The Coney Island Apartment Complex That Nearly Sparked a Banking Panic
Investors are worried about ticking time bombs on banks’ balance sheets. Warbasse Houses was one.
Amalgamated Warbasse Houses, a sprawling apartment complex blocks away from the Coney Island boardwalk, was an unlikely spark for a near panic in the banking industry earlier this year.
Few people knew it at the time, but the 1960s-era complex was a ticking time bomb buried in the balance sheet of New York Community Bancorp NYCB 0.00%increase; green up pointing triangle. When the bank revealed big losses on real-estate loans, which included Warbasse and another high-dollar property, its shares fell 60%, pulling down other lenders.
Regional banks have started to report first-quarter earnings, and investors are worried that more Warbasses will be revealed. Shares of these small and midsize banks, which are stuffed with loans for office buildings, apartment complexes and other commercial properties, are near their lowest level in five months.
NYCB’s $112 million charge-off on the Warbasse loan in last year’s fourth quarter was a surprise. Banks typically don’t disclose the names of their borrowers or how much they owe, and NYCB didn’t identify Warbasse by name in its financial disclosures, either. Clues left behind by the lender and the sheer scale of the complex’s mortgage helped unmask Warbasse.
NYCB said the loan was for a co-op and had “a unique feature that prefunded capital expenditures.” In addition, Wall Street stock analysts who had spoken with NYCB management said in their research reports that the unpaid principal balance was $275 million, which is huge for a co-op loan.
Those few details were enough to allow The Wall Street Journal to identify the borrower through a review of more than 70,000 NYCB real-estate loan records filed with the New York City Department of Finance. Details about the large capital spending at Warbasse were covered in the local real-estate press. The co-op’s identity was also confirmed by a person familiar with the matter.
NYCB spokesman Steven Bodakowski declined to comment. The other loan cited by NYCB was less unusual—a $40 million charge-off on a nonperforming loan for an office building.
There were times this year when it looked like NYCB could be on the brink and might even trigger a new regional banking crisis, less than a year after Silicon Valley Bank’s collapse. NYCB had been one of the beneficiaries of last year’s brief flurry of bank failures. It acquired most of Signature Bank’s deposits and about a third of Signature’s assets from the Federal Deposit Insurance Corp.
After its Jan. 31 earnings release, NYCB changed chief executives twice. The panic cooled after an investor group led by former Treasury Secretary Steven Mnuchin provided a lifeline by injecting $1 billion of fresh capital.
Warbasse is practically a small city unto itself. It has five 24-story towers, 2,585 units, about 8,000 residents and its own power plant. It was built as affordable housing for union families by the Amalgamated Clothing Workers Union and the United Housing Foundation, according to the co-op’s website.
Warbasse covers almost 27 landscaped acres and has a big contingent of Russian immigrants. Brighton Beach, a Russian enclave, is a few blocks away. The complex, where a two-bedroom apartment with a terrace costs about $1,700 a month, has a waiting list to get in.
Warbasse’s age, its location near the ocean and damage from Superstorm Sandy in 2012 help explain the unusually large mortgage.
The co-op refinanced its mortgage in 2014, borrowing $200 million from NYCB. Half of that was set aside for capital projects, according to a September 2021 article about Warbasse by Habitat Magazine, which covers the New York co-op scene. This appears to be the “prefunded capital expenditures” referred to by the bank.
The article said the Atlantic Ocean’s “corrosive salt air, punishing winds and occasional floodwaters,” had wreaked havoc on the property over the years. Leaks got so bad that residents began referring to the co-op as “Water-basse Houses,” the article said.
An engineering firm hired by the board in 2017 found that “the whole system was at the end of its life,” Michael Silverman, the longtime co-op board president, told the magazine. “We were one step short of a complete catastrophe.”
Silverman and other co-op board members declined to comment. Warbasse has undertaken a major renovation project since then, the magazine article said.
Property records show Warbasse refinanced again in March 2022, when it took on the new $275 million mortgage from NYCB.
While the borrower and the charge-off on the loan are known, there are still some mysteries behind it. NYCB said the borrower wasn’t in default. But the way it accounted for the loan loss made it clear that NYCB had determined the loan wouldn’t be fully collectible. The bank didn’t say why.
It wasn’t clear from public records if Warbasse had an interest-only loan. The copy of its mortgage filed with the city showed the original $275 million principal amount, but not the interest rate or maturity date.
Weeks after NYCB took the loan loss that helped shatter its stock, the bank sold the loan to Bank of America, which has a large mortgage-trading desk. BofA spokesman Bill Halldin declined to comment on the bank’s plans for the Warbasse loan.