Jillian Ambroz is contributing editor of the upcoming digital newsletter Distressed Assets Investor

DALLAS-The amount of loans in special servicing right now may grow to a staggering $100 billion by year-end, according to Steve Pumper, executive managing director at Transwestern. That figure includes all income-producing properties except for single family. And the number of loans in special servicing is estimated to have multiplied five or 10 times from what it was before the recent crisis took hold.

Pumper made these sobering comments before more than 300 people at the inaugural RealShare Distressed Assets conference in Dallas, where he moderated the panel, 'An Inside Look at the World of Special Servicers.' He noted that that some of the industry's most intelligent players are making the smart move of handing over the keys to their properties instead of trying to hang on to the troubled assets. RealShare Distressed Assets was co-sponsored by GlobeSt.com and Real Estate Forum.

Hines, for example, gave back a portfolio in Northern California and 333 Bush St. in San Francisco. That's a change from the last recession when borrowers did everything in their power to hold onto their assets, said Michael Carp, managing director of Real Estate Solutions for Capmark Financing and a member on the panel.

Today, almost every loan that matures goes into special servicing, noted fellow panelist Brian Pittard, a senior vice president with TriMont Real Estate Advisors. With roughly $800 billion worth of loans expected to mature over the next few years, the loan pool in special servicing could balloon to mammoth proportions. In fact, any loan not paid off by maturity is technically in default, Carp said.

Many of the older loans – the 10-year-old loans, for example – were refinanced at maturity. However, many of the maturing loans, especially the five- to seven-year loans that are maturing in the next few years, will not have refinancing options, said Robert Flandrau, vice president and senior asset manager for CWCapital Asset Management LLC. In the meantime, borrowers may need to face a repricing of their assets and take the losses or write-downs, Carp said.

On the bright side, investor interest in multifamily loans has picked up in the past 90 days, Pittard commented. He related that his firm recently got outbid for a loan, which is a positive sign that trading in that sector is getting more aggressive.

Considering all of the loans in special servicing, it's no surprise that there's been no true new CMBS issuance this year, or really since 2007, said Everett Greer, a managing member of Greer Advisors LLC and moderator of a panel titled, 'Appraising the Current Value of Distressed Assets.' But a few speakers noted that there will be a new CMBS-type vehicle to emerge out of this financial crisis, much as the RTC made it possible for the development of the CMBS model in the early '90s. "Most banks are not in the business of holding long-term debt," Greer said.

Patrick Sargent, president of the Commercial Mortgage Securities Association, touted the transparency of CMBS loans while noting that historically they have performed much better than other asset classes. "The CMBS market will come out a little different from the last issuance," Sargent said during a special update on TARP, TALF and PPIP. "But we do expect it to come back. When Treasury Secretary Timothy Geithner announced the TALF program, he said about 40% of the consumer and business credit will be financed through securitization. Any investment in this market will include a resurgence of securitization. Banks and other companies are not able to fund all of the maturities coming due, so they'll have to go to the capital markets."

One concern that was voiced by the 'Appraising the Current Value of Distressed Assets' panel by both advocates and opponents was the imminence of mark to market in the industry. "We're the last country that doesn't value assets on a market basis; we still do book valuations," said Jim D. Amorin, president of the Appraisal Institute. He added that when the change takes place, it will have a huge impact on valuations, both positively and negatively. "At some time when mark to market becomes fully entrenched, everything in public companies will have to be valued on a regular basis, which will change the landscape entirely."

Robert M. White, Jr., founder and president of Real Capital Analytics, said, "Investment markets around the world have started to pick up rapidly while we're mired down here. We've seen an uptick in global markets because they've done mark to market. They faced the music sooner."

But you can't do a mark to market with no viable market. "There's nothing to mark to now," said Patrick Duffy, president of Colliers Appelt Womack Inc.

Greer pointed out that Bank of America's $600 billion in real estate debt would have seen a $420 billion loss or write down if the industry did mark to market now. "It would crater the bank five-fold," he said. "If they bring in mark to market, they'll phase it in slowly because it could cripple every one of America's financial institutions."

Meanwhile, the government is working to make the TALF, TARP and PPIP programs available for the industry, albeit as a short-term solution. "We don't want a permanent government handout program in place," Sargent said during his presentation. "We want a jump start to the market that is locked up. Most of these programs were designed to be unattractive once the financial markets normalize. That's appropriate. TALF and PPIP should not be out there forever."

But thanks to ongoing talks with the government, TALF has been extended for new issuance until June 2010 and for legacy CMBS, until March 2010, Sargent said. As for PPIP, banks have not had any incentive to sell their loans as long as they are performing on par, he said. But, "PPIP is out there. It will be utilized and that will help any vehicles out there," he said.Some think the government programs are the reason lenders have not begun to sell their loans. "When the government made the investments in the financial institutions, they were talking to lenders about purchasing assets and the lenders felt good about life," said Timothy Zietara, a senior vice president with ING Clarion Capital. "That only clogged up the system more." Zietara, who was a panelist for the session, 'What Investors are Looking For,' also believes that the regulators need to get tougher and push harder for the banks to get their loans off their books, especially when the banks become healthy enough to start repaying the TARP money.

He noted that regulators enforced plenty of sales in the last downturn. "Regulators finally got hard and said, you're selling this, this and this," he noted. "That hasn't happened yet, but it will. 'Extend and pretend' will stop at some point."

Instant Insights /

Speakers Define Real Estate's 'New Normal'

Related Stories

Recommended For You