New York Community Bancorp's (NYCB) credit rating was downgraded to Junk by Moody's, eliciting fears and memories of 2023's regional banking crisis. Roundhill Investments Chief Strategy Officer Dave Mazza joins Yahoo Finance to discuss the contagion risk NYCB poses for the sector if bad news keeps coming.

"Ultimately, I think because of the stresses in the system and the lack of wanting for it to be real stress, something will happen here," Mazza states. "The new chairman [Alessandro DiNello]... moving from non-executive to executive... could settle down the name, but what we've learned is once the short sellers and investors turn on these regional banks, they don't have a lot of patience. That would be my concern for someone who's looking to invest in the space right now."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: --the latest on the regional banking turmoil and what is next for NYCB as well as this broader concern. We want to bring in Dave Mazza, Roundhill Investments chief strategy officer here with us in studio. Dave, good to see you.

DAVE MAZZA: Good to see you as well.

JULIE HYMAN: So I note today that bank stocks or at least financials broadly are not down, right? It is-- and NYCB itself is now rebounding. So how are you thinking about that broader CRE risk, Commercial Real Estate risk, and whether it is a larger problem?

DAVE MAZZA: Well, first and foremost, any time you see another bank under pressure, it gets the hairs on your skin rising up, right, because we've been through this drill before. Everyone goes back to '08 and what happened with the big banks, and it's not just one.

And then we had, almost a year ago today, banks that were generally considered to be high quality, well run, had strong exposures going under. And here we are again almost a year later with a bank that acquired some of the assets of one of those banks under pressure. So it really gets you thinking, is commercial real estate going to have this contagion risk?

But what's interesting and been fascinating to me is people have talked about this concept of a rolling recession. I think CRE is a great example of that. It's just the marketplace kind of has been picking its spots and saying, we're going to go after this area, right? Tech was the first place, right, and crypto and the exposures that banks like Signature and Silicon Valley Bank had to that.

But here, what's a bit more concerning to me about NYCB is the fact of all the multifamily loans that it has in the New York area, the largest market for multifamily loans, and what that could mean should the bank actually face further pressure.

JOSH LIPTON: So you seem be suggesting, Dave, if you're a viewer right now and you're invested in regional banks, you think there is reason for some concern here?

DAVE MAZZA: Certainly. I think some people have been trying to focus on buying the dip in regional banks, and there certainly could have been an opportunity. NYCB was actually one of the better-known or well-liked banks because of their strong dividend, and many of the buyers turn into sellers, right? If they're not going to pay you that dividend, they're going to exit right away.

What's interesting, though, is that to me, it's hard to say, like a wildfire, that this is not just a spark that's going to go away. What the concern is is, Does this then flame into other areas? Ultimately, I think because of the stresses in the system and the lack of wanting for it to be real stress, something will happen here.

The chairman-- of course, the new chairman, I should say, moving from nonexecutive to executive--

JULIE HYMAN: At NYCB.

DAVE MAZZA: --may-- exactly-- to be clear there, could settle down the name. But what we've learned is once the short sellers and investors turn on these regional banks, they don't have a lot of patience. So that would be my concern for someone who's looking to invest in the space right now.

JULIE HYMAN: OK, so let's talk beyond the space then because if you're concerned about spillover, does that mean you, as an investor, stay away not just from regional banks but from big banks? I mean, in the past situation last spring, the thinking was that big banks would actually benefit. I don't know if that's still the case with the commercial-real-estate exposure. Do you stay away from REITs, particularly multifamily and/or office REITs? Do you stay-- I mean, do you stay away from companies that offer credit to these, you know, that are in that space? Like, how far does it go, and what do you watch?

DAVE MAZZA: Well, I think it's sort of an interesting point. Ultimately, probably a large bank will end up acquiring these assets. Now, that's not a prediction. I don't cover the stock from a fundamental perspective, but I think that's the scenario we're finding ourselves in is that we cannot rely on having a bank, even a regional one, fail to a great extent because we know the impact that that has on real people on depositors, of which have not been the issue in this particular case. But there is stresses.

There's reports on a daily basis of large office buildings in areas like Los Angeles and other places that are selling for 50% less than they went out just a few years ago or, in some cases, even lower than 50%. So it's hard to say that there's not issues with the real-estate sector. REITs have been an area that I think many people have wanted to like for some time based off of the interest-rate environment, but it's just not there yet.

So even though rising rates, in theory, should help banks, this flat yield curve has done nothing but actually hurt them and, in fact, has put pressure on things that are variable like commercial loans. So the picture remains pretty murky.