NYCB 2017 Annual Report

42 Multi-Family Loans Multi-family loans are our principal asset. The loans we produce are primarily secured by non-luxury residential apartment buildings in New York City that feature rent-regulated units and below-market rents — a market we refer to as our “primary lending niche.” Consistent with our emphasis on multi -family lending, multi-family loan originations represented $5.4 billion, or 60.3%, of the loans we produced for investment in 2017. The latter amount was $307.2 million, or 5%, lower than the prior year’s volume. At December 31, 2017, multi-family loans represented $28.1 billion, or 73.2%, of total non-covered loans held for investment, reflecting a year-over-year increase of $1.1 billion, or 4.2%. At December 31, 2017 and 2016, respectively, the average multi-family loan had a principal balance of $5.8 million and $5.5 million; the expected weighted average life of the portfolio was 2.6 years and 2.9 years at the respective dates. The majority of our multi-family loans are made to long-term owners of buildings with apartments that are subject to rent regulation and feature below-market rents. Our borrowers typically use the funds we provide to make building-wide improvements and renovations to certain apartments, as a result of which they are able to increase the rents their tenants pay. In doing so, the borrower creates more cash flows to borrow against in future years. In addition to underwriting multi- family loans on the basis of the buildings’ income and condition, we consider the borrowers’ credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings’ current rent rolls, their financial statements, and related documents. While a small percentage of our multi-family loans are ten-year fixed rate credits, the vast majority of our multi- family loans feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged in the first five or seven years is generally based on intermediate-term interest rates plus a spread. During the remaining years, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the Federal Home Loan Bank of New York (the “FHLB - NY”), plus a spread. The fixed -rate option also requires the payment of one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five-or seven-year term. As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six or eight. Multi-family loans that refinance within the first five or seven years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed-rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For example, a ten-year multi- family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or two would generally be expected to pay a penalty equal to five percentage points. Because prepayment penalties are recorded as interest income, they are reflected in the average yields on our loans and interest-earning assets, our net interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment income, as such income is only recorded when cash is received. Our success as a multi-family lender partly reflects the solid relation ships we have developed with the market’s leading mortgage brokers, who are familiar with our lending practices, our underwriting standards, and our long- standing practice of basing our loans on the cash flows produced by the properties. The process of producing such loans is generally four to six weeks in duration and, because the multi-family market is largely broker-driven, the expense incurred in sourcing such loans is substantially reduced. At December 31, 2017, the majority of our multi-family loans were secured by rental apartment buildings. In addition, 63.6% of our multi-family loans were secured by buildings in New York City and 5.3% were secured by buildings elsewhere in New York State. The remaining multi-family loans were secured by buildings outside these markets, including in the four other states served by our retail branch offices.