BENEWOLF ... on banking

Loan Sale Market Update Q-3 2011

I wrote in early 2011 that the loan sale market appeared to be strengthening, that bid prices were steadily increasing and sellers were finally pulling the trigger on select transactions.  It appeared that the much maligned extend and pretend, pray and delay, modify and pacify tactics employed by most banks since 2007 had worked in their favor and we were about to finally see significant reductions of non-performing loans purged from balance sheets.  Not so much.

From what I am seeing today the market is in the “Junior High Phase,” where everyone is talking big about what they are “going” to do… but no one has “actually” done it.

I have personally heard numerous banks talk about their intent to offer billion dollar plus portfolios of distressed loan assets in 2011 and I have physically reviewed a significant number of very large portfolios but I have not seen anyone actually coming to the market with these assets much less pulling the trigger on a sale.

The CMBS markets appear to be a closed shop limited to very few buyers mostly consisting of Special Servicers exercising their first right of refusal to purchase.  The prices I see quoted on reports from groups such as Realpoint or Trepp are sub 50% of the unpaid loan balance and appear to be much lower that what I see and hear "banks" are receiving on similar credits which leads me to believe that if they “were” marketed in a “competitive bid” situation it was only to justify the Special Servicer’s low bid.    

The super regional and money center banks appear to be selling off select or easy to sell assets like multifamily or actual income producing loans themselves at reasonable prices but are leaving themselves with the “ugly,” more difficult loans in their held portfolio which will likely eat up any upside they received on the early “easy” sales when they finally do reach the market.

The unhealthy regional banks and the vast majority of community banks are still out of the market because insufficient capital prohibits them from taking the necessary market discount to sell non-performing assets in bulk. 

There are definitely a huge number of buyers waiting for a wave.  Most are extremely frustrated by the continued calm seas.  It will be interesting to see if the fourth quarter produces the typical wave action and if any lenders will graduate junior high and actually prove up their boasts.  My prediction is; that if the numbers of loans actually show up on the market as touted, that prices will “fall” significantly from those seen in the first three quarters of 2011.

The delay and pray ploy certainly got us from 30% to 65% bid levels since late 2007 however I don’t think we can expect to see the same type jump from 65% plus.  Sellers, you may have missed your window.

Upcoming Distressed Loan Workout Events

After thirty-five (35) years in the commercial real estate business, the past twenty (20) in distressed loan sales, it is fair to say that I have been to a few conferences.  I have been on the board of directors for a number of years of both the Risk Management Association (RMA) and of the Turnaround Management Association (TMA) serving as President of the TMA Oklahoma Chapter for 2010 and as such produced and hosted many distressed asset events.

Many of the distressed asset events I attend have a large number of "service providers" and small number of "lenders" represented and typically very few "qualified" bankers in attendance.  I attended my first IMN event in February 2011 in Ft. Lauderdale and my next in March in New York.   At both events I was pleasantly surprised at the number of executive level bankers in attendance and even more surprised at their interaction.

Although the agenda was quite packed, with most panels sitting less than an hour, the message was on point and the interactivity between the panelists and attendees was not just informative but immediately useful.  I could see where an attending seller or a buyer of distressed assets could go back to the office the following day and successfully implement many of the ideas and best practices.

I was impressed enough to commit both Benewolf and my partner Sperry Van Ness to attend, speak and sponsor three (3) more events in 2011.  I heard it said at the February IMN event that 2011 is "the year of the loan sale."  I began believe it then, I definitely believe it now.  Come join us in September in Chicago and Los Angeles and in Dallas in December, you will not be disappointed.

www.imn.org

Bank & Financial Institutions Special Assets Executive Forum on Real Estate Workouts

Chicago, IL - September 12-13

Los Angeles, CA - September 23-27

Dallas, TX - December 5-6

      

Loan Sales and Potential Lender Liability

Over the past year there has been a significant increase in the number of new loan sale advisory firms formed and appearing on the internet.  This is not a surprise considering the vast number of potential loan sellers in the market due to the ongoing real estate devaluation nationwide.

What is a surprise though is that many of these new companies, as well as a few more established firms, are “advertising” specific loans for sale and making public explicit loan collateral descriptions identifying project names, locations and even addresses.

The loan sale industry has always been known by its strict confidentiality practices.  The public advertising of loan sales much less the identification of specific loans has long been considered taboo in the loan sale industry for several reasons:

1. Most lender/sellers do not want to be identified as offering loans at a discount;
2. Borrower’s that become aware that their loan is being offered for sale as a result will likely expect a discounted payoff;
3. The borrower’s financial information is confidential and must not be shared with third parties by the lender except on a “need to know” basis by potential purchasers of the financial documents (notes) and then only under a strict confidentiality  agreement.  These confidentiality agreements almost always include a provision strictly prohibiting borrower contact.  There are a number of reasons for this but the primary reason is that the borrower is under no obligation to discuss their financial condition with anyone but the lender of record and most importantly it is prohibited under the Gramm Leach Bliley Act; 
4. The real estate that is the underlying collateral for the loans is “not” what’s for sale, only the financial note.  By advertising the specific collateral information it could mislead the potential investor/buyer that the real property securing the note is “readily” available, which is seldom the case.

I have on several occasions in past articles attempted to respond to the possible ramifications advertising loan sales and specific collateral addresses.  I recently took it a step further and polled twenty (20) of the top lender liability law firms in the nation and asked the following:

Hypothetical Situation: A property owner has his real property listed for sale; locates a potential buyer and enters into negotiation to purchase the property.  During the negotiation the buyer becomes aware the property owner’s “loan” is being advertised for sale.  The potential buyer then contacts the note seller (borrower’s lender) and negotiates a purchase of the “note” at a price far less than the property owner/seller is asking.  The buyer then ceases negotiation with the owner/seller and buys the note from the lender/seller. 

This note sale clearly impeded the owner/seller’s ability to sell his property and the ability to possibly recoup his equity and worked to the lender/seller’s favor by getting rid of a potential problem loan.

Question:  Would this action by the lender/seller expose the lending institution to a potential lender liability claim?

Of the twenty (20) law firms polled fourteen (14) responded.  None of the firms responding were aware of the practice of advertising loans for sale and none could state any known cases to refer to.  However all of the firms felt that such an action “could” lead to a lender liability claim.  The opinions only differed in “how” the potential buyer came to know about the loan being offered for sale.  Some felt that a lender could mitigate a claim by having a loan buyer sign a statement that they have not been in direct negotiation to purchase the collateral from the borrower.  But it was unanimous that by advertising a lender could not ensure the execution of a confidentiality agreement and therefore have “no” control over who did or did not speak to their borrower.

Oh, and they “all” had significant interest in just “where” to find these "advertisements" and announcements.  Of course I was glad to help.