Sperry Van Ness Asset Recovery Team powered by Benewolf

Sperry Van Ness A Distressed Asset Sales Force To Watch

By Pat Blount

If you are fortunate you get to be involved in the development of a cutting edge business idea once in your life.  If you are really lucky you get to do so during a paradigm shift in that industry.  So call me Mr. Lucky.

I had the opportunity to spend two days last week speaking to and getting to know almost 200 of the 900+ real estate professionals associated with Sperry Van Ness Commercial Real Estate Advisors.  This lucky break for me began last fall when I entered into an alliance with the 65 member Sperry Van Ness Asset Recovery Team.  The concept for the alliance sounded quite simple; I would offer SVN Asset Recovery Team members loan sale advisory capabilities via my company Benewolf and they in turn would afford Benewolf the ability to sell fee simple REO properties across the United States through independently owned Sperry Van Ness offices.

I said “sounded” simple, in fact it was anything “but” simple.  As much as distressed real estate and loans secured by distressed real estate sound similar we found vast differences in the way we approached a listing, conducted a valuation, marketed the product and closed a deal.  Our sellers were different, our buyers were different and our culture was different.

During this same time period Q4 2010 to Q2 2011 not only were Sperry Van Ness and Benewolf going through a steep learning curve, the distressed asset industry was maturing and changing rapidly.  Going and gone were the steep discounts, significant bulk sales were becoming fewer, quality collateral was getting harder to find.  It seemed that the FDIC’s loss share program was beginning to have an impact on the market by holding distressed loan product off the market indefinitely.  Loan sale prices were increasing steadily and with select product, such as Class A multifamily, demand and sale prices were even increasing astronomically.  As much as I hate to admit it, the “extend and pretend” and the “delay and pray” tactic lenders had been chastised for in the press during a period from 2008-2010 were clearly working.       

Although almost all of the SVN Asset Recovery team members went through an extensive training program with Benewolf to learn the nuances of a loan sale transaction one of the many things we learned during this gestation period is that the SVN commercial real estate advisors did not “each” need to become experts in the multiple facets of a distressed asset sale to be successful, they just needed to have faith in and know that their alliance partner Benewolf possessed the necessary expertise to succeed and that they could count on Benewolf to follow through on the many referrals, both buyers and sellers, that are being generated by the Sperry Van Ness Asset Recovery Team Advisors.

Last fall Benewolf also made the commitment to focus exclusively on the sale of loans secured by a first lien position on improved commercial real estate and to primarily offer those loans on a “one off” basis as compared with “bulk sales” that most of the industry was offering.  Given the current bid price levels Benewolf is achieving today and the course the lending industry has taken to “hold” until they receive a fair market price this is proving to be a positive commitment and correct market call.

In Q1 2011 the Sperry Van Ness Asset Recovery Team made another firm alliance further cementing their place as the industry leader in the distressed arena.  This alliance is with RW Kline Companies.  Bob Kline’s company is a FINRA Registered Broker Dealer that has expertise not only in loan acquisitions and workouts but in government contracting and has a thorough understanding of the Commercial Mortgage Backed Securities (CMBS) industry.  The affiliation of Sperry Van Ness with Benewolf and RW Kline positions these three companies acting in concert like no other in the industry. 

I had the continued good luck this week to witness the “team” coming together for the first time on a national level in a formal introduction to both the SVN corporate team and many individual SVN franchise owners that were not part of the Asset Recovery Team we had been working with for eight months.  I also had the good fortune to hear Sperry Van Ness’s president Kevin Maggiacomo lay out the vision that will take the company to a level unparalleled in the commercial real estate brokerage industry.  This company has, not will, combined real estate auctions, loan sales, loan workouts, commercial brokerage, leasing and property management services together with technology and social media in a way that will benefit their clients like never before.  I am proud to be a part of this venture, I invite you to watch us and join us.

 

Distressed Real Estate Brokerage

Economic downturn combined with over building can cause increased vacancy in commercial real estate; which can cause a decrease in commercial real estate income and therefore value; that can cause borrower distress; which in turn can cause distress in the loan securing the commercial real estate; which will cause distress in the lender’s balance sheet; which can cause distress in a bank’s financial condition.  

