From the sddt.com:
More distressed assets are expected to go back to their lenders — pushing those lenders to the brink of oblivion or over the edge.
The status of distressed loans, properties, failing banks and how long it will take to for these to work through the system were among the topics at the Mortgage Bankers Association’s Commercial Real Estate Real Estate Finance/Multifamily Housing Convention & Expo session at the Manchester Grand Hyatt on Tuesday.
William Landis, Rialto Capital chief investment officer, said with 800 to 1,000 troubled banks across the country, a tidal wave of closed institutions may be expected this year and next.
“The FDIC was moving very slowly, but the big vomit is coming in 2011 and 2012,” Landis said. “I would hope that by 2013 the bulk would be through the system. The economy should be stabilizing by then.”
Landis did suggest that the bad loans that will have led to many of those bank failures should have also largely played themselves out by 2013, as well.
The Rialto Capital executive added that even hotels, which were hammered by the recession, are rebounding already. “Hotel valuations have gone up dramatically. Most of those troubles will be cleared up pretty soon,” Landis said.
William Hoffman, Trigild Inc. president, isn’t so sure.
“They say this is getting better, but they ignore the explosion of loan maturities that will be happening within the next couple of years,” Hoffman said.
Michael J. Lesser, Eastdil Secured managing director, said at least $350 billion in commercial loans are expected to mature this year alone. He said about $90 billion of these are currently in some sort of special services status.
Kevin Donahue, PNC Real Estate/Midland Loan Services senior vice president, agreed that the maturing loan problem isn’t going to go away overnight. “I don’t expect the problems to resolve anytime soon,” Donahue said adding that these aren’t exactly pristine properties. “The nature of the assets are bad and the nature of the borrowers is worse.”
It is hotels that give Hoffman the most cause for concern. “We’re going to see a lot more hotel owners tossing the keys back. It’s that far upside down. That’s going to be a very big deal,” Hoffman said.
Donahue added that overleveraging is the biggest issue and that highly overpriced hotels purchased at the top of the market are a major reason why.
One of those hotels was the Hotel del Coronado. The landmark and future development rights were purchased by a group led by Strategic Hotels & Resorts for $745 million in 2005 at the peak of the market.
By 2009, the loan was showing strain and it went into special servicing last year before a Blackstone Group entity agreed to pay $425 million for a 60 percent stake in the hotel within the past few days.
The hotel is now valued at about $590 million. The indebtedness had been about $620 million prior to the restructuring.
Hotels and hotel loans aren’t the only kinds of assets that bring cause for concern.
Hoffman, who has handled everything from resorts to residential properties, said he is also seeing quite a number of self-storage facilities that smaller investors bought into during the middle of the last decade get into trouble.
Lesser said banks are becoming more proactive about working through any troubled loans “because they want to begin originating again.”
“Banks are building up a lot more cash reserves now,” Lesser said.
Lesser also said while lenders are becoming increasingly willing to take commercial real estate back and re-sell it, sometimes it makes much more sense to sell the notes.
Meanwhile, for receivers and others in the special servicing world,Landis warned that they shouldn’t work too hard only to have nothing to show for their efforts.
“We have 1,200 loans under $400,000,” Landis said. “You don’t want to chew up a lot of legal costs pursuing a $200,000 loan.”
So we haven’t seen the bottom yet?
I think a crazy thing happens when these guys get in front of a microphone.
They know people come to hear scoop, and because all they hear on TV is negativity, they think they should bad-talk the market. The grittier, the better.
900+ banks on the troubled list, soon to top 1,000 probably by mid-year.
Once you’re on it, it’s just like a foreclosure:
-A few will get bought out/merge at some point with another. (the house has been sold or refi’d out)
-A small few more miraculously fix things and are scot-free. (the loan is brought back current)
-The rest are just biding their time and waiting for their name to be drawn out of the hat for FDIC Friday. (the foreclosure finally or quickly happens)
Takes anywhere from 1-3 years these days for the bank to fail once on the list…
It’s a great time to be a buyer of distressed properties. There are probably a bunch of hotels and other commercial properties that can be purchased for 50 cents on the dollar or less.
As for a self-storage facility, I don’t see how you can get in trouble with one of those. Those are licenses to print money. You build them on cheap industrial land cheaply (cinder block buildings with tin roofs, no plumbing, and minimal electrical). You charge sometimes charge more per square foot than your typical apartment building does. Plus, if they don’t pay, you get to auction off their stuff! You really have to be clueless to screw one of those up.