loans these banks made. So now in 2011 these banks have had their balance sheets decimated.

They simply cannot afford to take the write downs which need to be made to be able to sell these

loans and assets which encumber their books. The result is they cannot make new real estate

loans, and they cannot sell or foreclose and take the hit to capital. Out beyond the major markets,

things remain problematic as a result.

In addition to these issues, Dodd Frank and the coming crunch from Elizabeth Warren, are raising costs and lowering profits just when these banks need much greater profits. Home mortgages are a basic business line of many of these banks, but that is not only very slow, but the lawyers and the regulators seem determined to fine the lenders and to make it much harder and more expensive to make new mortgages. Debit card charges are being squeezed to nil, and so all of these things together make it almost impossible for the smaller banks to thrive and to sell off the junk and to make new real estate loans. This is not going to get any better in the next couple of years, and is just starting to get much worse as the regulators and Warren ramp up the new rules and squeeze profits even more. In states like CA, NV, IL and Fl, it is going to remain very bad for years ahead. There will be increased consolidation and bank closures at the small bank end, and this will further constrain funding for transactions in the non urban markets.

The major equity investors are not particularly interested in the smaller markets, so often there is a lack of equity capital to deal with the restructuring that is required. In addition, there is beginning to be a noticeable amount of recidivism with the loans that were extended. One credible source states that it could get to be as high as 50% as we see the 2009 extensions now coming to their two year restated maturity dates. This is on top of the big bulge of loans made int eh froth of 2005 to 2007 which are now coming to their five year maturity. Lastly, we are now seeing the signs of rising rates which will make it more difficult for the deals that are staying out of foreclosure to continue to do so into next year.

Small banks cannot get rated. They need $2 billion of capital to achieve that. So raising new capital is expensive and difficult. Many investors who think that buying a bank, or a group of banks is the route to the real estate portfolio do not understand that in most cases they need to first recapitalize the bank itself in order to be able to rework the real estate. You cannot simply take over the troubled bank, and then go for the real estate. It does not work that way. The likely result will be more bank consolidations and less available debt for the average property in the average non urban market. Translation, values are likely to remain below the highs of 2007.

Some banks offered to finance buyers of assets in order to try to achieve better pricing and to move assets from non performing to performing. The regulators have frowned on this and generally it has been seen that the bank is financing someone who had no capital and so he is unable to really fix the asset and remarket it. In short, this approach is stopping and is unlikely to be revived in any meaningful way.

Lastly, banks sometimes assume a lower cost of capital for potential buyers of loans and assets, and so have not marked them for sale at low enough levels to attract real buyers who have a higher cost of capital than the bank assumes, and who have a higher return requirement than the appraiser of the bank assumed. This has also limited sales.

Bottom line, we have a long way to go in many small and mid-sized markets. The banking system has not been fully repaired in much of the country, and it is unlikely that there will be any flood of transactions in the next two years as a result. The administration still has no clue. They prefer to sic Elizabeth Warren on the banking system instead of really fixing the problem. It will get better as the economy improves, but there are a lot of forces arrayed against the sort of system wide cleansing that we saw in the RTC days which is what we really need.