The distress can result in a foreclosure; which will result in a distressed sale; which further impacts real estate values; creating a vicious cycle that affects investors/property owners and real estate lenders.   A significant concentration of this type of loan and real estate collateral can cause a lender enough regulatory and financial distress to cause a lender/institution to fail.  

When these events combine often enough in a specific area, city, state or even region; the entire area, city, state or region can be affected causing a cataclysmic decline in real estate values.  This decline not only affects the investor/property owner/borrower and lender/financial institutions that were in line to gain from the commercial real estate operation and appreciation had that been their collective goal but to everyone residing in those areas that were not in line to share those gains or losses. 

Of course we have all been witness to the global financial meltdown of 2007-20?? That was a direct result of a national real estate and real estate mortgage bubble.  Clearly investors in financial stocks, mortgages and real estate funds have lost billions.  It has been estimated that $6.3 trillion dollars in residential equity has been lost since the 2007 decline in value began.  I have not read a credible number for commercial real estate losses but one can certainly assume it will be a multi-trillion dollar figure.

In any event no one “forced” any of these investor/owners to buy real estate and by investing they assumed the risk of loss.  Unfortunately there are many people who became affected by the fallout from this ongoing crisis that had not invested in real estate and real estate lending without the benefit of upside or the ability to evaluate the financial risk.  Number one is the United States taxpayer. 

Bondholders and other passive investors continue to lose, or are at risk of losing, billions of dollars, a story that has been well reported and can be heard or read about daily.  One group that does not receive a lot of press coverage that has lost as much as any other industry or maybe more percentage wise and continues to lose is the real estate brokerage community.  Both residential and commercial brokers have been equally affected.  I cannot speak for residential brokers since I am not directly involved in that industry but I do feel qualified to speak on behalf of commercial real estate brokers and commercial real estate loan sale advisors.

The vast majority of real estate brokers have worked diligently both before the crisis began and as it continues to unfold to bring a valued added service to buyers and sellers in the acquisition and disposition of real estate and loans secured by real estate.   Unfortunately, there are few sellers and buyers today that feel this is an opportune time to sell their property and as a result most real estate professionals are earning a fraction of the fee income they had enjoyed for decades.

The one segment of sellers in the market that “is” selling, or considering selling, is financial institutions.  That’s the good news.  The bad news is that because of the bulk of the product that these sellers control sales commissions have been, and are continuing to be, compressed.  The lure of multiple listings from banks and special servicers combined with the lack of other opportunities has caused brokers to drastically cut their fees.  This cut could not come at a worse time since these mega sellers not only expect a discounted commission they also expect more services such as free broker price opinions as well as the ability for the broker/advisor to offer services such as electronic bidding, underwriting and multi product marketing services such as short sale negotiation, bulk REO sales and whole loan sales.

To compound the problem of discounted fees many of these lender/sellers have no intention of selling at a significant discount in order to facilitate a quick sale and in fact may not be a realistic seller at all and are just listing the properties or loans to appease the banking regulators.

I have been involved in numerous competitive listing situations where the advisor told the lender/seller whatever they wanted to hear regarding a higher than market valuation in order to secure a listing in hope that the lender/seller will lower their price expectation once they see what value the market actually brings.  Unfortunately this is seldom the result.

In some cases broker/advisors bring this downward pressure on themselves by unnecessarily cutting fees by either not believing that they truly bring a value add or by sheer desperation.  In other cases I believe lenders and servicers are acting predatorily taking advantage of the distressed market and trying to offset their losses onto the brokerage community.

We have seen a massive and continued consolidation in the banking and lending industry.  I believe we will see a similar consolidation in the commercial real estate brokerage and loan sale industry.  I hope that brokers and advisors will see this disturbing fee reduction trend as unnecessary and unprofessional and I hope that competent brokers and advisors will believe in their valuable services and remember that a lender/seller’s losses have nothing to do with the broker/advisor’s services and they have the right and obligation to hold firm on their fees and earnings.      

