According to press reports (supported by anecdotal evidence supplied by Bank Lawyer's Blog's "ear-to-the-ground" magpies), bank lawyers in the Sunshine State who know the legal issues surrounding the purchase and sale of "scratched and dented" real estate loans should be having a field day.
In what market players term as the first wave, investors are lining up to buy banks' problem real estate loans.
The buyers are New York-based investment funds, South Florida investment pools and individuals.
The loans are mostly development and construction loans on condominiums and housing developments, where construction has stalled or sales have slowed amid the housing slump.
Some banks are looking to sell loans several payments delinquent, provided that prices are not deeply discounted. The alternative is to continue with time-consuming workout efforts to restructure loans and payment schedules.
Loan buyers will pay par - the original loan amount - for some loans where strong long-term profit is likely.
On others, where properties have good prospects, buyers might offer prices between 1 percent and 12 percent lower than original value, said Ralph Espinosa, a partner in Coral Gables-based accounting firm Garcia, Espinosa, Miyares & Co., which is advising two South Florida investment groups.
Buyers will look only for loans where the location and type of project will produce strong sales once buyer demand rebounds, according to Espinosa and Kyle Meyer, president of Fort Lauderdale-based BuilderFinancial.
Loan buyers are bringing "patient capital," with more time and flexibility than FDIC-regulated banks, Meyer said.
Over the past several months, we've been hit with e-mail solicitations (one national trade newsletter has been selling its subscriber list, apparently) and telephone calls from "dent and scratch" investors who seek bank lawyers to look out for clients and other financial institutions that they may encounter who may need to unload problem real estate loan portfolios, or even individual loans and properties. Some focus only on single-family delinquent portfolios, others on subprime mortgages only, and others on commercial real estate loans with "hair" on them. Some are willing to arrange the purchase of performing, as well as non-performing, loans. Everyone seems to have a slightly different set of criteria and product mix in mind, but all are looking to take advantage of the perceived lack of "time and flexibility" of commercial banks.
Luckily for those of us at BLB, our clients are both patient and flexible, and well-capitalized enough to withstand the current downturn -- for now, at least.
Some of us who worked with commercial banks and thrifts in the 1980s are reminded of the fact that many of the folks who made a bundle out of the collapse of the real estate markets at that time were those who purchased huge portfolios of "bad loans" and "bad real estate" from the most impatient of all lenders: the RTC and the FDIC. Shortly before the passage of FIRREA in 1989, the FDIC, which would staff and run the RTC, invited a few partners from my law firm to the FDIC headquarters in Washington, D.C., to give the FDIC our views on how they might approach the job of "working out" insolvent thrift institutions, a job previously handled by the soon-to-be-obliterated FSLIC. Included in our little band of merry men was a former FDIC attorney, a former General Counsel of the Federal Home Loan Bank Board, a corporate partner who represented a certain Ft. Worth bazillionaire family in the purchase of the largest broke thrift in the country, and yours truly, an idiot savant from Texas who had some experience with broken savings banks. After listening politely to our views on the benefits of preserving the real estate in the institutions, preserving the institutions themselves, and waiting out the return of the market, the FDIC representatives stated flatly that they were liquidators, not workout specialists; they weren't going to hire the outside help required to "work out" the real estate; as far as they were concerned, the assets of these insolvent institutions were valueless and the only "assets" that had value were the deposits (the "liabilities"); and that the RTC's game plan was to sell the deposits to commercial banks for a (slight) premium and liquidate the loans, real estate and other assets as quickly as possible. "Let the private sector work out the real estate" was the FDIC's plan of action.
Oh, yeah, and thank you for sharing your thoughts with the FDIC. Buh-bye now. Don't let the door hit your backsides on the way out.
It's always nice to command respect.
On the other hand, our mamas didn't raise no fools, and we walked out of that room knowing what our game plan was going to be. For the next few years, we, and many other lawyers, made some serious money representing financial institutions, investments funds, private investors, developers, and many others who picked up real estate assets for a song. For many of these buyers, "working out" meant "buying and hanging on," and not for a very long time. While the regulators claimed that they were ridding the market of an "overhang" of real estate held by insolvent institutions, which overhang was depressing the market, those of us on the other side of the fence always thought that even in the "competitive bidding process" used by the regulators, the assets were seriously undervalued over even the "medium haul," and grossly undervalued over the "long haul." Nevertheless, part of being mature is accepting the world as it is, and we mature adults were certainly happy to help our clients reap the benefits of the government's skewed view.
To be fair to the FDIC, the "prop-up-and-hold-on" alternative typified by the Southwest Plan (ironically, a structure created originally by the FDIC under the Chairmanship of Stewart Root and later adopted by the Federal Home Loan Bank Board) was a political impossibility, even if the FDIC had decided to continue it. For a lot of reasons that we needn't belabor, Congress would never have stood for it. It was terminally disturbed about the "hidden" costs of the S&L "bailout," and the public was, as well. Therefore, political expediency dovetailed nicely with bureaucratic preferences to create a perfect "bargain sale" opportunity for the investor with ready cash.
The current opportunities are not as "choice" as they once were. Nevertheless, the lessons of the past are not totally wasted. For an institution that must liquidate its portfolio, or dump a single problem credit, come hell or high water, purchasers abound, and they will reap the upside. At least the problems will be off your balance sheet, so they won't get any worse. For the rest of the banking business, however, there's no sense in not just staying in the saddle and riding this pony back around the circle.
