The question I'm asked most often these days is whether loans are selling for just pennies on the dollar. The answer: yes, but very few of them.
The commercial real estate landscape has legions of investors with massive war chests of cash lined up, waiting for owners to sell their troubled loans for acceptable prices. However, one must consider the overall state of the US economy and its affect on the banks holding these assets. At the same time, investors have been assembling for more than a year and are ready to swing into action.
Investors looking for deep discounts in commercial loans, however, might as well be waiting for Godot. It's not happening any time soon, or ever in this cycle-at least not when portfolios of loans are packaged properly to maximize values for the seller. When we market loan portfolios on behalf of the FDIC or many of our banking clients, one of the most important parts of the process is the stratification of loans into individual pools that will be most attractive to sophisticated buyers. For this reason, we strongly believe in keeping the packages homogeneous to the type of collateral, meaning pooling loans by asset class, quality, geography, balance size, etc. When you mix loans secured by industrial property with loans on office properties, for example, it drags down the value of the pool.
Strategic packaging of diverse portfolios gives us confidence that the prices we are achieving represent market value. And the results provide us with a terrific birds eye view of where real estate loans are trading across a wide range of criteria. Besides, the quality of information and access to immediate answers regarding individual loans positively impacts prices.
Due to the generalized instability in the markets, non-performing loans secured by commercial real estate are trading at widely divergent prices, from 35 cents to 85 cents on the dollar. But we are simply not seeing loans trade for pennies on the dollar. There are certainly good values to be had, but they are nowhere near the levels some doomsayers had predicted.
At the same time, loan sales on behalf of private banking clients are revealing clear downward pressure on pricing. We are seeing that the difference between the bid and the ask is diminishing. As these numbers get closer to each other, it signals that banks now recognize that the value on the underlying assets is remaining flat. As a result, they are more willing to trade their loans at closer to the bid price.
We are also seeing an increase in velocity of sales. Four new banking clients, for instance, have recently tapped us to execute loan sales in the fourth quarter. This high velocity may satisfy some market demand and help to recalibrate values over time.Indeed, homogeneous packaging of loan portfolios goes a long way to maximizing the value of the loans in a transaction. It also helps us track values and appetites to be able to determine strike prices of future offerings. This is good news for sellers, but bad news for those waiting for those elusive pennies-on-the dollar opportunities. Sorry guys, but depending on the type of loan you're targeting, you're going to be waiting on the sidelines for quite a while.
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