April 27, 2012
by Amy Wolff Sorter
DALLAS-Bliss Morris, founder and CEO of First Financial Network Inc. of Oklahoma City, will moderate the note sales panel on Friday, May 4 at RealShare Distressed Assets. She talked with GlobeSt.com about trends in the area of loan note sales and offerings.
GlobeSt.com: You mentioned in a recent article that the pace of loan sales has increased significantly. What are some of the factors behind this trend?
Morris: A lot of that comes from the fact that pricing is firming up. In 2007, 2009 and 2009, values on commercial real estate and residential real estate were dropping so fast, it was difficult to predict the value of the loan; that's important when it comes to analyzing the loan. It made it difficult for banks and investors to figure it out. But banks have had the opportunity to write down loans, where the book value is closer to the prices investors are offering. Everyone is more secure in valuations and what to be offered, and that's good to see.
GlobeSt.com: What will that mean for the rest of 2012?
Morris: Well . . . one of the things we're seeing is that the FDIC has slowed down in terms of the number of bank failures this year. It still has a significant number of loans under management placed with servicers, though they're keying up some of their structured sales this year. That will have an effect on how much is sold, depending on the activity during the second half this year.
But one thing to keep an eye on is community banks. They're in a tough position today; they have have heavy requirements that will be put on them under Dodd-Frank over next couple of years and they'll be under the regulator microscope. The other thing that is tough for them, is the loans made in their communities to reputable business five or seven years ago. Though the borrowers might be paying as agreed, every single month or quarter, because the real estate that's backing the loan might have fallen in value, the collateral coverage has changed. So when regulators come in to examine the banks, they criticize those loans because of the lowered collateral value.
These smaller banks can't really argue that, but they end up having to preserve capital by implementing a disposition strategy for those loans over several quarters. This is a more recent phenomenon, and I don't see it ending any time soon. If anything, it'll increase and continue to be a challenge for community banks.
GlobeSt.com: What about the larger banks?
Morris: That's active too, but in a different sense. The large money-center banks and super regional banks are looking at non-core portfolios, in other words, portfolios that no longer fit their part plans. Many of those portfolios involve performing loans; some of them are a in good position from a collateral standpoint.
We have a portfolio like that we're bringing to market in the next 30 days; a $100 million commercial real estate loan portfolio, and our strategy will be to market intensively small groups of these loans to small community banks with lot of capital that are trying to grow their loan base, but don't have anyone coming into borrow. This portfolio is perfect for the community banks with capital but no one coming in to borrow. There's two sides to the community bank scenarios.
GlobeSt.com: But is there a danger of too much distress, or problem loans, hitting the market with the pace picking up?
Morris: I hear this a lot, talking to different people that are looking to, in a big way, engage in portfolio sales. They mention they're afraid of selling off a lot of loans because they'll disrupt the market. But we don't just prepare loans and have them fly out the door – there isn't really a glut; there's a lot that goes in bringing these portfolios to market. There's valuation reviews, marketing strategies, investor due diligence, closing and assigning these loans – it's a lot of preparation. We could do several thousand loans at a time, market disruption shouldn’t be a concern.
GlobeSt.com: You're moderating a panel at the upcoming RealShare Distressed Assets conference. The event is in its fourth year; how has the role of loan advisors like First Financial changed during the past four years?
Morris: Technology has changed our business a lot. Because of the way loans are reviewed by investors today, online, 24/7, the security part of our business is enormous. The way we handle document security and security of personal information of our borrowers; it has to pass high scrutiny. Our IP security is at the top of the house, as it is with the FDIC and banks.
Another thing that's changed in the past few years is the number of investors – some years ago, the group was smaller, but it's grown by leaps and bounds, as capital is chasing opportunities to make returns. The thing is, we absolutely have to vet our customers before they get on our platform to review anything. At one point, we could confirm the investors with a phone call to the banks; but it was a smaller world, not like it is today.