Following a year like 2010, I am hard pressed to make a prediction about exactly what will happen in the world of loan sales in 2011. After all, the best and brightest of our industry predicted that 2010 would bring a lot of trades, and through those sales would come the beginning of an end to the log-jam of loans in limbo. Instead, despite an uptick in marketing activity, especially in the last quarter of the year, and a deluge of offers to buy, many deals did not occur. All the bullish predictions last year couldn't budge the lethargic economic and lending environments. If you're looking at transactions, in a word, 2010 was flat.
However, when you look beyond transactions and focus instead on other types of activity that took place in the management of loan portfolios, 2010 was quite dynamic. It was the year when large commercial, regional and community banks all shook off the torpor and shock of 2008 and 2009 and began, in earnest, to take a cold, hard look at their portfolios and make action plans for their ongoing management.
Lenders entered 2010 with a hunger for information and a desire to make decisions and take the best course of action. Where answers had once been clear-cut, they had become hazy. In particular, loan portfolio values were difficult to nail down. The continued deterioration of commercial real estate and the difficulty of pricing for risk and forecasting future performance, all combined with a lack of transactions, made it tough to pinpoint loan values. It also made it challenging for banks to accept purchase offers with confidence that the offer was reasonable. Many companies that have well-seasoned veterans who review loans for potential acquisition have conveyed to us that they too have struggled to quantify all of the factors mentioned above and translate the results into a confident value.
Lenders are bringing a new mindset to 2011. Most banks and financial institutions now know which of their loans flat-lined, and they recognize that the underlying assets are potentially deteriorating. They realize that most of their problem loans will not heal any time soon. They accept the drop in market values, recognizing that they correlate with many economic woes. They are no longer focusing their analysis on how many more quarters they have to wait until they can write down problem loans. They are addressing these loans, looking at the best strategies for working them out and taking action.
Banks continue to analyze their balance sheets carefully, evaluating the delicate relationship between moving loans to the held-for-sale accounting category and its potential impact on their stock price. For the most part, analysts view these activities positively. When a CEO or CFO of a publicly traded bank makes intelligent comments about using strategic note sales to clean up less valuable performing loans and impaired NPLs, the analysts evaluating these institutions are happy. In 2011, compared to 2010, the additional capital and losses taken translate into transactions getting done in the near future.
Just as banks spent the past year analyzing their portfolios and then changing their mindset, so, too, have buyers. Investors accept that, while real estate values have declined (affecting the value of a loan), prices for loans backed by commercial real estate are firming up.
The large structured sales that took place in 2010, by their nature, included only a handful of potential buyers. Today, the hundreds (if not thousands) of other buyers who sat out because of the scale of the sales or the rigidity of pricing are armed with capital and poised to enter the market for deals within their newly realistic parameters.
All the inactive analysis and valuation that took place last year is already having an impact on market activity. The final quarter of 2010 saw an uptick in the marketing of loans; more portfolios were brought to market in the past three months than in the preceding nine. Approximately $2.7 billion of note sales were offered just before year's end. This increase in sales activity reflects the acceptance by banks and other financial institutions of a reduction in values in some cases by 50% or more and the long-term establishment of a new norm. It also reflects that banks are dealing with their portfolios. Combine that with a growing comfort level with pricing among investors, and you have an environment ripe for transactional activity. Based on what we learned in 2010, I will make a conservative prediction: Where 2010 was flat, I predict 2011 to be much more productive. I think we'll see an increase in loan trades on a rocky road to recovery, a road requiring thoughtful navigation.
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