apartment-loan reductions can outrun the cost of carrying the weaker credits. Flagstar’s latest numbers show progress on portfolio size alongside renewed pressure on reserves. Its next filings will help establish whether that balance is improving.

Source: Flagstar Bank third-quarter earnings release and SEC exhibit, October 23, 2026. Featured image: Zoshua Colah / Unsplash, illustrative New York streetscape; no depicted property is identified as a Flagstar collateral asset.