I spend a lot of time studying and writing about distressed loans and distressed lending.  Even though I make my living from sales commissions I sometimes forget about the plight of the broker/advisor.  I want to thank my son Matt who is a senior loan trader at Benewolf for encouraging me to write about this timely subject and hope that readers will share this post with other real estate professionals.      

 

Distressed Real Estate Investors vs. Distressed Loan Investors

I’ve been selling real estate since 1975 and distressed loans secured by real estate for over two decades so it’s reasonable to say I’ve met a significant number of investors in my life both on the real estate and the loan side of the aisle.

Today with the huge inventories of commercial real estate clogging lender balance sheets and the limited desire by investors to pay “retail prices” I am seeing a significant influx of potential buyers considering coming over to the loan buyer’s side.

This could be both good and bad.  It could be good for the market to see an increase in the number of potential buyers for any given asset.  It could be bad for investors who don’t have the skill set or the personality make up to be a loan “collector.”

Consider the events of a typical distressed real estate transaction:

Seller (typically a lender) has need for cash or cash equivalent;

Seller decides it’s an opportune time to SELL his real estate investment property;

Seller engages a real estate broker and assesses projected net on sale of real estate;

Buyer decides it’s an opportune time to BUY distressed real estate investment property;

Buyer locates suitable investment property and makes an offer to the seller;

An agreeable price is negotiated, probably not as LOW as the buyer wants and likely not as HIGH as the seller wants but they reach an agreement and close, both getting what they ultimately want, the seller cash and the buyer real estate.

 Now consider the events of a typical distressed loan sale:

 The seller (definitely a lender) has a need to get rid of a problem loan secured by real estate.  The reason or motivation for the sale could come from a number of sources:

                              A regulatory agency;

                              An accounting issue;

                              A legal issue;

                              An internal bank directive;

                              The borrower’s actions;

                                             Non payment;

                                             Litigation;

                                             Bankruptcy;

In any event the loan sale is typically not of the lender’s choosing.  Certainly the original goal for making the loan, timely repayment in full with interest, willnot be met.

In addition to the “seller” there is another party to consider, the borrower.  The borrower’s original goal of buying a real estate investment, operating it and/or selling it for a profit certainly will not be met.  Plus the borrower is facing the following issues:

               The payment of interest;

               The payment of taxes;

               The lack of operating capital;

               The need for additional capital injection;

               The need for additional guarantees;

               The need for additional collateral;

               A possible lawsuit;

               A possible foreclosure;

               A possible deficiency judgment;

               Significant legal fees;

                And the possibility of the subject loan’s quality, status and contamination affecting  his other investments, his livelihood or even his entire net worth.

Clearly both the distressed seller and the distressed borrower put the “stress” in “distress.”  Now enter the “loan buyer.”  In order to be “successful” at his job he has to buy the loan cheap enough from the lender/seller to cover the unknown risks of associating with the distressed borrower, then negotiate or force the distressed borrower to act in “his” best interest.  In short the loan buyer’s world is the world of adversity combined with the world of prudent real estate investment.  I am not saying that loan buyer’s prey on the misfortune of others but their world does have a number of “vulture like” qualities such as the ability to thrive on things most others would reject.  They must pick up the pieces of a failed project, a failed investment and a failed lender/borrower relationship and somehow re-shape an ill conceived or ill-timed plan into a coherent investment with a viable exit scenario. 

What I am trying to show is that loan buying requires a significantly different skill set than real estate investing and before a investor jumps into loan acquisitions with both feet he needs to be sure the possesses the following traits:

Patience – Lender/sellers move glacially.  Borrowers have been trained by lenders that moving slow is okay.  Courts are backed up and move equally slowly.  Loan buyers need to be prepared to move at a pace that they cannot control.

Dedication – Loan buyers will have to kiss a lot of frogs to find a prince in the loan acquisition game.  Buyers will review many loans to find a suitable candidate then likely submit a significant number of bids before actually winning any.

Toughness – Loan sellers, their legal counsel, distressed borrowers, their counsel, judges and even loans sale advisors aren’t pushovers.  Loan buyers will also encounter many sad stories and both financial and personal tragedies.   

