March 20, 2013
By Danielle Reed
Tougher regulators, FDIC loss-share phase-outs and a healthier economy are boosting bank sales of troubled small-balance loans, said panelists at a real estate workouts conference this month.
More bank selling is expected both for NPLs and for performing but underwater small-balance CRE loans, said the panelists, speaking in New York at IMN's 14 March Bank & Financial Institutions Special Asset Executive Conference on Real Estate Workouts. The panelists defined small balance as roughly between USD 1m and USD 2.5m.
One small Pennsylvania bank had performing small-balance commercial loans on its books but its portfolio was still recently criticized by regulators because the property values had fallen so far since origination, said Bliss Morris, CEO of First Financial Network. First Financial was able to help the bank market USD 115m in two separate portfolios of performing and non-performing loans to resolve the issues, she said. "We will see much more of this in the coming years," Morris said.
Generally speaking, bank regulators have gotten tougher in terms of making banks mark down assets to current market levels, said Tim Mazzetti, partner and executive vice president with Cohen Financial. "Regulators are not quite as soft as they were" in the early days of the financial crisis, when "there was a huge amount of extend and pretend," he said. Now that real estate fundamentals have improved, banks can "take a hit" and sell troubled assets, he said.
Panelist Chris Demko, senior vice president and corporate workout manager for Fulton Financial Corporation, said his institution has "turned to note sales occasionally ... and I suspect [there will be] one or two more."
Notably, publicly traded banks seem motivated to sell, Mazzetti said. "Those are the best targets" for investors in troubled assets, he said. "They're sensitive to stock price."
This year marks the end of many loss-share agreements between acquiring banks and the FDIC, the panelists said. As the loss-share agreements expire for troubled loans, banks will be looking for ways to get rid of potential liabilities. The word around Washington is that the FDIC is unlikely to extend agreements, for the most part, Morris said. However, large, bulk sales of troubled loans would have to be approved by the FDIC, and that also seems unlikely to happen, Morris said.
"It's unusual [for the FDIC] to approve multiple loans in bulk sale prior to the expiration of loss share" agreements, she said.
That doesn't mean there won't be sales of any kind. "I think there would be incentives to shed the loss-covered loans sooner rather than later," said Matt Anderson, managing director at Trepp LLC, in a separate interview with Debtwire ABS. "The typical comment from bankers is that the process to get approval for a sale can take some time."
But the smallest banks are not necessarily the ones that will want to sell the most, Anderson said. "The large and mid-sized banks have by far been the most successful in raising additional capital over the last few years," he said, and this "gives them additional capacity to handle losses." On the other hand, "small banks are still loathe to sell off problem loans, so while NPL sales are occurring, it is more of a gradual process."
Also, as far as regulators criticizing performing loans because the property values have fallen from origination, "I don't think it will necessarily be a flood of criticized loans banks will put on the market," Anderson said. "Property fundamentals are slowly improving, so the banks might decide to hold onto the loans and hope for higher valuations/lower LTV ratios when they re-appraise the properties." The most likely loans to go up for sale first "would be loans where the outlook for near-term appreciation is low," he said.