As for the institutions the FDIC seized last year, it has been slow to separate the assets from the banks. The agency has instead been executing loss-sharing agreements, guaranteeing 80% to 95% of the assets up to a certain point, Wilson says. "After the write-down, the FDIC is on the hook for that 80% to 95%," he says. "That's primarily how the troubled assets have been sold."

We should see the FDIC do quite a bit more selling in 2010, says Bliss Morris, president and CEO of First Financial Network, one of the firms tapped by the FDIC to auction distressed debt. Morris shares that FFN has a number of private bank loans sales coming down the pike in the first quarter. "Banks are getting realistic about the value of loans," she says. "They've been sitting with them long enough that they're wanting to move those loans."

Still, there are some lenders who are opting for modifications and extensions, continuing to hamstring sales. "The biggest problem for banks is commercial real estate and the commercial lending side," says Gerald Hanweck, professor of finance at George Mason University. "They have renegotiated and will renegotiate a lot of loans. That doesn't mean they're not bad, they're just delaying the recognition of the loss."

Many industry observers are also questioning how special servicers are going to work through their holdings, which have ballooned to more than $100 billion, representing a 4% default rate, at press time. That number is expected to grow to 5.2% by year-end and then top out at 5.3% in 2011, according Real Estate Econometrics. That $100 billion represents about 12% of all CMBS loans.

Fitch Ratings pegs CMBS loan delinquencies at 6% by the end of the first quarter and up to 12% by the end of 2012. A recent report by the ratings agency warns of "steeper future performance declines over the next 18 to 24 months."

Robert Flandrau, vice president and senior asset manager for CWCapital Asset Management LLC, forecasts "we will see at least the same volume of loans-probably higher-transfer into special servicing in 2010." He adds, "There are borrowers who have been hanging on by their fingernails, hoping for better times. They are going to run out of capital to feed the debt service shortfalls."

Expect to see special servicers siphon off more loans between 2010 and 2013, Morris says. At the same time, we may also see a lot more modifications and workouts.

Flandrau says General Growth Properties' deal to restructure $8.9 billion of mortgages on 77 of its malls last year could set a standard going forward for large REITs in similar situations, but the deal may not have much of an impact on the industry.

It's also too soon to tell if the workout guidelines set forth by the Federal Reserve Board, the FDIC and three other agencies will have much of an impact on loan resolutions. Some view the option as another delay tactic. "A lot of these loans, if not restructured in some way, will have to be written off," Hanweck says.

But it's likely that looming loan maturations over the next few years may be resolved without sale. "Most of the maturity defaults will be extended," says Robert M. White, Jr., president of Real Capital Analytics. "We won't see a big rash of mass fire sales in that regard.

"Last year, we saw transaction volumes wither to almost nothing," White continues. "Prices fell, especially in the first half of the year, regardless of property type or quality. You name it, it was heading south in a steep fashion." White says we'll see more opportunities this year with lesser quality, non-cash flowing assets, vacant properties, land and broken developments.

"While volume is clearly picking up, we believe that pricing is still heading down," says Robert Knakal, chairman of Massey Knakal Realty Services. As unemployment likely peaks in the first quarter, he adds, fundamentals will be the weakest and pricing should hit bottom. "From there, we expect pricing will bounce along the bottom for a period of time as the market goes through a massive de-leveraging."

White says investors must keep an eye on the European markets, especially London, which will give a clue as to what inflection points and levels will be in the states. "They're already bidding up prices again in London," he says.

"At some point, that capital will say, 'compared to London, New York looks cheap. We should be buying there: " He also predicts there will be a huge dichotomy in pricing between core and value-add assets, which are tough to finance these days.

One bright spot in 2009 was the REIT sector and its ability to raise equity capital, refinance and deleverage, White says. "We're starting to see them move from a defensive positionpaying down debt-to offensive," he says, noting the year-end $2.2-billion deal for Simon Properties Group to acquire Prime Outlets from Lightstone. "We haven't seen a big REIT M&A in a long time. REITS, of all capital sectors, are in the best position going into the new year."

White ticks off the reasons: they've taken care of most debt problems, many have set up institutional or foreign joint venture partners, they've expanded their lines of credit, they have better access to capital than any player and they've sold a number of assets over the past year. He expects REITs to be among the most active buyers in 2010.

Last year, there were several REIT IPOs totaling $2.4 billion with nine REITs, according to Renaissance Capital, a consultancy in Greenwich, CT. Mortgage REITs were the hot item, but as White says, they were seemingly "a flash in the pan." The most notable IPO of 2009 was Starwood Capital, which raised $810 million to invest in distressed assets.

Yet "the majority of capital raised for public REITs was through secondary offerings and this will continue to be a major trend in 2010," says Guy Langford, Deloittes head of real estate mergers and acquisitions. "This year is also expected to be a big one for REIT IPOs, with 23 in the pipeline slated to raise more than $6.9 billion."

Still, the new REITs have not seen much activity. "They haven't seen the volume of opportunities they'd like to," says Nick Einhorn, an analyst at Renaissance Capital "If prices continue to be where they are, people will take advantage of it and will start investing."

Public non-traded REITs followed closely behind the traded ones as the second- largest net investor group last year, according to RCA.

And private equity funds still managed to attract large amounts of capital. Late last year, Dallas-based Lone Star Funds raised more than $1.2 billion for two funds targeting distressed commercial real estate and securities. White believes the private funds may face a bit of a challenge in 2010 because there's so much pent-up capital and demand with very little spent so far. "It's still a challenging environment for first time funds," he says.

"The institutional players and pension funds don't have much of an appetite for investment in opportunistic funds, and even if they do, they would prefer to be in core investments," White says. "A lot of those pension fund investment-types got burnt by their opportunity fund investments and co-mingled funds in general."

This year, REITs, private equity funds, and sovereign wealth funds are all looking to enter the distressed asset market, focusing on hotel, retail and office, Langford says.

The industry is bracing for a harsh wake-up call this month when the Financial Accounting Standards Board's new accounting rules, FAS 166 and FAS 167, take effect. Assets and liabilities of prior private label RMBS and CMBS will be put on the balance sheet of the issuer, servicer or special servicer for all deals prior to Jan. 1, 2010. The new guidelines will also apply to all future deals.

"FAS 166 and FAS 167 will require hundreds of billions of dollars of assets to come onto the banks' balance sheets as of Jan. 1,2010," said John A. Courson, the Mortgage Bankers Association's president and CEO, in a statement. "These assets would immediately require an allocation of capital under the regulatory rules proposed. Coming at a time when regulatory capital is already a scarce resource, it may hinder the current economic recovery underway."

Meanwhile, the CMSA is furiously lobbying on the Hill to help shape and modernize regulatory reform for financial services systems. Last November, the House got the ball rolling with an amendment that reduces the maximum retention requirement of the credit risk on loans being sold as bonds from 10% to 5%. This would allow B-piece buyers to repackage such bonds into new securities, holding only a sliver of debt and trading the rest for cash. Sources say it is very likely this legislation will pass in 2010.

The coming year will also see the sunset of the Troubled Asset Relief Program and Term Asset-Backed Securities Loan Facility programs. The legacy program for TARP is slated to end in March, while TALF has a deadline of June or July.

"TALF has been extraordinarily successful in bringing down spreads and increasing private investment in the space," says Brendan Reilly, SVP of government relations for CMSA.

"We all need to see a viable securitization market to meet the demand coming from borrowers with upcoming loan maturities," Reilly says. "It remains to be seen if the market will continue to support itself without TALF and be able to produce more diversified conduit deals that are critical to commercial real estate."

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