JPMorgan Chase may be the quintessential New York money center bank, but the Big Apple is a rare market where it lags in multifamily lending.
Nationwide, the largest U.S. bank's apartment loan business is mushrooming, aided by a pullback by Fannie Mae and Freddie Mac. Among banks, JPMorgan is the largest multifamily lender by far, with a portfolio that dwarfs its closest competitor. Yet much of that lending has taken place in Western markets like Los Angeles and San Francisco, since the team responsible was inherited from Washington Mutual, the failed Seattle thrift JPMorgan acquired in 2008.
Now the bank is refocusing on New York, where the fundamentals for apartment lending are attractive—and where JPMorgan's also-ran status has caught the attention of Chief Executive Jamie Dimon.
"I know Jamie and other executives tease me about it," says Al Brooks, who heads commercial term lending for JPMorgan Chase out of Irvine, Calif. "We're throwing a lot of our focus there…but we have a long ways to go."
Apartment lending continues to hold its allure for JPMorgan Chase despite fierce competition for apartment loans, an expected rise in interest rates next year and potentially slower growth ahead. Competition has led to lower credit standards that could spell bad news down the road for banks that hold multifamily loans on their balance sheets, some bankers and analysts say. But others point to the mandated pullback in multifamily lending by Fannie Mae and Freddie Mac that has redirected billions in new lending to banks.
"Banks are desperate for loan growth and this has been one of their main engines," says Tad Philipp, director of commercial real estate research at Moody’s Investors Service.
Multifamily lending was the first asset class to rebound from the housing downturn, and several factors, including demographics, are still working in its favor. Though Fannie and Freddie still dominate the sector—together they back about 45% of all multifamily loans—the government-sponsored enterprises were required last year to cut their financing of apartments by 10%. No such mandates have yet been announced this year, but analysts expect another pullback.
"The loans Fannie and Freddie would have made are going to banks," says Philipp, who estimates $6 billion in new lending has been freed up for banks and other funding sources such as insurance companies and investors in commercial mortgage-backed securities.
Brooks acknowledges the pullback by the GSEs has had some impact. Though JPMorgan Chase dominates multifamily lending—its book of loans is twice that of the No. 2 lender, New York Community—it managed to post a 16.5% jump in such mortgages from a year earlier, to $45 billion in the fourth quarter, according to Trepp, a provider of research on commercial lending.
To put that growth in perspective, JPMorgan Chase’s $6.4 billion year-over-year increase is bigger than any of the portfolios of all but five other banks. If a new bank went out and loaned $6.4 billion against apartment buildings, matching JPMorgan Chase’s fourth-quarter volume, that bank would be the seventh-largest multifamily lender in the U.S. Then again, these numbers look smaller in light of JPMorgan's total assets of $2.4 trillion.
"They’re the 800-pound gorilla," says Richard Ehst, president and chief operating officer of $4.2-billion-asset Customers Bancorp in Wyomissing, Pa., which itself posted a $700 million annual increase in multifamily lending.
Even more astonishing is that JPMorgan Chase courts customers with smaller-balance loans. Its average loan size is just $1.8 million. "We're doing a lot of little loans," Brooks says.
The bank has won customers by refusing to charge "junk fees" for appraisals and legal costs, says Brooks, who used that strategy at Washington Mutual, where he held the same job. Brooks also touts short turnaround times of 45 days or less, compared to the 65 to 90 days it takes other banks to fund a loan. JPMorgan Chase has standardized loan documents to reduce costs and stress to borrowers.
"We offer things others can't. We use our size to tap the value to the customer. It's why we tend to get the first call," Brooks says.
Apartment lending is "kind of in flux," Brooks says. Though he doesn’t anticipate another big run-up in rents this year, he also is not seeing any signs of banks retrenching.
Matt Anderson, a managing director at Trepp, says the foreclosure crisis turned out to be a boon for multifamily lending because millions of former homeowners, now with blemished credit, became renters. Younger households also have put off buying homes either because of the difficulty of qualifying for a mortgage or because of a lack of steady employment.
"Even with all the growth that has occurred over the last two to three years, multifamily lending has been a bright spot and demand is still quite strong," Anderson says.
A handful of markets, including Austin, Texas, and Raleigh, N.C., have seen a surge in construction, causing Moody’s to warn that some markets could become overheated.
Competition also has tempted a few lenders to lower credit standards. Some are allowing loan-to-value ratios as high as 85%, when 70% is the norm, says Ehst at Customers Bancorp. Another problem is cash-out refinances of 40% to 50%, he says, which is far above the typical 20% to 25% and could leave some landlords with "very little skin in the game."
"The one thing that all banks are going to have to look out for is what happens to cap rates down the road," says Ehst, referring to capitalization rates, a commonly used ratio to determine apartment yields. "It can be a slippery slope. It’s important to stress test every loan to compensate for what could happen in a rising rate environment."
Still, housing prices in markets like San Francisco remain sky-high. A dearth of supply has led to rising rents and low occupancy rates, a low-risk combination that prodded JPMorgan Chase to open the lending spigot in 2010. Though JPMorgan Chase was careful not to lend too heavily in markets like Las Vegas or Phoenix, where there was never a big disparity between rents and mortgage payments, Brooks admits New York has not been a big enough focus.
"It’s all about economics," Brooks says, explaining the New York market's appeal. "Renting is the most economical way for someone to live in a great part of town and the most extreme example is New York, where the differential between rent-controlled units and market-rate rents is the greatest in the country."