Ability to Read People – Lender/sellers, advisors, attorneys and most of all borrowers have their own agendas and loan buyers can be sure those agendas don’t match theirs.  Loan buyers need to be able to read between the lines.

Highly Verbal – Excellent communication skills are a must in dealing with both the acquisition and collection of the loans.  How and what loan buyers say to lenders will determine if they even get a seat at the table.  How and what loan buyers say to borrowers will largely determine whether or not they find themselves in an adversarial position.  

Willing to Learn – Nothing that an investor has done in past real estate investments can really prepare him for dealing with unrealistic and unmotivated lender/sellers, and the many obstacles that will be thrown at them by sophisticated borrowers.

Creative – Not just thinking outside the box but totally reconfiguring the box.  By the time a loan is offered for sale the lender/seller and the borrower have likely tried many avenues for restructure and repayment that have failed.  Loan buyers need to be prepared to bring something new to the deal.  

Risk Taker – Needless to say this is going to be the most important trait of a loan buyer.  The risks can be considerable, from known risk, to unknown risk to perceived risk.  Again, remember a loan buyer has to come to the table with a price high enough to buy but low enough to cover “all” the risks.

Successful loan buying is a lot more complex than just becoming a landlord.  Happy hunting.

 

 

Bank Mythology 2011 - How Long Can A Bank Hold An REO?

There was a time someone could answer questions like “how long can a bank hold an REO?”  Today however the lines are blurred and bank rules are subject to multiple interpretations and vary by bank size, bank condition, regulatory agency and if in fact the rule is even being enforced.

Regulatory guidelines aside you have to ask yourself “Why a bank would want to hold an REO for any term in a market that offers no visible upside in the foreseeable future.  I don’t see how anyone can argue with the following facts:   

• There is an unprecedented amount or REO property currently on the market.
• There is an even more unprecedented amount of “shadow inventory” off of the market.
• There is a slowing but still continued influx of new foreclosures.
• Although sales activity has increased over the past two quarters the largest percentage of sales are from lenders which impacts owner sellers and are at best considered distressed.
• Leasing activity for office continues to be slow in most regions and the per foot cost of Tenant Improvements typically exceeds the per foot sale price of an REO property.
• Retail leasing continues to be slow with few big tenants coming to the market except for those moving to similar space for significantly “less” rent. 
• Small mom and pop tenants continue to be in short supply since there are few, if any, lenders lending money for improvements to this type of tenant.
• Hospitality properties are holding steady, but there is no growth in sight.
• Warehouse leases are improving in select areas but with ultra competitive lease rates.
• It is highly anticipated that interest rates will rise in the coming quarters.
• Although inflation fears are strong it appears that inflation will be limited to consumables (food, gas, commodities) not likely real estate.
• There is certainly no tax incentive for real estate on the horizon.
• Municipalities with their deficits are not going to decrease taxes voluntarily and certainly not for “wealthy” lenders.
• And of course lenders will continue to reap the many benefits of having bank owned properties:
  • Property management fees
  • Property leasing fees
  • Tenant improvement costs
  • Real estate taxes
  • Insurance at increased rates due to non owner occupied and vacant properties
  • Vandalism
  • Liability
    • Fire
    • Hazard
    • Personal Injury
    • Environmental
    • Structural
  • Maintenance
  • Property Condition Assessment costs
  • New Appraisal costs
  • Title issues
  • Real Estate Sales Commission
• Oh yeah, and unlimited amounts of man hours to administrate all of the above.

Now let’s take a look at the list of reasons lenders should hold REO properties:

• They may become worth more money over time if the market improves.

So how long can a lender hold an REO?  How long can you hold a hand-grenade?

 

Distressed Loan Sale Comparables and Valuations

I just returned from attending and speaking at my third distressed asset conference in as many months.  Again my number one take away from the conference by bankers and investors alike is that “no one” holds any stock or value in today’s real estate appraisals.  Banks still contend they need them to appease regulators but for the most part they believe that the appraisals are grossly “overvalued” except when they are grossly “undervalued.”

