The concentration of multi-family loans is not a weakness, according to this bank


Malaga Financial in Palos Verdes Estates, Calif. Is comfortable going against the grain.

At a time when many community banks are determined to diversify their loan portfolios to avoid mergers, Malaga’s $ 1.2 billion assets stick to a business model heavily focused on multi-family lending. These loans, which are largely for low- and middle-income properties, made up almost 85% of Malaga’s $ 1 billion portfolio as of June 30.

While Randy Bowers, president, president and CEO of Malaga, has said he is open to other categories of loans, including mortgage banks, he has yet to find anything that he is passionate about.

He thinks of new lines of business “periodically,” Bowers said. “We haven’t seen anything attractive enough.”

Highly concentrated business models like the one in Malaga have become atypical in the banking sector.

In recent years, regulators have sought to limit the exposure to commercial real estate, including multi-family loans, although they have been willing to make concessions for lenders who demonstrate a strong track record. In December, they lifted a key concentration limit for New York Community Bancorp in Westbury which had limited the $ 53 billion multi-family loan portfolio and CRE to 850% of total risk-based capital.

Malaga, which regularly responds to questions from its regulators, “was able to make them understand our model and appreciate what we do,” said Bowers. “They don’t give us passes, anyway, but we’ve worked well with them.”

A big challenge for Malaga is low cost financing at a time when banks are placing more emphasis on liquidity.

The company’s total loans grew 18% over the four-year period that ended June 30, outpacing deposit growth by 2% during that time, according to data from the Federal Deposit Insurance Corp. . As a result, Malaga’s loan-to-deposit ratio fell from 117% to 135%.

The company is making the difference with wholesale financing.

“The third quarter continued to be difficult” for deposit collection, Bowers said. “Competition for deposits has intensified as rates on loan receivables have continued to decline.”

Multi-family lenders face barriers linking deposits to their loans, said Bryan Shaffer, senior director and general manager of George Smith Partners, a real estate capital advisory firm in Los Angeles.

Because the rents for the buildings in the Malaga portfolio are paid mainly by check or money order, “owners feel more comfortable most of the time that their property managers deposit them in a bank where they can walk”, he said. -he declares. More often than not, this leaves Malaga, with a small network of agencies, out of the picture.

Even when lenders can attract the deposit account, they aren’t particularly lucrative because homeowners also use them to pay investors and operating expenses, Shaffer said.

Bowers’ commitment to multi-family projects also comes at a time when the industry faces challenges from a new state law limiting annual rent increases to 5%, plus the local inflation rate. California voters rejected an even stricter rent control measure last fall.

The law has created uncertainty over investor appetite for multi-family development, said Tom Bannon, CEO of the California Apartments Association.

“There is now a cloud as to whether people are going to invest in rental housing,” Bannon said. “The only way to remove this cloud is if California, the state legislature and city councils make new housing a priority. And currently, this is not the case.

Bowers, for his part, said Malaga was equipped to handle statewide rent control, noting that severe restrictions were already in place in several jurisdictions in the Los Angeles area. He said rent control could benefit lenders by controlling overall rents.

Shaffer agreed, noting that higher rents in new buildings, which are not covered by either state or local rent control laws, push people to older, rent-controlled buildings where costs are inferior. As a result, their occupancy rates are between 95% and 100%.

New York Community expressed similar confidence in July, after New York City enacted a rent control law with similar restrictions. In a recent presentation to investors, the company called its $ 30 billion multi-family asset portfolio “well protected from recent changes to rent regulation laws.”

An advantage for Malaga was the quality of the credit.

The company had a loan – totaling $ 321,000 – that was 90 days or more past due as of September 30.

Bowers attributes this to Malaga’s ability to “pick” the best deals. The results have been substantial. the asset until September 30 is 1.30%

Bower’s biggest concern is increased competition for these deals, fueled by a decision by Fannie Mae and Freddie Mac to increase purchases of multi-family loans. The number of lenders competing for multi-family transactions in the Malaga market has grown from a dozen a few years ago to around 40 today, he said.

“A lot [of lenders] saw that it’s a good asset class and jumped in, ”he said.

It’s not just the increase in the number of competitors, Shaffer said. Malaga could also be affected if one of the market’s heavyweights, like JPMorgan Chase, decides he wants a slice of the smaller loans that make up Malaga’s bread and butter.

Despite this, Malaga does not plan to adjust its strategy or enter new markets.

“We’re not going to allow the competition to influence us,” Bowers said. “And I don’t see how you can get acquainted with [other markets] from a base in California. “

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