A number of my friends have assignments to advise lenders on what they have on their book and what to do to fix the problem loans. They are finding an amazing lack of knowledge at the lenders, and bad files even on large loans. The special servicers are overwhelmed and have staffed up in some cases with young people who are not really capable of understanding the real estate. In addition, special servicers are under no pressure to take action. Their fees stop if they foreclose and sell, and the bondholders are still hoping that time will heal all wounds. Because they are overwhelmed, it takes them months to get to try to understand any one asset, while the borrower is in a hurry to fix his problem or give back the keys and get out from under.

Some of the big problems in trying to fix the loan book are docs are often missing, they are poorly drafted, some key items of collateral were not secured, intercreditor agreements do not really work well in some cases, and often the bank loan officers or people at special servicers do not know or understand the asset. In a number of cases they do not even understand what they need to know. While we all know a lot of loans were made with no real underwriting, the problem now is the people who are supposed to deal with the problems do not know how to underwrite either. In short, the lack of knowledge at lenders of all types which caused the mess, is not changed, and many lenders do not really want to have a consultant tell them they should write down their book which will mean capital deficiencies.

Further complicating the fix is the number of small banks who made local loans, and now the bank is out of business or will be within a year. These banks cannot make new loans and likely do not have any staff capable of intelligent restructuring. There have already been 240 banks closed by the FDIC over the last 18 months or so, and there are likely another 200-400 to go. If the economy continues to be slow to improve, which is likely, and with the confusion sewn by FinReg, the number of closed banks will probably be closer to the high end. In the meantime getting new loans for small and mid size assets is difficult, and finding lenders for secondary cities is very hard. There may be a lot of capital around, but it is not for the vast number of smaller assets that are way over levered.