Will Flagstar Survive ZoMa and Rebound? We Like the Leverage...

October 29, 2025 | A number of readers of The Institutional Risk Analyst have asked us about Flagstar Bank, National Association (FLG), the NYC bank f/k/a New York Community Bank. FLG beat earnings estimates in Q3 2025 and continues to make progress toward resolving some of its most problematic credit exposures. It is no small irony that the inflation that is crushing New York consumers and landlords alike may also help the bank shed multifamily exposures.

There is a growing crowd of greater fools forming who just must acquire New York City commercial real estate. As of the end of the third quarter of 2025, lenders had initiated foreclosures on more than 60 commercial properties in New York City. This does not represent nearly all commercial real estate defaults, however, which can include missed payments and renegotiated or modified loans. Since lenders are avoiding taking over residential multifamily properties in New York via foreclosure, the actual number of multifamily defaults is likely much higher.

Flagstar's stock price cratered in Q1 2024 after revelations about weak internal controls and credit exposures to rent regulated multifamily commercial properties. Moody's downgraded the bank's credit rating to "junk status" in February 2024, citing high risks and a large quarterly loss. In the beginning of Q4 2025, the bank merged with its former parent company, Flagstar Financial, and the unitary national bank is now the survivor.

The big question is what is going to happen to FLG and other New York area banks in the event that the far-left New York State representative Zohran Mamdani (ZoMa) is elected mayor next week. Regional banks including privately held Apple Bank, Valley National Bancorp (VLY), Flushing Financial Corporation (FFIC) as well as money centers such as JPMorgan (JPM) and Citigroup (C) have exposure to both rent-stabilized properties and buildings that are at least partially regulated.

We wrote about the prospects for lenders in the event of a win by ZoMa earlier this year (“Zohran Mamdani's NYC Bank Dead Pool”). The investors and lenders in New York multifamily assets are clearly not advantaged by a ZoMa win.  That said, we think that ZoMa’s campaign has a lot in common with his clueless democrat/socialist antecedent, Bill de Blasio, which was more about winning office than doing anything of substance, good or bad. 

Is the impending ZoMa administration in NY City Hall any worse than the devastation caused by the 2019 Housing Stability & Tenant Protection Act of 2019? How does the prospect of a ZoMa regime impact lenders and developers?  We think that the panicked crowd of New York landlords have greatly exaggerated the impact of ZoMa vs the 2019 legislation. ZoMa is a slick salesman but has even less substance that the disastrous Mayor Bill de Blasio. 

The big issue confronting ZoMa and all NYC officials is inflation. “According to Zillow, the average rent for all bedrooms and all property types in New York is $3,595, compared to the national average of $2,000,” Newsweek reports. “While rents have increased in recent years, wages in the city have not kept up.”  And clearly rents have not kept up with operating costs for multifamily buildings. As we have noted on more than one occasion, there is no way to make New York City affordable for anyone but the ultrarich. 

Can Lee Smith Save Flagstar?

FLG CFO Lee Smith noted in the Q2 2025 earnings call that the crowd of investors looking at multifamily assets is growing and includes the GSEs, Fannie Mae and Freddie Mac. This strange fascination with loss leading commercial real estate may help FLG dispose of its multifamily exposures.  Every time an investor in NYC multifamily takes a total loss, another recent arrival jumps into the fray and buys the asset. We believe that FLG can use the irresistible appeal of NYC property to a certain class of optimistic commercial investors to slowly shed the bank’s multifamily book.  

The steady erosion of purchasing power for consumers nationally was the major impetus behind the 2019 legislation in New York. But does this mean that lenders like Flagstar Bank are doomed? Not necessarily. While the financial results for FLG earlier this year were pretty grim, the bank is slowly digging its way out of a hole and has posted guidance that suggests that the $90 billion asset lender will start to grow assets and earnings in 2026. The most recent guidance from FLG is shown below.

CFO Smith noted in the Q3 2025 conference call that the bank is lowering funding costs and increasing asset returns, even as it looks to shed multifamily assets.  We’ve know Lee Smith for more than a decade and have enormous respect for his talents as a mortgage banker and a manager. Smith:

“[W]hat I would say is in terms of the balance sheet, youʼll have noticed that it only declined $500 million in Q3, despite us paying off another $2 billion of brokered deposits. We think at the end of this year, Q4 will probably be the low point. The balance sheet will be, and this is total assets, $90 to $91 billion. We expect the balance sheet to start to grow as we move through 2026. I think that kind of level sets everything first and foremost. We do expect to see continued NIM expansion as we move forward, and we have multiple levers to do that, as you know. I mentioned in my prepared remarks, as the multifamily loans continue to pay off or as they continue to hit their reset dates, they have a weighted average coupon that is less than 3.7%. If they stay with Flagstar, our sort of pricing reset is five-year flub plus 300 bp or prime plus 275 bp, and weʼre staying sort of firm to that. We get a benefit if they reset and stay with Flagstar. If they pay off, then weʼre taking those proceeds and investing them into the C&I growth, or we use need to pay down high-cost either brokered deposits or we can pay down flub advances. Thatʼs sort of one area. We continue to show excellent growth on the C&I side. What we didnʼt mention is of the new loan originations in the third quarter, the average spread to SOFR on all of those was 242 basis points.”

One of the big concerns we’ve had with FLG is that the yield on the loan book is low, a full point below the 6.1% gross yield for Peer Group 1 in Q2 2025. The yield on the FLG Treasury portfolio is also below peer, but the MBS book is well above peer and the other securities line has a 7% yield.  As FLG gradually reprices its loan and securities book, there is enormous potential for expanding the asset returns of the bank and gradually generating some operating leverage.  The chart below shows the FLG price as of yesterday's close.

Is FLG out of the woods?  Not yet, but we like the progress that the bank is making under the leadership of Lee Smith and we are taking a speculative position in the stock for our bank portfolio. The road ahead is likely to be bumpy, but FLG has a head start over other lenders with NYC multifamily exposures. We like the leverage. Just remember that this stock carries a lot of headline risk, but the numbers are going in the right direction.

Source: Yahoo Finance

Most of the banks that we follow in the WGA Top 50 Banks are pretty expensive, even with the recent market volatility.  Invesco KBW Bank ETF (KBWB) is up 93% over five years while FLG is down 50%. At 0.64x book, FLG is off of the extreme lows of 2024 and we like the upside in the stock as we move into 2026.  Buckle up.

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