After several years of downright sluggish performance, the pace of loan sales has increased significantly, just as we first predicted back in early 2011.
by Bliss Morris
After several years of downright sluggish performance, the pace of loan sales has increased significantly, just as we first predicted back in early 2011. According to industry reports, the FDIC alone sold $3.1 billion in real estate loans in 2011. What’s arguably more important is that the aggregate value of bank and CMBS real estate loans sold last year rebounded to levels not seen since 2008. Whole loans collateralized by commercial and residential real estate offered by the FDIC last year sold at 84% of unpaid principal balance compared to 34% in 2010 and 72% in 2008. What’s more, performing commercial and residential real estate loans sold during the same period went for 91% of principal balance.
As a result, lots of folks are hanging out their shingle and touting loan sale advisory services. Seller beware. The intricacies of a loan sale transaction are unique and require deep experience.
It’s a good time to break down the complexities of a typical loan sale by looking at the entire process necessary to bring loans to market.
- Accurate data: A fair and successful loan sale requires the most accurate and current information. At FFN, for example, we employ a proprietary “Metrics” system, which is a fully integrated transaction management platform that includes loan data extraction processes, document imaging, indexing and redaction software, loan file inventory system, due diligence/underwriting module, secure data file manager and stratification selection software. The objectives of data collection are to provide information about the loans to potential investors; collect information to assist in valuing the assets; identify documents necessary for selling the loan; and aggregate all other information relevant to the sale.
- Security: FFN deals with billions of dollars worth of loans and millions of loan documents containing sensitive, private information including social security numbers, tax identification certificates, birth dates and credit card numbers. We invest a significant amount of capital annually to mitigate penetration threats by implementing security technology at each step of the loan sales process. FFN employs Digital Rights Management technology as well as a dedicated team of IT security professionals that monitor the constantly changing landscape of security risks.
- Valuation: Accurately valuing the loans in a portfolio, as well as the underlying assets is vital to making critical decisions including forecasting, acquiring the assets of other institutions, determining critical balance sheet issues for raising capital and executing transactions. FFN employs its extensive historical database to determine the influence of factors relevant to pricing as they change across time and uses the dependence coefficients to forecast the value of various loan portfolios. FFN’s Qualitative Estimated Cash Recovery model focuses on weighted qualitative factors as a basis for valuation. The weighted factors encompass the present quality of the loans and investor purchasing criteria when determining risk and return on investment.
- Pooling: Depending on the particulars of the deal, pooling loans can result in getting the most value. A prime example of this was a recent transaction FFN executed involving $100 million of real estate and commercial and industrial loans, marketed on behalf of a leading bank. The collateral properties in this particular deal were located in both New York and California. Approximately 40% of these loans were performing and the remaining balance was composed of non-performing loans. After analyzing the portfolio, FFN determined that stratifying the portfolio based on collateral type, geographic location, performance and borrower relationships was the most appropriate approach. Prospective qualified bidders were then allowed to bid on individual pools or a combination of pools. FFN also tapped into its own online Loan Sale Network to provide qualified investors with immediate access to due diligence information.
- Legal complexities: Conducting basic due diligence is the first step in mitigating any potential surprises that may occur down the road during the late stages of the loan transaction process. Identifying factors which decrease the loan’s potential for sale in the pre-sale process is critical. In addition, the legal documents governing the transaction are vital to establishing a sound framework which minimizes risk to the seller.
In today’s accelerating financial climate, loan sale volume will likely continue to climb. Each transaction is unique with its own set of challenges. Loan valuation is dependent upon more than just the value of the underlying real estate. Only a firm with years of experience in both banking and loan sales can properly execute the loan sale transactions the market is now seeing and can be a key differentiator between a smooth transaction and a no trade. Bliss A. Morris is president and CEO of First Financial Network and a member of the DAI editorial advisory board. She may be reached at firstname.lastname@example.org. The views expressed here are the author’s own.