Westchester County Home News: Distressed Asset Sales from Crisis Will Be Big, but Market Slow to Develop

Thursday, October 22, 2009

Distressed Asset Sales from Crisis Will Be Big, but Market Slow to Develop

While the market for distressed assets from the financial crisis may be the biggest since the savings & loan disaster of the 1990s, it is taking longer to develop and it may be next year before asset sales begin in earnest.

A recent report by Ernst & Young said a broad spectrum of buyers are simply waiting for the dam to burst and unleash a highly anticipated wave of deals, according to Commercial Property Executive.

In the wake of the S&L crisis, the Resolution Trust Corporation (RTC) forced the sale of bad assets and quickly set market-clearing price levels. In the current crisis, by contrast, there are very few deals other than one-off distressed sales. The government’s public-private partnership to handle asset sales has been slow to get off the ground as sellers are weighing their options.

Once sales do begin, Ernst & Young expects the market to be highly competitive from the outset. About 35 percent of investors polled in a survey claim to have return requirements above 20 percent and an equal number are aiming for returns in the 10 to 15 percent range.

About 47 percent of the respondents to the survey believe that a significant increase in commercial mortgage defaults will begin before the end of the fourth quarter, while just over 30 percent believe the market is already witnessing significant default activity. About 20 percent don’t expect major default pressure to come to bear on the market until next year, according to Ernst & Young.

A little more than half of respondents, 53 percent, purchased distressed or nonperforming loans in the past year and a half, with 47 percent staying out of the market.

More than 45 percent of those responding said they were looking at commercial whole loans as their primary target, followed by 18 percent looking at residential and land loans, and 11 percent looking at residential acquisition and development (A&D) and construction loans. Commercial and residential mortgage-backed securities and loans backed by hotel assets each appealed to fewer than 10 percent of respondents.

In the meantime, Commercial Property Executive reported, Oklahoma City-based loan sale advisor First Financial Network plans to sell $150 million in loan participations on November 3 on behalf of the FDIC from four failed banks in receivership.

First Financial Network regularly offers packages of loans and loan participations as a conduit for the FDIC, which tries to get the maximum value from the assets.