I wanted to reach out to my regular blog readers to let them know about an opportunity that has come my way. I believe this opportunity will be a true benefit to my clients that I have represented in both loan sales and loan acquisition transactions over the past years.
As reular readers are likely aware I have been exclusively involved in the loan sale business for over twenty years, the past five as CEO of Benewolf, LLC. During my career I have constantly striven to be innovative and a market leader in this industry and to date I believe I have been succeeded at both.
The loan sale industry continues to change rapidly as banks become more heavily regulated. Profit margins are compressed for both loan sellers and loan buyers alike and the amount received by loan sellers or paid by loan buyers have to be the best very execution for each party.
I have been given the opportunity to become a part of the international real estate investment banking firm the Carlton Group in their New York City office and have gladly accepted. The Carlton Group is a major global player in the world of distressed real estate. I will be acting as the Managing Director of Loan Sales and Loan Valuations not only in the U.S. market but he fast emerging European markets as well.
The Carlton Group has an existing state of the art loan sales platform known as the Carlton Exchange (CEX) that I believe will be complimentary with the platform I developed and implemented while operating Benewolf. I look forward to continuing to do business with my clients and expect a seamless transition in bringing quality and accurately priced loans to the market.
You can always reach me on my cell phone worldwide at (405) 471-1265 or by email at pblount@carltongroup.com
You will see significant branding changes to the look and feel of this blog in the coming weeks however you can count on the same "pull no puches" content that my blog has contained since inception.
Four short years ago (or “long” years if you are in the financial services industry) on August 17th the “sub-prime” markets crashed and began the domino effect that led to the global financial disaster of the of 2008. The anniversary date is more like a wedding anniversary than a date signifying a one-time event, like the death of Elvis, because the carnage continues. The Great Depression officially lasted 12 years so maybe I’m jumping the gun wanting to hurry up and have this problem behind me.
Over the past few weeks the American Banker headlines read:
And the American Banker publication is on the bank’s team. You can only imagine what the rest of the press is writing about this nation’s banks.
I was truly hoping by this point that banks would have cleared their decks of distressed balance sheet loans and we would be on to something new like the next great bubble. The FDIC recently announced that there are fewer banks in trouble in Q3 2011. I find that hard to believe since we have still not seen the great purging of distressed loans we have anticipated since 2007.
Did asset quality improve without the rest of us knowing?
Did rents and occupancy rebound on a national level while we weren’t looking?
Was there some unknown force that caused hidden massive property appreciation whereby borrowers are no longer upside down in their mortgages?
Could these same big banks that are currently being sued by AG’s offices in fifty states, the Federal government and investors of every ilk be lying about asset quality and market conditions?
Surely not.
Happy fourth anniversary indeed, unfortunately I feel confident we will see anniversary number five.
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.
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.
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
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:
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.
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.
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.
Although this blog is typically dedicated to discussing loan sale issues between lenders and investors I want to take time today to discuss something dear to my heart and to me much more important than business.
In June of 2000 we lost our son Tyler in a rodeo accident at the Oklahoma High School Finals Rodeo. As a father that had no expeience in the loss of a child I immediately tried to "fix" the problem and quickly formed the Tyler Blount Memorial Foundation to ensure that Tyler's name would not be forgotten. Over the first few years after Tyler's death the foundation raised money and community support and built a new rodeo arena in Guthrie, Oklahoma in Tyler's name.
I have learned in the past eleven years that a father cannot "fix" the loss of a child no matter how hard he tries, how much money he spends and how many hours he spends doing so. But a father can keep a son's memory alive and we are going to continue do so this year by producing a community event to support our nation's troops.
On July 9, 2011 the Tyler Blount Memorial Arena is hosting a day long BBQ Cook Off that will include games, music, food and finish off with a professional open bull riding event. All ticket proceeds will go to the benefit of the Oklahoma Army National Guard friends and families support group.
There are many hundreds of families affected by the continued deployment of our National Guard and Reserve troops. I hope you will join us in our effort to support them and to make sure that they are not forgotten. Please consider this blog article a formal invitation to attend.
We are activley seeking sponsors at any price level and volunteers for the production and hosting of the event. If you are interested in making a donation or supporting this event please contact me at pblount@benewolf.com or 800-294-3074 or look for the event on Facebook - BBQ n Buckin Bulls. Donations can be made to the Tyler Blount Memorial Foundation at 115 N 2nd Street Guthrie, OK 73044
God Bless America!
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, will not 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.
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:
Now let’s take a look at the list of reasons lenders should hold REO properties:
So how long can a lender hold an REO? How long can you hold a hand-grenade?