The reason no one can believe appraisals today is that there is no mechanism in place that can accurately track loan sales results.  Loans are typically sold at a discount to the unpaid principal balance and today that percentage is significantly less than Par.  The only “recorded” information upon the sale and transfer of a loan sale is the Assignment of Note or Mortgage.  That Assignment refers only to the "original" Note amount and has no reference to the purchase price of the Note.  As a result there is no way for a third party to determine the sales price and no way for appraisers to gauge collateral value based on comparable sales.

For a variety of reasons lenders are not going to voluntarily publicize the loan sales results and they typically are not going to allow their loan sale advisors to publish sales results.  Loan buyers have no incentive to publish what they paid for the loan for several reasons, one being the obvious reason that if borrowers knew what type of discount the investor/buyer received that they would in turn expect a discounted payoff.

Unbelievably there are a few national advisory firms advertising that they have the ability to accurately gauge the value of the CMBS market and have the ability to gauge the depth and breadth of the entire loan sales market.  My response to their claims is “prove it.”  I am confident that they cannot.  Loan sales are announced every day that only advertise the aggregate amount being offered for sale.  There is no mention of the seller, the identity of the loans or the identity of the collateral, in short results are untraceable.  Further there is never a follow on announcement of the sale results, how many loans actually sold, if any, or at what price.  So how are these firms coming up with these magic numbers?

Don’t stop reading now, it gets even more bizarre.  Today’s headline in American Banker reads “Four States Weigh Bills to Make Appraisers Disregard Foreclosures.”  The article says “Four states are considering legislation that would prohibit or restrict appraisers from using distressed sales, such as those of foreclosed properties, as comparable sales when assessing the value of a home.” “The rationale for the bills in Illinois, Nevada, Missouri and Maryland is that the prevalence of foreclosures and short sales — almost four out of 10 sales in the country are distressed — is distorting the markets.”

Welcome to the Twilight Zone of real estate lending and investing 2011.

 

The Bigger They Are...The Harder They "Lie"

I have included a link to an unbelievable article from www.propublica.org regarding the proposed mortgage fraud settlements with the top four (4) money center banks.  If you are a mortgage holder, mortgage buyer, mortgagor, bank stock investor or just an average citizen this should concern you deeply.

Read carefully the dollar amount of second liens held by the top four (4) U.S. banks, $408 billion, over half the total TARP amount and over two times today's repoted estimate of damage as a result of Japan's earthquake and ensuing tsunami.

The article describes how a clause in the settlement agreement will let the big four banks treat second mortgages like first and allow the banks to write down the seconds at the same rate as the first mortgages, i.e. a 10% write down on the first would equate a 10% write down on the second.  Folks, I am no math wizard but when your first lien mortgage is higher than your property value, wouldn't that mean that your second lien position is worthless?

The article goes on to describe a scenario that if these top four bank's second lien mortgage portfolio is worth only 50% on the dollar the result could be catastrophic.  Fifty cents?  They are worth ZERO in today's market. 

We are certainly still kicking the can in Q1 2011, unfortunately it isn't going very far down the road.

 

Article Link: http://www.propublica.org/article/behind-administration-spin-bailout-still-123-billion-in-the-red

 

Kicking the Can in a Headwind

An article published March 3, 2011 in American Banker “A Law Born of Crisis Looks Helpless to Prevent Another One” was written to be alarming and eye opening.  But is likely is neither to those of us involved in the loan sale business.

The article quotes two respected sources on both sides of the Atlantic, Adair Turner, Chairman of the Financial Services Authority who is responsible for the regulation of the financial services industry in the United Kingdom and Tom Hoeing, President of the Federal Reserve Bank of Kansas City.

Turner said that the reform enacted over the past three years and the increased capital requirements have not been enough to reduce the probability and severity of a future financial crisis.  The Fed's Mr. Hoeing said “In spite of all that’s been done and debated the soundness of the largest financial institutions and the systemic risks they continue to pose is no better." He finished by saying "In my view, it is even worse than before the crisis.”  

