The U.S. banking industry has recovered steadily from its doldrums during the Great Recession; however, many lending institutions are still faced with a significant amount of troubled real-estate loans.
That was the view of a panel of experts on a recent episode of the "Commercial Real Estate Show" radio program. Guests provided an enlightening look at the banking sector and outlined a wide array of strategies and valuable tips for banks and other lenders faced with problem loans.
Numbers Improving
As of September 2012, 91 percent of U.S. banks were profitable, according to Christopher Marinac, managing principal and director of research for FIG Partners. “[Still], if you go back seven years, the industry was making 14 to 15 percent returns on equity. That no longer is the case. We’re closer to 8 or 9 percent, as a general rule.”
Furthermore, 51 banks failed in 2012, a notable decline from the preceding years, Marinac added. He predicted that number to drop to approximately 30 this year.
Troubled Loans Remain
Despite the steadily improving conditions, many banks have “a long way to go” in working through troubled real-estate loans, said Rob Whitmire, a senior vice president at Bull Realty who oversees the firm’s Special Asset Services Group. “There is still a significant amount of problem loans out there.”
“I think we’re still another 18 months away from getting back to ideal levels of problem assets,” Marinac added.
Loans on residential land and office properties often are troubled, according to Marinac. “Other [property types] – such as multifamily – are the exact opposite, are very strong,” he said. “Hotels have been surprisingly good. Industrial seems to have come back.”
Do Your Homework, Don’t Procrastinate
Bankers and lenders saddled with troubled loans must be “be decisive and do their homework,” advised Joe Briner, a partner with GGG Partners, a firm that advises banks and financially distressed companies. “[Successful lenders] rapidly assess their expected recovery, and they implement their plans. They’re disciplined about how they do it.”
“Timing is everything,” Marinac added. “Banks’ first mistake with troubled loans is waiting, kicking the can down the road and figuring that they can have a better solution if they wait three to six months. I’ve never seen that work.”
Many banks and lenders faced with troubled loans are opting to simply sell the notes. While that often is a good solution for some, Whitmire urged lending institutions to always weigh all their options. “If [selling] a note is going to return 40 percent of your loan value, maybe other options would be a short sale that would provide you 80 percent or a foreclosure that would provide you 60 percent,” he said.
A short sale can be an appealing option when you have a cooperative borrower; however, Whitmire said it’s imperative that a lender get involved in the process.
“When banks try to do short sales, they really try to stay hands off,” he noted. “You want to be more involved – you want to know who the borrower’s choosing to market the property. You want to see all that marketing to make sure it’s really being done well.”
If a lender decides to instead foreclose on a property, then the lending institution should undertake extensive due diligence on the asset, because it’s basically buying it, my guests and I pointed out. That means hiring third parties to do environmental reports, getting a management team in place, and making sure there’s enough cash in reserves to pay for tenant improvements and leasing commissions if needed while the lender owns the property.
As for eventually selling the property, a lender should work closely with its broker to have a system for countering offers in place before the property hits the market. “You want to be able to respond quickly,” Whitmire said. “The deals that I see that fall through the most are when a lender takes two or three weeks to respond – you want to strike while the iron’s hot.”
The entire episode on banker/lender strategies is available at www.CREshow.com.
Michael Bull, CCIM, is the president and founder of Bull Realty, a regional commercial real estate brokerage firm based in Atlanta, and the host of the weekly “Commercial Real Estate Show” radio program.