How Lenders Are Handling Non-Performing Loans in 2010

A perspective from Daniel Lisser, Managing Director of Johnson Capital
(re-printed with permission from Mr. Lisser)

As we head into the second half of 2010, the commercial real estate market appears to have hit bottom. While values are not yet increasing, they have stopped their sharp decline, and more investors are jumping in with the belief that the worst is over.

The spike in recent sales also indicates some positive momentum in the commercial real estate market. Using New York City as an example, three trophy office buildings - 125 Park Avenue, 340 Madison Avenue and 600 Lexington Avenue - changed hands over the past few months. All three properties saw strong investor interest and very aggressive pricing. I believe that these sales of well-located, well-leased, Class-A institutional quality buildings are not exactly an indication that the market is back, but of sellers taking advantage of the pent-up market demand for institutional quality assets.

Lenders’ reluctance to deal with the non-performing loans on their books may be playing a large role in preventing a full recovery of the commercial market. The longer lenders take to deal with the problem loans on their books, the longer it will take for the real estate market to improve. Why are lenders not selling their loans and moving on? I believe there are five main reasons for this lack of activity:

1. These lenders have a long memory. Many remember selling loans in the early 1990’s at very steep discounts only to see the note buyers reap strong returns as the market bounced back much quicker than anticipated. While the current cycle will likely not see that strong increase in values, lenders are still reluctant to sell their loans at a discount.

2. Any third party investor interested in purchasing a non-performing loan from a lender is most likely looking for a 15 percent-plus return on their investment. Once again, lenders feel they would be leaving money on the table by selling this kind of loan to a third-party investor.

3. Banks are not feeling any real pressure from the regulators and government. The main reason for the lack of deals in the market is likely the government’s decision not to push lenders to mark down their assets to their true value. The regulators seem to be more concerned with the bank’s capital base.

4. With bank’s funding costs practically negligible, the net interest margin they earn is at a very high level, enabling them to use earnings to build up their capital base.

5. Finally, lenders believe that they will fare much better by selling/modifying loans next year when they believe the market will be stronger and property values higher.

Founded in 1987, Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. The Johnson Capital Loan Sales Group works with community and regional banks to assist them in valuing their portfolios and creating proactive marketing plans to sell off commercial mortgages that maximize value. In general, they believe that the first bid is usually the best bid and, in most cases, proactively selling performing or non-performing loans sooner rather than later is a lender’s best strategy. To learn more, email: dlisser@johnsoncapital.com.

Daniel Lisser is a Managing Director of Johnson Capital Loan Sales Group, New York, N.Y., which recently moved their offices to 370 Lexington Avenue, Suite 2000, New York, NY 10017.

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D. Ebt Relief said...

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