Those of us who work in or with bank special asset departments know that relatively few distressed loans have been shed over the past three years.  The FDIC Q4 2010 U.S. Bank condition balance sheet shows $533 billion in past due and non performing loans, plus an OREO balance of $53 billion.  That number totaled equals 4.5% of the total assets held by banks.  Until recent years it was assumed that if a bank’s non-performing loans ever exceeded 5% that it was likely to fail.  

While we are on the NPA percentage subject, the February 2011 CMBS report shows aggregate delinquency at 8.213%, a number could get you on the Texas Ratio problem bank list if you are a thrift, but we are only talking about a $768 billion dollar problem.

I get really confused when banks say they have shed billions in unwanted loans then hear a nationally recognized loan sale advisor say on television that $26 billion in loans were offered last year and only "half" was sold.  At that rate ($13 billion per year) it will take 38 years to move through the present bank inventory, add the CMBS inventory and you can double that number. 

If you examine the CMBS stats you will see that the prices for liquidated loans thus far in 2011 show an average loss of 46.5%.  If you look at the FDIC loan sale results for 2010 it shows that the average "recovery" or sale price of loans in 2010 was 55.1% or an average "loss" of 44.9% almost identical to the CMBS loss.  

So by reckoning that 50% of all offered loans did not sell, likely as a result of the price was too low, that would mean that we now have at least $13 billion put back into banks in 2010 that conceptually have a value of less than 55.1% therefore one could assume the present market value of those loans are less than $6.5 billion.  The probable reason those did not sell is that the selling bank did not have the capital to take the loss; or that the bank thought that the market was improving so fast that they could afford wait it out.  They likely claimed the latter in either case.     

If you could apply those same formulas of the actual 2010 results to the existing bank inventory you could make the case that the $533 billion non-performing loans held by banks are actually only worth $271 billion or a shortfall of $262 billion or about 1/3 of the total TARP allocation in 2008.

In summary this could explain one of two things; (1) that the massive 50%+ reduction in loan loss reserves by all but one of the “too big to fail” U.S. money center banks was prudent; or (2) that Messers Turner and Hoeing are right on the money in their statements.

Lean into that wind when you kick. 

 

WARNING – DANGER – Loan Sale Confidentiality Practices

I am seeing lenders and loan sale advisors doing something today that astounds me and that I feel will not only have negative ramifications for both the lenders and advisors involved but for the entire loan sale  industry.  That something is the “advertising” of loans for sale via the Internet and showing the loan description, the collateral photograph and the collateral address without first obtaining a confidentiality agreement from the prospective buyers.

I have had many conversations with lender’s attorneys over the past twenty years as a loan sale advisor regarding the securities aspect of loan sales.  The majority, but not vast majority, of those conversations resulted in the attorney acquiescing and stating that although they considered whole loans a “security” that there was no clear cut regulation prohibiting a loan sale and that there was no licensing body, such as the NASD, or now FINRA, regulating the sale and marketing of whole loans.  Other considerations that affected positive decisions to agree to a loan sale were the fact that potential buyers were to be Accredited Investors; the loan would not be advertised for sale; that strict Confidentiality Agreements would be adhered to by both advisors and prospective buyers; and the significance that many peer lenders have been successfully conducting loan sales for many years without issue.

Then in 1999 the passage of the Gramm Leach Bliley Act (GLBA) and in 2000 the adoption of GLBA by the SEC in the formation of Regulation S-P again muddied the water as to “what confidential information is allowed to be shared by financial institutions and with whom.”  There appears to be a consensus that Reg. P as it is known is limited to “consumer” loans and does not apply to loans for “commercial” purposes.  However loan documents between borrowers and lenders can create many exceptions to these laws and regulations.  For a current insight into what these issues could be as it relates to loan sale I recommended reading a very clear and concise article by the McGuire Woods Law Firm at:

 http://www.mondaq.com/unitedstates/article.asp?articleid=121576

There is no argument that loan sale laypersons and seasoned professionals alike can become confused by what information is considered “allowed” to be shared with non financial institutions with or without a Confidentiality Agreement.  So let me try to quell the confusion here by simply stating what I see to be obvious:

All loan sale Confidentiality Agreements that I have ever received from a lender (I’m sure it’s well over 1,000 in 20 years) or have recently reviewed on the Internet sites advertising loan sales and that identify specific loans, collateral and collateral addresses contain a provision that specifically “prohibits” contact of the borrower or borrower's representative by the reviewer for “any” reason.

