Where Are All The DealsEveryone is asking when will the lenders start to sell paper and REO in a meaningful way. The answer is- not for a long time. The problem is twofold. First the banks are so damaged that they cannot bear the hit to capital that a true recognition of current value would require. While the suspension of mark to market was necessary to avoid a complete collapse of the bank balance sheets in 2008, it created an Alice In Wonderland world. Now everyone is living in the land of make believe. Almost all real estate is worth 40% less than at the peak in 2007, and 40% less than it is being carried. We are not going back to those frothy values for a very long time-maybe 10 years on an inflation adjusted basis. So now we have been forced into extend and pretend loan extensions to continue the fairy tale. If there were no such extensions, then the lenders would have to recognize reality, and we would be back to the problem of lender capital being hard hit by recognition of true values. Many lenders are also under the illusion that they can repeat what a few did in 1993-94, which was to hold the assets and later book a material profit on later sale. Lastly they looked at the huge profits many opportunity funds and individual investors made in the RTC deals, and they think they should now reap those profits by holding the REO and loans.Borrowers remain in denial. They grossly overpaid in the froth period, and they cannot now accept that they have been wiped out, so they also are making huge bets that their equity values will return if they just put in more through a loan reduction and extension of two years. They never look at the reality of the lack of any return on investment on the new equity which will be the result, and they live in hope of substantial inflation in the next two years to bail them out. They think that all that cash they pulled out when the refinanced their properties is really their money and they fail to accept that was their profit, and now it is time to turn over the asset and move on with that cash still in their pocket. They would be far better in many cases to use the cash they are paying to the lender for an extension, and instead use it to buy a new asset at today's deep discounted values. Servicers have told me they view that cash as really theirs, and they are forcing borrowers to disgorge it by loan pay downs and extend and pretend.Special servicers are not lenders. They are essentially high yield investors running distressed debt shops. Most will not see it that way, but it is what is happening. Real example: A servicer told me this week that they had taken back a distressed hotel. They invested $1 million of funds in the trust to renovate and reflag the hotel. Then they resold it for a $4 million profit. He did a good thing for the trust, but this is not the actions of a traditional lender. This mentality and action on the part of special servicers, combined with extend and pretend, means hundreds of billions of potential REO sales will not happen for a long time.Everyone needs to finally accept that this delaying of truth is going to continue for a long time. Eventually truth will prevail and the extend and pretend periods will run out. The special servicers and lenders and auditors cannot continue this delusion forever. Assets need to be moved out of the hands of weak and unskilled owners, to the hands of well funded and skilled operators. No financial crisis has ever been cured by make believe and ignoring real value recognition. The RTC, in retrospect, was a wonderful solution. It will not happen this time. The regulators need to force the small and regional banks to take the hits, and then close the weak lenders who will then fail. That is not politically palatable so it is not going to happen. We have a very long way to go as a result.