By Roshan Abraham
Over the past week, bank runs have caused multiple U.S. institutions serving the technology and crypto industries to collapse. Two banks, Silicon Valley bank (SVB) and Signature Bank, have been placed into receivership with the Federal Deposit Insurance Corporation (FDIC), which will put all deposits into bridge banks run by the FDIC until they can be sold in an effort to quell panic about the stability of the banking system.
According to the FDIC, customers “will continue to have uninterrupted customer service and access to their funds by ATM, debit cards, and writing checks in the same manner as before. Signature Bank’s official checks will continue to clear.”
Like SVB, there’s new scrutiny about how risky Signature’s lending practices have been. The bank was well-known as a key banker for the hyper-speculative crypto industry, which has experienced a collapse over the past year. While most of its deposits were not crypto-related, it launched a product called Signet that facilitated commercial crypto payments and which was approved for use by the New York State Department of Financial Services.
Despite its crypto notoriety, Signature Bank is a far larger player in the housing market; former senator Barney Frank, who sat on Signature’s board, told Bloomberg that the bank is “the biggest lender in New York City under the low-income housing tax credit.” Low-Income Housing Tax Credits (LIHTC) are a federal program where states grant tax subsidies to private developers, who in turn sell them on the private market to finance construction. Signature Bank maintains about $80 million of the credits in New York; the purchase helps fund affordable housing while the credits lower the bank’s tax liability.
A publicly available FDIC evaluation from 2022 shows that nearly half of all Signature’s lending was in real estate. And $16 billion of those real estate loans—over half—went to financing multifamily apartment buildings. And it owns a Real Estate Investment Trust that invests in mortgage-backed securities, the same type of speculative assets that helped drive the 2008 financial crash.
While Frank points to LIHTC as the reason why Signature is a worthy investor, tenant advocates have been criticizing Signature Bank’s other lending practices for years, alleging that they lend to corporate landlords that have been among the state’s worst evictors and whose risky business model destabilizes neighborhoods. In 2019, New York Communities For Change said Signature Bank had, together with Capital One, “loaned out $468 million to landlords that are among the city’s worst evictors.”
For this reason, advocates are not thrilled that Signature clients are getting full coverage of their deposits from the government. Even though shareholders will be wiped out and the bank’s top management removed, experts have suggested that a new implicit guarantee that all large, uninsured deposits in any bank will be covered by the government will encourage more risky behavior.
“I think it’s a problem that we’re doing full coverage of all deposits with banks that are investing in some really risky things,” says Saqib Bhatti, co-director of Action Center on Race and Economy, a member of the Public Bank NYC coalition. A bailout “seems like a big slap in the face to all the communities and workers that they screw over as a part of their normal business practice,” Bhatti said.
The Association of Neighborhood & Housing Development (ANHD), which has been organizing campaigns against Signature’s lending practices for years, issued a statement thanking the New York Department of Financial Services for shutting down the bank.
“Signature Bank’s collapse comes as no surprise to the [ANHD], who has long called out their faulty business model, which relied on predatory and speculative activities in New York City,” the statement said. “Signature paved the way for thousands of tenants to suffer living in unsafe conditions, the victims of harassment, or displaced from their homes and communities.”
The city’s Right To Counsel Coalition, a group of nonprofit providers advocating for free attorneys for people in eviction court, compiled a list of New York City’s worst evictors during the early days of the COVID-19 pandemic, along with the funding sources. According to that list, Signature Bank lent to Jay Rosenfeld of AMA LLC / Revona Properties, whose portfolio is 86 percent rent-stabilized housing and who successfully filed 202 evictions between 2017-2020. (Rosenfeld also received loans from Fannie Mae and Freddie Mac, the government-run housing corporations.) Alma Realty, Parkash 242 LLC and Memadet Realty Corporation are also top ten evictors who were lent money from Signature.
Signature Bank has lent to Zara Realty, A&E Real Estate Holdings LLC and Sugar Hill Capital Partners, among other real estate companies that are known for large purchases of rent-stabilized multifamily housing and who made aggressive attempts to deregulate those buildings.
The funding source and the aggressive attempts to deregulate units cannot be decoupled; landlords of these buildings leverage massive amounts of debt to purchase rent-stabilized portfolios that can only be paid back if the buildings’ units become market rate. The nature of the debt means deregulation is baked into the business model that underwrites a loan.