Understood, however that applies only to those who have “signed” the agreement.  Every loan buyer and real estate professional knows how to locate the name of the owner of a property when they know just the location not to mention the specific address.  By knowing the name of the property owner it’s very easy to look up the lien recording information thereby having the name of both the borrower and the lender.

This being the case poses the question: “How do you police “non-registrants” from contacting the borrower?”

Answer: “You cannot.”

Experience tells me that “bad” things can happen when a borrower is notified of an upcoming loan sale.  Experience also tells me that “worse” things can happen when potential buyers contact those borrowers.  I have not personally witnessed what happens when those same borrowers obtain legal counsel and file lender liability claims for breach of confidentiality but I have heard firsthand accounts of the results and they ain’t pretty.

I’ve said it before lenders, you know better; advisors you should know better.  It does not take a fortune teller, psychic or a sage to see the future if this practice continues.  To quote the movie "There will be blood."

 

2011 Distressed Asset Outlook

I attended the Interface Distressed Asset Conference this week in Miami Florida, not only was the temperature abnormally cold so was the outlook for commercial real estate values as we head into 2011.

There were forty-five (45) panelists and speakers with various backgrounds including loan sale advisors, appraisers, CMBS special servicers, commercial real estate brokers, receivers and lenders.  The consensus was that we have likely hit bottom in the residential markets (excluding land) but “not” yet hit bottom in the commercial real estate world.  This is due to two major factors (1) the massive number of CMBS maturities looming for 2011 and 2012 and (2) the off market or “shadow inventory” of bank held delinquent CRE loans that are a result of the “delay and pray” or “extend and pretend” strategy employed by most lenders during the period from 2008-2010.

As a matter of fact a moderator asked the question; “Are we past the “extend and pretend” cycle?” and most panelists answered “Yes.”  My opinion and comment is that we may be past “that” period but we are now in the “modify and pacify” period meaning that lenders are continuing to modify loans to pacify regulators.

Another overall consensus was that both investors and lenders believe most appraisals are “absolutely worthless.”  All believe that you can still get an appraisal at “any value” you wish.  But since the regulators continue to accept the appraisals it's “game on.”   It was interesting to note that although appraisers are the pariah in the market, Broker’s Opinion of Value  (BOV’s) are considered by both lenders and investors as quite valuable, extremely reliable and very necessary when determining current market value.  This may be something real estate brokers might consider the next time they conduct BOV for $150.00 or free of charge for a lender.

I find it interesting that when an appraisal is considered too high that “nobody” believes it, but when one is clearly too low that “everybody” believes it.         

In summary the mood was predominately upbeat, this could be because the speakers largely consisted of advisors, brokers and receivers but it appears that the transaction gridlock between lenders and investors has broken for now.  As a result commercial real estate values are expected to stay flat at best for the near term but clearly the purging of the massive inventories of nonperforming loans and lender owned distressed assets is necessary for a fluid marketplace and to create an opportunity for value to return to the commercial real estate market.  It does appear at the moment as one speaker said; “2011, the year of the loan sale.”

 

 

Lender Fatigue 2011

In the days prior to what became known as the sub-prime crisis we would talk to banks about "Lender Fatigue" loans.  You know, same borrower, same problem, different year.  All banks had a few.

Today Lender Fatigue has taken on a whole new meaning.  It can describe everything from coming to work, to dealing with impossible situations, to forecasting how many months, quarters, years, or even decades is this downturn going to last.

However in 2011 the original description is now more appropriate than ever.  Problem borrowers in this market are even a bigger problem and are now accompanied by marginal borrowers.  These borrowers become a cancer on a loan portfolio because of the time and effort they require to manage.  Lenders are well advised to rid their portfolios of this type of borrower at any cost.  One thing for certain, Lender Fatigue loans don't get better.