But not all the small stuff is good, according to panelists. One of the huge channels for a real estate investor is the FDIC, and a lot of that real estate, according to John Brady, head of global real estate at Oaktree Capital Management, “is a pile of crap.”

He expects to see the massive pile—which consists of local regional assets, boarded up waffle houses, an apartment 60 miles outside of Atlanta, or a shack with a marsh standing in the way—continuing to build. “A lot of them are broken real estate deals,” he said. “This pile of crap is going to have to get dealt with and working through it will take time,” he said, “and the government is carefully moderating the outflow.”

Brady expressed worry about the problems ahead because many of the FDIC assets are trading at much more than they should be trading for because of the low transaction volume. “There are investors who feel like, if they do the government deal, they have seven years before anyone knows it was a bad deal.” And in seven years, he says, “they are back in business and might feel like maybe it won’t really matter.”

It is all junk, added Bill Lindsay, founding partner of Pacific Coast Capital Partners. “The first asset I looked at was a vacant one-acre plot in Little Rock, AR.”

Lowe agreed that the really small-balance assets are junk and can’t be underwritten. “There are a lot of people out there who don’t believe that you have to underwrite stuff,” he said. “We only finance stuff that we can underwrite and we only finance people who buy stuff when they can underwrite it. The best deals come from desperate sellers if you are a buyer.”

Lindsay pointed out that his firm’s average equity investment is probably $15 million to $20 million. “We are looking to make loans on assets that are coming out of broken capital structures,” he said. “On the equity side, there is way too much money chasing way too few deals and if the deal has a bow around it, it is truly insane.”

Brady agreed, pointing out that the “new normal” on the investment side is that a lot of capital is chasing a very small number of deals. “If you don’t have a fairly substantial debt trading capability, restructuring potential, bankruptcy knowledge and the additional skills beyond real estate, it is hard today to see deal flow.”

Brady added that he is still seeing a lot of the “extend and pretend environment” out there. His preference is to “work arm-in-arm with borrowers who are ready to face reality and move forward.

Most of what Sam Freshman, president and founder of Standard Management Co., is doing in this “new normal” is financing a gap in bridge lending. His firm’s preference is apartments, but it also considers other product types where there is strong potential cash flow. “We are hoping that at some point, the extend and pretend will end,” he said.

What asked if lenders are going to be selling more product in 2011, Lindsay said that in the 90s, as a lender, it was forbidden to sell the note at a discount to the borrower. Now, it is done all the time. “The commercial reality is that often times, borrowers control their workouts,” he said. “If you can solve the problem for a bank, you can make a deal.”

There is a preference for making a deal with the borrower in most situations, added Freshman. “If you can get in with the borrower before it drags on too long, you can usually cut a pretty good deal, and that is part of the new normal: working with your clients,” he said. “Banks want to retain a lot of these borrowers, who were good customers. If you understand the complexities of note purchases, there is a discount factor, and there is an edge if you buy the notes,” he added.

Freshman pointed out that one of the major differences between now and seven years ago is that now, “no matter where you are in the spectrum, you’ve got to have skin in the deal to make a deal. You have to show that you’ve got new equity,” he said. “The skin in the deal isn’t the money that you lost in the project. It is based on the current value of the property in this current market.”

When panelists were asked about housing prices, they suggested watching the unemployment numbers. “Until we see some real movement on the employment front, we aren’t getting anywhere with housing prices,” said Freshman. “People need jobs to buy a house.”

On the other hand, Lindsay pointed out that housing affordability is creeping up to very high numbers. “I think the issue isn’t the price of the house, it is the giant shadow market of foreclosures,” he said. “With interest rates where they are and some consumer confidence, I think the housing market will recover.”