“When you compare the rent-stabilized rent rolls, the revenue generated by the building to the debt service required to pay back the loans and keep up the maintenance of the building, there’s a mismatch,” says Will Spisak, senior program associate of New Economy Project and a member of Public Bank NYC, a coalition that is pushing NYC to put its funds into a public bank rather than private ones like Signature. “It’s this understanding between the bank and the landlord that the landlord will find ways to deregulate units.”
Zara Realty, for instance, has not only been on the New York attorney general’s “worst landlords” list for years in a row, but was sued by the attorney general in 2019 for illegally raising rents and coercing tenants into signing illegal leases. Zara Realty’s portfolio is 91 percent rent stabilized, and they came under fire for years for using loopholes, including major capital improvements to deregulate units.
Major capital improvements allow landlords to raise rents on otherwise rent stabilized apartments by claiming that building-wide improvements were made, but the law was loosely regulated, and landlords often inflated the costs of improvements, something Zara came under fire for.
In 2019, sweeping tenant-friendly reforms narrowed the parameters for landlords of rent regulated units to raise rents and deregulate buildings, including through MCIs. It meant that landlords like Zara were deregulating far fewer apartments. (There are still, however, loopholes that allow for deregulation.) It also meant Zara and others could potentially have more trouble paying back their loans to Signature and other lenders.
Spisak suspects this risky lending contributed to Signature’s shaky footing. “We have a suspicion one of the challenges that Signature Bank is having is that a lot of the landlords that are highly over-leveraged are now having trouble making those payments on those buildings,” he said. Sugar Hill Capital, for instance, recently stopped making payments on mortgages for some of the 50 mostly rent stabilized buildings it owns in Manhattan.
These predatory owners were also often ignoring basic maintenance. Coupled with the higher interest rates, it makes the buildings harder to resell, Spisak said.
As expected with a bank of its size, Signature has a diverse range of lending and investments, some of which affordable housing developers relied on. It maintains about $80 million worth of LIHTCs that fund housing development in New York. It invested $45.3 million through LIHTC to rehabilitate a 204-unit Nassau County rental property consisting of Section 8 tenants. (Critics have long pointed out that , however, that LIHTC-funded housing is not necessarily always deeply affordable and properties it finances revert to market-rate within a few decades.)
Yet the FDIC was unimpressed by the scale of Signature’s affordable housing investments, especially since the bank’s assets grew by nearly 150 percent during the pandemic. The evaluators wrote that, “Signature, with its significant increases in total assets and securities, could have pursued other qualified investment opportunities, including those that are not LIHTC-related.” Its overall score for Signature under the Community Reinvestment Act was “low satisfactory,” meaning the bank met its minimum obligations for lending within the communities where it takes deposits under the 1977 law.
Spisak says Signature was aware of how their loans were being used by landlords who planned to jack up rents and evict tenants. He says tenant advocates had multiple sit-downs with Signature to explain the predatory practices of their customers and Signature employees received walk-throughs of dilapidated properties, but the bank did not change course. According to a statement from ANHD, Signature Bank agreed to adopt ANHD’s best practices for lending in July 2018. “Unfortunately, in the more than four years since that pledge, Signature Bank had yet to fully live up to its commitments and often fought back against doing so,” according to ANHD’s statement.
The FDIC was also aware of Signature’s lending practices. In their 2022 evaluation, officials spoke to tenant advocates and reviewed public comment and learned about the “ongoing problem of bad landlords who continue to own and operate multifamily buildings that are deteriorating,” and heard complaints that Signature is “continually able to secure financing from area lenders and private entities to purchase additional multifamily buildings.” FDIC evaluators also learned that landlords “appear to engage in various forms of harassment tactics to encourage current tenants paying lower rent levels to move out, in order to move the properties to full market rate rents.”
For this reason, advocates are hoping this moment will force Signature to apply higher scrutiny to its real estate lending.
“We look forward to working with State and Federal regulators to ensure that tenants’ homes are protected and affordability is preserved—especially in the midst of a housing crisis, and on the edge of an eviction tsunami. We can not allow another financial institution to take control of loans and continue Signature’s practice of predatory lending,” ANHD said in its statement.
The Public Bank NYC collective also want the city of New York to stop putting its money in Signature Bank, where about $50 million of the city’s funds sit, and put that money in a public bank instead.
“At the end of the day, whether it’s predatory equity landlords or cryptocurrency or mortgage backed securities, these banks proved time and again that they’re just interested in making the biggest and fastest profits that they can,” Spisak said. “Public banking is the clear alternative to this.”