Failed Banks Had $566.9Bln of Assets, FDIC Has $33Bln Left

Based on the following article in today's CRE Direct, the FDIC is succeeding in a battle against time to dispose of the assets of failed institutions it is taking over. It is still a program of the large investors buying assets in structured transactions which leaves out the everyday investor but it is working for the Feds....As expected, the market for non-performing commercial mortgages has not grown into the same feeding frenzy that occurred in the RTC days...but it is still early in the game....we will have to watch how the special servicers who are expected to have double-digit default rates by the end of the year choose to dispose of their bad loans....It may be time to re-sharpen that saw and be prepared - but then again, it may just be more of the same of what we have experienced over the past two years....May G-d be with us all.

Failed Banks Had $566.9Bln of Assets, FDIC Has $33Bln Left

Monday, 26 April 2010
Commercial Real Estate Direct Staff Report

The FDIC, which since the beginning of 2008 has taken over 205 failed banks with $566.9 billion of total assets, has only about $37 billion of those assets left to sell.

And roughly $4.2 billion of those assets are in the process of being brought to market through the agency's structured sales, where it partners with investors on large acquisitions and provides them with financing. Factor those out and the FDIC is left with about $33 billion of assets left to sell.

Interestingly, that's roughly the same volume of assets the agency had left to sell six months ago, after it had taken over 118 failed banks with $476.4 billion of assets. That indicates that its sales efforts are accelerating. And the expectation is that they'll continue to accelerate, especially because so many other institutions have issues. Indeed, 702 banks with $402.8 billion of assets were formally tagged as "problem" institutions by the FDIC at the end of last year. Those are the highest levels since 1993 and are up from 552 banks with $345.9 billion at the end of the third quarter.

And, according to Trepp, a common thread among problem banks is their relative exposure to commercial real estate.

The agency is expected to continue relying on its structured offerings to dispose of the lion's share of assets it takes over because of their relative efficiency. It's able to sell $1 billion or more of assets in one fell swoop, while retaining a stake, which could allow it to benefit if asset values climb. It has also offered financing and has been able to sell that into the market.

In addition, the agency will continue to sell assets individually through its whole-loan, or cash sales, which are handled by five advisers. It had until early this year sold commercial real estate assets on a whole-loan basis, but has since then shifted its focus to sell such assets solely through its structured packages.

And while the agency has yet to securitize assets taken from failed banks, that's expected to change. Sheila Bair, FDIC chairman, said earlier this year that "securitization will play an increasing role" in the agency's efforts to rid itself of assets from failed banks.

The reason the agency has relatively little left to sell is that buyers of deposits of failed banks have generally acquired most of their assets, largely because of the backstop against losses that the agency provides.

Until recently, the FDIC would insure up to 80 percent of any losses from failed-bank assets subject to the loss-sharing agreements. In some cases, its insurance would climb to 95 percent. But lately, it has sought to reduce the scope of its backstop. And because market conditions have improved, evidently it's been able to do just that.

When TD Bank agreed to acquire three failed banks, American First Bank of Clermont, Fla., First Federal Bank of North Florida, Palatka, Fla., and Riverside National Bank of Florida of Fort Pierce, Fla., it agreed to assume $2.2 billion of the institutions' assets. And the FDIC agreed to cover only 50 percent of the possible losses from those assets.

The $566.9 billion of assets held by banks that failed since the beginning of 2008 compares with $519 billion of assets held by the 1,043 savings and loans that failed during the S&L crisis of the early 1990s. While that volume is not adjusted for inflation, it puts the current banking issue in context. It also shows just how large some failed banks have been.

Indeed, this time around, a $307 billion-asset institution - Washington Mutual Bank - failed. No similar-sized institution failed during the last crisis. Another seven institutions had more than $10 billion of assets each.

If you exclude WaMu, the 205 banks that have failed had an average of $1.3 billion of assets. But the top 25, exclusive of WaMu, had an average of $7.5 billion of assets.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.

Copyright ©2010 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved.

Demand still outstripping supply in US nonperforming loan market

Telling us what we already knew, my friends at Ernst & Young have published the results of a new survey which sheds addtiional light on an otherwise dark tunnel. This is not being handled like the RTC days or any other prior times. The nursing of toxic assets rather than quick liquidation has prevented the market from establishing a floor. Meanwhile, institutions have depositor capital tied up in bad or underperforming loans rather than in making new loans to fund acquistiions, leasing and redevelopment activities - and slowing the recovery in commercial real estate. Sooner or later Washington will find out it is a Phyrric Victory and we will have all paid a dear price for it. Check out the report - perhaps there is a pearl you can use to create something bankable. May G-d bless you!

Demand still outstripping supply in US nonperforming loan market, according to new survey by Ernst & Young

New York, 1 April 2010 – More than sixty percent of respondents to a new survey of the distressed debt market bid on or priced US nonperforming loan (NPL) portfolios in the last year, but fewer than 17.5 percent were successful in completing a transaction. This is one of the key findings in a report published today by Ernst & Young’s Real Estate Distress Services Group based on a survey of real estate investment and opportunity funds, private equity funds, institutional investors and real estate developers conducted in late December 2009.
The Ernst & Young survey portrays a US nonperforming loan market in which investors last year were eager to buy, but in which sellers were unwilling or unable to sell. Consequently, the few deals that came to market attracted multiple bids, leaving more investors foiled than fulfilled.

“The question on everyone’s mind today is whether the US distressed loan market in 2010 and 2011 will be the same as 2009; characterized chiefly by buyers waiting for sellers to turn up and transact,” said Mark Grinis, leader of Ernst & Young’s Real Estate Distress Services Group. Added Chris Seyfarth, a partner in the Real Estate Distress Services Group of Ernst & Young LLP, “The continued development of an efficient market for nonperforming loans here in the US will depend on sellers being prepared to enter the process over the next six months.”

Nevertheless, investors remain bullish about the opportunity to put out significant sums into NPL purchases in 2010 and 2011. More than half of the investors surveyed believe that conditions in the NPL market will be favorable enough for them to enter this year with almost 40%expecting to enter the market sometime after June 1. Behind this projection may be a feeling that by the second half of the year, the country’s economic recovery will be well underway and a bottoming of commercial real estate values may be within sight.

What are these investors most interested in buying? In terms of loan type, nearly three quarters of investors surveyed preferred distressed whole loans backed by office, industrial and multifamily properties. About a third of investors favor distressed residential loans such as single family and condo loans as well as Acquisition and Development (A&D) and construction loans. Some investors also want hotel, CMBS, and land loans, but none favored residential MBS loans.

The capital is clearly there for a market to develop quickly. When asked how much they had allocated to invest in NPL portfolios, two thirds of respondents indicated they would have up to US$500 million each available for purchases. Almost 5%of respondents have made US$500 million or more available for such purchases.

However, the critical piece of the puzzle for a robust market in distressed loans in 2010 is still absent, says the Ernst & Young report. Despite an increase in troubled loans and growing Congressional scrutiny of financial institutions’ loan exposure, banks generally have been slow to deal with their problem loan portfolios, most likely due to a fear of incurring losses from loan write-offs, reductions in earnings or erosion of capital. According to recent FDIC data, US banks’ provisions for loan loss reserves totaled US$61.1 billion in the fourth quarter 2009. The Ernst & Young survey suggests that respondents believe regional banks and thrifts are the most likely active sellers of commercial real estate loans in 2010.

For a comprehensive summary of the entire survey and to download a copy of the published report, “Is history repeating itself? Distressed real estate loans investor survey,” go to www.ey.com/realestate.

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